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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
FOR THE FISCAL YEAR ENDED APRIL 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to _______________
Commission file number 0-17085
TECHNICLONE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3698422
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14282 Franklin Avenue, Tustin, California 92780-7017
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 508-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $98,114,000 as of July 15, 1999, based upon a
closing price of $1.375 per share. Also, excludes 5,014,142 shares of Common
Stock held by executive officers, directors, and shareholders whose ownership
exceeds 5% of the Common Stock outstanding as of July 15, 1999.
1
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.
76,369,778 shares of Common Stock
as of July 15, 1999
DOCUMENTS INCORPORATED BY REFERENCE.
Part III of the Form 10-K is incorporated by reference from the
Registrant's Definitive Proxy Statement for its 1999 Annual Shareholders'
Meeting.
2
TECHNICLONE CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED APRIL 30, 1999
TABLE OF CONTENTS
Forward-Looking Statements 4
Risk Factors 4
PART I
Item 1. Business 14
Item 2. Properties 26
Item 3. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Security Holders 27
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders' Matters 27
Item 6. Selected Financial Data 29
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 31
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 35
Item 8. Financial Statements and Supplementary Data 35
Item 9. Changes in and Disagreements with Accountants
On Accounting and Financial Disclosures 35
PART III
Item 10. Directors and Executive Officers of the Registrant 35
Item 11. Executive Compensation 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management 35
Item 13. Certain Relationships and Related Transactions 35
PART IV
Item 14. Exhibits, Consolidated Financial Statement
Schedules, and Reports on Form 8-K 36
As used in this Form 10-K, the terms "we", "us", "our" and "Company" refers to
Techniclone Corporation, Techniclone International Corporation, its former
subsidiary, Cancer Biologics Incorporated ("CBI"), which was merged into the
Company on July 26, 1994 and its wholly-owned subsidiary Peregrine
Pharmaceuticals, Inc. ("Peregrine"), a Delaware corporation, which was acquired
on April 24, 1997.
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FORWARD-LOOKING STATEMENTS
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Except for historical information contained herein, this Annual Report
on Form 10-K contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. In light
of the important factors that can materially affect results, including those set
forth elsewhere in this Form 10-K, the inclusion of forward-looking information
should not be regarded as a representation by the Company or any other person
that the objectives or plans of the Company will be achieved. We may encounter
competitive, technological, financial and business challenges making it more
difficult than expected to continue to develop, market and manufacture our
products; competitive conditions within the industry may change adversely; upon
development of our products, demand for our products may weaken; the market may
not accept our products; we may be unable to retain existing key management
personnel; our forecasts may not accurately anticipate market demand; and there
may be other material adverse changes in our operations or business. Certain
important factors affecting the forward-looking statements made herein include,
but are not limited to, the risks and uncertainties associated with completing
pre-clinical and clinical trials of our technologies; obtaining additional
financing to support our operations; obtaining regulatory approval for such
technologies; complying with other governmental regulations applicable to our
business; obtaining the raw materials necessary in the development of such
compounds; consummating collaborative arrangements with corporate partners for
product development; achieving milestones under collaborative arrangements with
corporate partners; developing the capacity to manufacture, market and sell our
products, either directly or indirectly with collaborative partners; developing
market demand for and acceptance of such products; competing effectively with
other pharmaceutical and biotechnological products; attracting and retaining key
personnel; protecting proprietary rights; accurately forecasting operating and
capital expenditures, other commitments, or clinical trial costs and other
factors. 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 us to alter our capital
expenditure or other budgets, which may in turn affect our business, financial
position and results of operations.
RISK FACTORS
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IF WE CANNOT OBTAIN ADDITIONAL FUNDING, OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION EFFORTS MAY BE REDUCED OR DISCONTINUED.
At April 30, 1999, we had $2,385,000 in cash and cash equivalents. We
have expended, and will continue to expend, substantial funds on the development
of our product candidates and for clinical trials. As a result, we have had
negative cash flows from operations since inception and expect the negative cash
flows from operations to continue for the foreseeable future. We currently have
commitments to expend additional funds for antibody and radioactive isotope
combination services, clinical trials, product development contracts, license
contracts, severance arrangements, employment agreements, consulting agreements,
and for the repurchase of marketing rights to certain product technology. We
expect operating expenditures related to clinical trials to increase in the
future as clinical trial activity increases and expansion for clinical trial
production continues. We also expect that the monthly negative cash flows will
continue. We will require additional funding to sustain our research and
development efforts, provide for future clinical trials, expand our
manufacturing and product commercialization capabilities, and continue our
operations until we are able to generate sufficient revenue from the sale and/or
licensing of our products.
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During June 1998, we secured access to $20,000,000 under a Common Stock
Equity Line (Equity Line) with two institutional investors. The Equity Line
expires in June 2001. Under the terms of the Equity Line, we may, in our sole
discretion, and subject to certain restrictions, periodically sell ("Put")
shares of our common stock for up to $20,000,000 upon the effective registration
of the Put shares. Up to $2,250,000 of Puts, unless an increase is otherwise
agreed to, can be made every quarter, subject to the satisfaction of certain
conditions, including share issuance volume limitations identical to the share
resale limitations set forth in Rule 144(e). In addition, if the closing bid
price of our common stock falls below $1.00 during the ten trading days prior to
the call date, then the amount of Puts will be limited to 15% of what would
otherwise be available. If the closing bid price of the Company's common stock
falls below $0.50 or if the Company is delisted from The Nasdaq SmallCap Market,
the Company would have no access to funds under the Equity Line. As of July 15,
1999, we had $12,000,000 available for future Puts under the Equity Line.
We cannot be certain whether we can obtain required additional funding
on terms satisfactory to us, if at all. If we do raise additional funds through
the issuance of equity or convertible debt securities, these new securities may
have rights, preferences or privileges senior to the presently outstanding
securities of the Company. If we are unable to raise additional funds when
necessary, we may have to reduce or discontinue development, commercialization
or clinical testing of some or all of our product candidates or enter into
financing arrangements on terms which we would not otherwise accept. Our future
success is dependent upon raising additional money to provide for the necessary
operations of the Company. If we are unable to obtain additional financing,
there would be a material adverse effect on the Company's business, financial
position and results of operations.
Without obtaining additional financing or completing a licensing
transaction, we believe that we have sufficient cash on hand as of July 15, 1999
and available pursuant to the Equity Line mentioned above, assuming we make an
additional quarterly draw of $2,250,000, to meet our obligations on a timely
basis through September, 1999.
WE HAVE HAD SIGNIFICANT LOSSES AND ANTICIPATE FUTURE LOSSES.
We have experienced significant losses since inception. As of April 30,
1999, our accumulated deficit was approximately $92,678,000. We expect to incur
significant additional operating losses in the future and expect cumulative
losses to increase substantially due to expanded research and development
efforts, preclinical studies and clinical trials, and expansion of manufacturing
and product commercialization capabilities. We also expect losses to fluctuate
substantially from quarter to quarter. All of our products are currently in
development, preclinical studies or clinical trials, and no revenues have been
generated from commercial product sales. To achieve and sustain profitable
operations, we must successfully develop and obtain regulatory approval for our
products, either alone or with others, and must also manufacture, introduce,
market and sell our products. The time frame necessary to achieve market success
for our products is long and uncertain. We do not expect to generate significant
product revenues for at least the next year. There can be no guarantee that we
will ever generate product revenues sufficient to become profitable or to
sustain profitability.
5
PROBLEMS IN PRODUCT DEVELOPMENT MAY CAUSE OUR CASH DEPLETION RATE TO INCREASE.
Our ability to obtain financing and to manage expenses and our cash
depletion rate is key to the continued development of product candidates and the
completion of ongoing clinical trials. Our cash depletion rate will vary
substantially from quarter to quarter as we fund non-recurring items associated
with clinical trials, product development, antibody manufacturing and facility
expansion and scale-up, patent legal fees and various consulting fees. We have
limited experience with clinical trials and if we encounter unexpected
difficulties with our operations or clinical trials, we may have to expend
additional funds, which would increase our cash depletion rate.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY NOT BE SUCCESSFUL.
Since inception, we have been engaged in the development of drugs and
related therapies for the treatment of people with cancer. Our product
candidates, which have not received regulatory approval, are generally in the
early stages of development. If the initial results from any of the clinical
trials are poor, those results will adversely effect our ability to raise
additional capital, which will affect our ability to continue full-scale
research and development for our antibody technologies. In addition, product
candidates resulting from our research and development efforts, if any, are not
expected to be available commercially for at least the next year. Our products
currently in clinical trials represent a departure from more commonly used
methods for cancer treatment. These products, if approved, may experience
under-utilization by doctors who are unfamiliar with their application in the
treatment of cancer. As with any new drug, doctors may be inclined to continue
to treat patients with conventional therapies, in most cases chemotherapy,
rather than new alternative therapies. We or our marketing partner may be
required to implement an aggressive education and promotion plan with doctors in
order to gain market recognition, understanding and acceptance of our products.
Market acceptance could also be affected by the availability of third-party
reimbursement. Accordingly, we cannot guarantee that our product development
efforts, including clinical trials, or commercialization efforts will be
successful or that any of our products, if approved, can be successfully
marketed.
WE MAY NOT BE ABLE TO EXPAND OUR FACILITIES TO IMPLEMENT COMMERCIAL PRODUCTION
OF OUR PRODUCTS.
In order to conduct clinical trials on a timely basis, obtain
regulatory approval and be commercially successful, we must expand our
manufacturing and product commercialization processes so that our product
candidates, if approved, can be manufactured and produced in commercial
quantities. To date, we have expended significant funds for the expansion of our
antibody manufacturing capabilities for clinical trial requirements for two of
our product candidates and for refinement of the production processes. We intend
to use existing antibody manufacturing capacity to meet the clinical trial
requirements for these two product candidates and to support the initial
commercialization of these product candidates, if approved. In order to provide
additional capacity, we must successfully negotiate agreements with contract
antibody manufacturers to have these products produced, the cost of which is
estimated to be several million dollars in start-up costs and additional
production costs on a "per run basis". Such contracts would also require an
additional investment estimated at five to nine million dollars over the next
two years for antibody radiolabeling services and related equipment and related
production area enhancements, and for vendor services associated with technology
transfer assistance, expansion and production start-up and for regulatory
assistance. We have limited manufacturing experience, and cannot make any
guarantee as to our ability to expand our manufacturing operations, the
suitability of our present facility for clinical trial production or commercial
production, our ability to make a successful transition to commercial production
or our ability to reach an acceptable agreement with one or more contract
manufacturers to produce any of our other product candidates, if approved, in
clinical or commercial quantities.
6
OUR TECHNOLOGY AND PRODUCTS MAY PROVE INEFFECTIVE OR BE TOO EXPENSIVE TO MARKET
SUCCESSFULLY.
Our future success is significantly dependent on our ability to develop
and test workable products for which we will seek approval from the United
States Food and Drug Administration to market to certain defined patient groups.
There is a significant risk as to the performance and commercial success of our
technology and products. The products we are currently developing will require
significant additional laboratory and clinical testing and investment over the
foreseeable future. Our proposed products may not prove to be effective in
clinical trials or they may cause harmful side effects during clinical trials.
In addition, our product candidates, if approved, may prove impracticable to
manufacture in commercial quantities at a reasonable cost and/or with acceptable
quality. Any of these factors could negatively affect our financial position and
results of operations.
OUR DEPENDENCY ON A LIMITED NUMBER OF SUPPLIERS MAY NEGATIVELY IMPACT OUR
ABILITY TO COMPLETE CLINICAL TRIALS AND MARKET OUR PRODUCTS.
We currently procure, and intend in the future to procure, our antibody
and radioactive isotope combination services under negotiated contracts with two
domestic entities, one Canadian entity and one European entity. We cannot
guarantee that these suppliers will be able to qualify their facilities or label
and supply antibody in a timely manner, if at all. Prior to commercial
distribution of any of our products, if approved, we will be required to
identify and contract with a commercial company for commercial antibody
manufacturing and radioactive isotope combination services. We are presently in
discussions with a few companies to provide commercial antibody manufacturing
and radioactive isotope combination services. We also currently rely on, and
expect in the future to rely on, our current suppliers for all or a significant
portion of the raw material requirements for our antibody products. Antibody
that has been combined with a radioactive isotope cannot be stockpiled against
future shortages. Accordingly, any change in our existing or future contractual
relationships with, or an interruption in supply from, any such third-party
service provider or antibody supplier could negatively impact our ability to
complete ongoing clinical trials and to market our products, if approved.
TERMINATION OF OUR RELATIONSHIP WITH SCHERING A.G., GERMANY COULD ADVERSELY
AFFECT OUR BUSINESS.
In March 1999, we entered into a license agreement with Schering A.G.,
Germany for the worldwide development, marketing and distribution of our direct
tumor targeting agent product candidate, Oncolym(R). Under the agreement,
Schering A.G., Germany has assumed control of the clinical development program,
regulatory approvals in the United States and all foreign countries and handling
sales and marketing of this product candidate. Schering A.G., Germany may
terminate the agreement under a number of circumstances as defined in the
agreement, including thirty days' written notice given at any time prior to
receiving regulatory approval. We are relying on Schering A.G., Germany to apply
its expertise and know-how through the development, launch and sale of this
product candidate. If Schering A.G., Germany decides to discontinue the
development of this product candidate and terminates our license agreement, we
may have to discontinue development, commercialization and clinical testing of
this product candidate, which could negatively affect our operations and
financial performance. In connection with our agreement with Schering A.G.,
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Germany for Oncolym(R), Schering A.G., Germany has also agreed to discuss the
development and commercialization of our Vascular Targeting Agent technology. If
we enter into an agreement with Schering A.G., Germany with respect to our
Vascular Targeting Agent technology, we will also rely on Schering A.G., Germany
to apply its expertise and know-how through the development, launch and sale of
our Vascular Targeting Agent product candidates. We cannot guarantee that
Schering A.G., Germany will devote the resources necessary to successfully
develop and/or market any product candidate.
WE DO NOT HAVE A SALES FORCE TO MARKET OUR PRODUCTS.
At the present time, we do not have a sales force to market any of our
products, if and when they are approved. We intend to sell our products in the
United States and internationally in collaboration with one or more marketing
partners. If and when we receive approval from the United States Food and Drug
Administration for our initial product candidates, the marketing of these
products will be contingent upon our ability to either license or enter into a
marketing agreement with a large company or our ability to recruit, develop,
train and deploy our own sales force. We do not presently possess the resources
or experience necessary to market any of our product candidates. Other than an
agreement with Schering A.G., Germany with respect to the marketing of our
direct tumor targeting agent product candidate, we presently have no agreements
for the licensing or marketing of our product candidates, and we cannot assure
you that we will be able to enter into any such agreements in a timely manner or
on commercially favorable terms, if at all. Development of an effective sales
force requires significant financial resources, time and expertise. We cannot
assure you that we will be able to obtain the financing necessary to establish
such a sales force in a timely or cost effective manner, if at all, or that such
a sales force will be capable of generating demand for our product candidates,
if and when they are approved.
WE MAINTAIN ONLY LIMITED PRODUCT LIABILITY INSURANCE AND MAY BE EXPOSED TO
CLAIMS IF OUR INSURANCE COVERAGE IS INSUFFICIENT.
The manufacture and sale of human therapeutic products involves an
inherent risk of product liability claims. We maintain only limited product
liability insurance. We cannot assure you that we will be able to maintain
existing insurance or obtain additional product liability insurance on
acceptable terms or with adequate coverage against potential liabilities.
Product liability insurance is expensive, difficult to obtain and may not be
available in the future on acceptable terms, if at all. Our inability to obtain
sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims in excess of our insurance coverage,
if any, or a product recall could negatively impact our financial position and
results of operations.
EARTHQUAKES MAY DAMAGE OUR FACILITIES.
Our corporate and research facilities, where the majority of our
research and development activities are conducted, are located near major
earthquake faults, which have experienced earthquakes in the past. Although we
carry limited earthquake insurance, in the event of a major earthquake or other
disaster in or near the greater Southern California area, our facilities may
sustain significant damage and our operations could be negatively affected.
8
THE LIQUIDITY OF OUR COMMON STOCK WILL BE ADVERSELY AFFECTED IF OUR COMMON STOCK
IS DELISTED FROM THE NASDAQ SMALLCAP MARKET.
The Common Stock is presently traded on The Nasdaq SmallCap Market. To
maintain inclusion on The Nasdaq SmallCap Market, we must continue to have
either net tangible assets of at least $2,000,000, market capitalization of at
least $35,000,000, or net income (in either our latest fiscal year or in two of
our last three fiscal years) of at least $500,000. In addition, we must meet
other requirements, including, but not limited to, having a public float of at
least 500,000 shares and $1,000,000, a minimum closing bid price of $1.00 per
share of Common Stock (without falling below this minimum bid price for a period
of 30 consecutive trading days), at least two market makers and at least 300
stockholders, each holding at least 100 shares of Common Stock. At various
times, we have failed to maintain a $1.00 minimum closing bid price for extended
periods of time. As of April 30, 1999, we had failed to maintain a $1.00 minimum
closing bid price for 19 consecutive trading days. From April 30, 1999 through
July 15, 1999, our minimum closing bid price has fallen periodically below the
minimum $1.00 closing bid price. If we fail to meet the minimum closing bid
price of $1.00 for a period of 30 consecutive trading days, we will be notified
by The Nasdaq Stock Market and will then have a period of 90 calendar days from
such notification to achieve compliance with the applicable standard by meeting
the minimum closing bid price requirement for at least 10 consecutive trading
days during such 90 day period. We cannot guarantee that we will be able to
maintain these requirements in the future. If we fail to meet any of The Nasdaq
SmallCap Market listing requirements, the market value of the Common Stock could
fall and holders of Common Stock would likely find it more difficult to dispose
of the Common Stock. In addition, if the minimum closing bid price of the Common
Stock is not at least $1.00 per share for 10 consecutive trading days before we
make a call for proceeds under our Regulation D Common Stock Equity Line
Subscription Agreement with two institutional investors or if the Common Stock
ceases to be included on The Nasdaq SmallCap Market, we would have limited or no
access to funds under the Regulation D Common Stock Equity Line Subscription
Agreement. Moreover, should the market price of the Common Stock fall
significantly, we would be required to issue to the two institutional investors
a much greater number of shares than we would otherwise if the market price were
stable or rising, which could cause the market price of the Common Stock to fall
further and faster. In addition, we and broker-dealers effecting transactions in
the Common Stock may become subject to additional disclosure and reporting
requirements applicable to low-priced securities, which may reduce the level of
trading activity in the secondary market for the Common Stock and limit or
prevent investors from readily selling their shares of Common Stock.
THE SALE OF SUBSTANTIAL SHARES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
As of July 15, 1999, we had approximately 76,370,000 shares of Common
Stock outstanding. We are also obligated to issue up to an additional
approximately 191,000 shares of Common Stock upon conversion of 91 outstanding
shares of our 5% Adjustable Convertible Class C Preferred Stock and exercise of
related warrants. Under our Regulation D Common Stock Equity Line Subscription
Agreement with two institutional investors, we may issue up to an additional
approximately 18,150,000 shares of Common Stock (assuming a market price of our
common stock of $1.00 per share), at our sole option, from time to time, in
exchange for an aggregate purchase price of $12,000,000, which includes warrants
equal to 10% of the shares of Common Stock issued under such agreement, which
must be exercised on a cashless basis only. In addition, an additional
approximately 15,495,000 shares of Common Stock are issuable upon exercise of
outstanding stock options and other warrants at an average exercise price of
$1.81. The conversion rate applicable to our Class C Preferred Stock and the
purchase price for the shares of Common Stock and warrants to be issued under
the Regulation D Common Stock Equity Line Subscription Agreement are at a
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significant discount to the market price of the Common Stock. The sale and
issuance of these shares of Common Stock, as well as subsequent sales of shares
of Common Stock in the open market, may cause the market price of the Common
Stock to fall and might impair our ability to raise additional capital through
sales of equity or equity-related securities, whether under the Regulation D
Common Stock Equity Line Subscription Agreement or otherwise.
OUR HIGHLY VOLATILE STOCK PRICE AND TRADING VOLUME MAY ADVERSELY AFFECT THE
LIQUIDITY OF THE COMMON STOCK.
The market price of the Common Stock, and the market prices of
securities of companies in the biotechnology industry generally, has been highly
volatile and is likely to continue to be highly volatile. Also, the trading
volume in the Common Stock has been highly volatile, ranging from as few as
44,000 shares per day to as many as 19 million shares per day over the past
eighteen months, and is likely to continue to be highly volatile. The market
price of the Common Stock may be significantly impacted by many factors,
including announcements of technological innovations or new commercial products
by us or our competitors, disputes concerning patent or proprietary rights,
publicity regarding actual or potential medical results relating to products
under development by us or our competitors and regulatory developments and
product safety concerns in both the United States and foreign countries. These
and other external factors have caused and may continue to cause the market
price and demand for the Common Stock to fluctuate substantially, which may
limit or prevent investors from readily selling their shares of Common Stock and
may otherwise negatively affect the liquidity of the Common Stock.
WE MAY NOT BE ABLE TO COMPETE WITH OUR COMPETITORS IN THE BIOTECHNOLOGY
INDUSTRY.
The biotechnology industry is intensely competitive. It is also subject
to rapid change and sensitive to new product introductions or enhancements. We
expect to continue to experience significant and increasing levels of
competition in the future. Virtually all of our existing competitors have
greater financial resources, larger technical staffs, and larger research
budgets than we have, as well as greater experience in developing products and
running clinical trials. Two of our competitors, IDEC Pharmaceuticals
Corporation and Coulter Pharmaceuticals, Inc., each has a lymphoma antibody that
may compete with our direct tumor targeting agent product, Oncolym(R). IDEC
Pharmaceuticals Corporation is currently marketing its lymphoma product for low
grade non-Hodgkin's lymphoma and we believe that Coulter Pharmaceuticals, Inc.
will be marketing its respective lymphoma product prior to the time our
Oncolym(R) product will be submitted to the United States Food and Drug
Administration for marketing approval. Coulter Pharmaceuticals, Inc. has also
announced that it intends to seek to conduct clinical trials of its antibody
treatment for intermediate and/or high-grade non-Hodgkin's lymphomas. In
addition, there may be other companies which are currently developing
competitive technologies and products or which may in the future develop
technologies and products which are comparable or superior to our technologies
and products. Some or all of these companies may also have greater financial and
technical resources than we have. Accordingly, we cannot assure you that we will
be able to compete successfully with our existing and future competitors or that
competition will not negatively affect our financial position or results of
operations in the future.
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WE MAY NOT BE SUCCESSFUL IF WE ARE UNABLE TO OBTAIN AND MAINTAIN PATENTS AND
LICENSES TO PATENTS.
Our success depends, in large part, on our ability to obtain or
maintain a proprietary position in our products through patents, trade secrets
and orphan drug designations. We have been granted several United States patents
and have submitted several United States patent applications and numerous
corresponding foreign patent applications, and have also obtained licenses to
patents or patent applications owned by other entities. However, we cannot
assure you that any of these patent applications will be granted or that our
patent licensors will not terminate any of our patent licenses. We also cannot
guarantee that any issued patents will provide competitive advantages for our
products or that any issued patents will not be successfully challenged or
circumvented by our competitors. Although we believe that our patents and our
licensors' patents do not infringe on any third party's patents, we cannot be
certain that we can avoid litigation involving such patents or other proprietary
rights. Patent and proprietary rights litigation entails substantial legal and
other costs, and we may not have the necessary financial resources to defend or
prosecute our rights in connection with any litigation. Responding to, defending
or bringing claims related to patents and other intellectual property rights may
require our management to redirect our human and monetary resources to address
these claims and may take years to resolve.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY BE REDUCED OR
DISCONTINUED DUE TO DIFFICULTIES OR DELAYS IN CLINICAL TRIALS.
We may encounter unanticipated problems, including development,
manufacturing, distribution, financing and marketing difficulties, during the
product development, approval and commercialization process. Our product
candidates may take longer than anticipated to progress through clinical trials
or patient enrollment in the clinical trials may be delayed or prolonged
significantly, thus delaying the clinical trials. Delays in patient enrollment
will result in increased costs and further delays. If we experience any such
difficulties or delays, we may have to reduce or discontinue development,
commercialization or clinical testing of some or all of our product candidates.
Schering A.G., Germany has recently advised us that it is analyzing the results
of the current Phase II clinical development program for our direct tumor
targeting agent product candidate and based on that analysis, Schering A.G.,
Germany may revise the current protocol. As such, the current clinical trial
sites will remain open for treating existing patients, however, no new
enrollment of patients will be made under the current trial. Schering A.G.,
Germany has further informed us that if a revised protocol is developed, it will
be submitted to the United States Food and Drug Administration for additional
clinical trials. If Schering A.G., Germany decides to discontinue the
development of this product candidate and terminates our license agreement for
the worldwide development, distribution and marketing of this product candidate,
we may have to discontinue development, commercialization and clinical testing
of this product candidate.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY BE REDUCED OR
DISCONTINUED DUE TO DELAYS OR FAILURE IN OBTAINING REGULATORY APPROVALS.
We will need to do substantial additional development and clinical
testing prior to seeking any regulatory approval for commercialization of our
product candidates. Testing, manufacturing, commercialization, advertising,
promotion, export and marketing, among other things, of our proposed products
are subject to extensive regulation by governmental authorities in the United
States and other countries. The testing and approval process requires
substantial time, effort and financial resources and we cannot guarantee that
any approval will be granted on a timely basis, if at all. Companies in the
pharmaceutical and biotechnology industries have suffered significant setbacks
in conducting advanced human clinical trials, even after obtaining promising
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results in earlier trials. Furthermore, the United States Food and Drug
Administration may suspend clinical trials at any time on various grounds,
including a finding that the subjects or patients are being exposed to an
unacceptable health risk. Even if regulatory approval of a product is granted,
such approval may entail limitations on the indicated uses for which it may be
marketed. Accordingly, we may experience difficulties and delays in obtaining
necessary governmental clearances and approvals to market our products, and we
may not be able to obtain all necessary governmental clearances and approvals to
market our products. At least initially, we intend, to the extent possible, to
rely on licensees to obtain regulatory approval for marketing our products. The
failure by us or our licensees to adequately demonstrate the safety and efficacy
of any of our product candidates under development could delay, limit or prevent
regulatory approval of the product, which may require us to reduce or
discontinue development, commercialization or clinical testing of some or all of
our product candidates.
OUR PRODUCTS, IF APPROVED, MAY NOT BE COMMERCIALLY VIABLE DUE TO HEALTH CARE
REFORM AND THIRD-PARTY REIMBURSEMENT LIMITATIONS.
Recent initiatives to reduce the federal deficit and to reform health
care delivery are increasing cost-containment efforts. We anticipate that
Congress, state legislatures and the private sector will continue to review and
assess alternative benefits, controls on health care spending through
limitations on the growth of private health insurance premiums and Medicare and
Medicaid spending, price controls on pharmaceuticals and other fundamental
changes to the health care delivery system. Legislative debate is expected to
continue in the future, and market forces are expected to drive reductions of
health care costs. Any such changes could negatively impact the commercial
viability of our products, if approved. Our ability to successfully
commercialize our product candidates, if and when they are approved, will depend
in part on the extent to which appropriate reimbursement codes and authorized
cost reimbursement levels of such products and related treatment are obtained
from governmental authorities, private health insurers and other organizations,
such as health maintenance organizations. In the absence of national Medicare
coverage determination, local contractors that administer the Medicare program,
within certain guidelines, can make their own coverage decisions. Accordingly,
there can be no assurance that any of our product candidates, if approved and
when commercially available, will be included within the then current Medicare
coverage determination or the coverage determination of state Medicaid programs,
private insurance companies and other health care providers. In addition,
third-party payors are increasingly challenging the prices charged for medical
products and services. Also, the trend toward managed health care and the growth
of health maintenance organizations in the United States may all result in lower
prices for our products, if approved and when commercially available, than we
currently expect. The cost containment measures that health care payors and
providers are instituting and the effect of any health care reform could
negatively affect our financial performance, if and when one or more of our
products are approved and available for commercial use.
OUR MANUFACTURING AND USE OF HAZARDOUS AND RADIOACTIVE MATERIALS MAY RESULT IN
OUR LIABILITY FOR DAMAGES, INCREASED COSTS AND INTERRUPTION OF ANTIBODY
SUPPLIES.
The manufacturing and use of our products require the handling and
disposal of the radioactive isotope I131. We currently rely on, and intend in
the future to rely on, our current contract manufacturers to combine antibodies
with radioactive I131 isotope in our products and to comply with various local,
state and or national and international regulations regarding the handling and
use of radioactive materials. Violation of these local, state, national or
international regulations by these companies or a clinical trial site could
significantly delay completion of the trials. Violations of safety regulations
could occur with these manufacturers, so there is also a risk of accidental
12
contamination or injury. Accordingly, we could be held liable for any damages
that result from an accident, contamination or injury caused by the handling and
disposal of these materials, as well as for unexpected remedial costs and
penalties that may result from any violation of applicable regulations. In
addition, we may incur substantial costs to comply with environmental
regulations. In the event of any noncompliance or accident, the supply of
antibodies for use in clinical trials or commercial products could also be
interrupted.
OUR OPERATIONS AND FINANCIAL PERFORMANCE COULD BE NEGATIVELY AFFECTED IF WE
CANNOT ATTRACT AND RETAIN KEY PERSONNEL.
Our success is dependent, in part, upon a limited number of key
executive officers and technical personnel remaining employed with us, including
Larry O. Bymaster, our President and Chief Executive Officer, Steven C. Burke,
our Chief Financial Officer, and Dr. John N. Bonfiglio, our Vice President of
Technology and Business Development and interim Vice President of Clinical and
Regulatory Affairs. We also believe that our future success will depend largely
upon our ability to attract and retain highly-skilled research and development
and technical personnel. We face intense competition in our recruiting
activities, including larger companies with greater resources. We do not know if
we will be successful in attracting or retaining skilled personnel. The loss of
certain key employees or our inability to attract and retain other qualified
employees could negatively affect our operations and financial performance.
OUR BUSINESS MAY BE ADVERSELY EFFECTED IF OUR COMPUTER SYSTEMS AND THE COMPUTER
SYSTEMS OF OUR SUPPLIERS ARE NOT YEAR 2000 COMPLIANT.
We are aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The year 2000 problem is
pervasive and complex. The issue is whether computer systems will properly
recognize date-sensitive information in the year 2000 due to the fact that the
programming in most computer systems use a two digit year value, which value
will rollover to "00" as of January 1, 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. We have identified substantially all of our information technology ("IT")
and non-IT systems, including major hardware and software platforms in use and
we have modified and upgraded our hardware, software of IT and non-IT systems to
be year 2000 compliant. We do not presently believe that the year 2000 problem
will pose significant operational problems for our internal computer systems or
have a negative affect on our operations. However, we cannot assure you that any
year 2000 compliance problems of our suppliers will not negatively affect our
operations. Because uncertainty exists concerning the potential costs and
effects associated with any year 2000 compliance, we intend to continue to make
efforts to ensure that third parties with whom we have relationships are year
2000 compliant. We have not incurred significant costs to date associated with
year 2000 compliance and presently believe estimated future costs will not be
material. However, actual results could differ materially from our expectations
due to unanticipated technological difficulties or project delays. If any third
parties upon which we rely are unable to address the year 2000 issue in a timely
manner, although we are uncertain as to our worst case consequences, it could
have an adverse impact on our operations, including delaying our clinical trial
programs. In order to minimize this risk, we have developed a contingency plan,
the implementation of which should be completed by November 1999, and we intend
to devote all resources required to attempt to resolve any significant year 2000
problems in a timely manner.
13
PART I
------
ITEM 1. BUSINESS
--------
COMPANY OVERVIEW
Techniclone Corporation was incorporated in the State of Delaware on
September 25, 1996. On March 24, 1997, Techniclone International Corporation, a
California corporation (a predecessor company incorporated in June 1981), was
merged with and into Techniclone Corporation. This merger was effected for the
purpose of effecting a change in our state of incorporation from California to
Delaware and making certain changes in our charter documents. Techniclone
Corporation refers to Techniclone International Corporation, its former
subsidiary, Cancer Biologics Incorporated ("CBI"), which was merged into the
Company on July 26, 1994 and its wholly-owned subsidiary Peregrine
Pharmaceuticals, Inc. ("Peregrine"), a Delaware corporation, which was acquired
on April 24, 1997.
Techniclone Corporation is a biopharmaceutical company engaged in the
research, development and commercialization of targeted cancer therapeutics. We
develop product candidates based primarily on our proprietary collateral
(indirect) tumor targeting technologies for the treatment of solid tumors and a
direct tumor targeting agent for the treatment of refractory malignant lymphoma.
We have four potential product candidates: two products are in Phase II clinical
trials and two products are in preclinical studies.
Collateral (indirect) tumor targeting is the therapeutic strategy of
targeting peripheral structures and cell types, other than the viable cancer
cells directly, as a means to treat solid tumors. We are currently developing
three collateral (indirect) targeting agents for the treatment of solid tumors:
Tumor Necrosis Therapy, which is potentially capable of carrying a variety of
therapeutic agents to the interior of solid tumors and irradiating the tumor
from the inside out; Vasopermeation Enhancement Agents, which potentially
increases the permeability of the tumor site and consequently can increase the
concentration of killing agents at the core of the tumor; and Vascular Targeting
Agents, which potentially creates a blockage within the capillaries and blood
vessels that supply solid tumors with nutrients, thus potentially destroying the
tumor.
A Phase II clinical trial of our Tumor Necrosis Therapy agent (called
Cotara(TM)) for the treatment of malignant glioma (brain cancer) is currently
being conducted at The Medical University of South Carolina and the University
of California at Los Angeles, with five additional clinical trial sites at
various stages of contract negotiation. In addition, our Tumor Necrosis Therapy
agent is being used in an equivalent Phase I clinical trial for the treatment of
pancreatic, prostrate and liver cancers at a clinical trial site in Mexico City.
We are collaborating with outside scientists for preclinical studies on
Vasopermeation Enhancement Agents and on Vascular Targeting Agents.
To date, the business has been financed primarily through the sale of
equity securities and we have not received any significant revenues. However, on
March 8, 1999, we entered into a license agreement with Schering A.G., Germany,
a major multinational pharmaceutical company, with respect to the development,
manufacture and marketing of our direct tumor targeting agent candidate,
Oncolym(R). At the time we entered into the license agreement with Schering
A.G., Germany, Oncolym(R) was in a Phase II/III clinical trial for the treatment
of non-Hodgkin's B-cell Lymphoma. Under this license agreement with Schering
A.G., Germany, Techniclone received an initial $3,000,000 payment and provisions
for additional payments and reimbursements of up to $17 million, subject to the
achievement of certain milestones, and royalties based on sales of Oncolym(R).
As part of this Oncolym(R) agreement, Schering A.G., Germany and Techniclone are
proceeding with negotiations concerning the terms of a possible licensing
transaction on the Vascular Targeting Agents technology. We cannot be certain
whether we will be successful in entering into a licensing transaction on the
Vascular Targeting Agents technology on terms satisfactory to us, if at all.
14
Our principal executive offices are located at 14282 Franklin Avenue,
Tustin, California 92780-7017 and our telephone number is (714) 508-6000.
BACKGROUND OF CANCER AND CONVENTIONAL TREATMENTS
Before we discuss our technologies and business in more detail, we have
gathered the following information derived primarily from data provided by the
American Cancer Society, to better assist you in understanding cancer and
conventional treatments.
Cancer is a family of more than one hundred diseases that can be
categorized into two broad groups: (i) solid tumor cancers, such as brain, lung,
prostate, breast and colon cancers and (ii) non-solid tumor cancers such as
hematological or blood-borne malignancies, including lymphomas and leukemia's.
All cancers are generally characterized by a breakdown of the cellular
mechanisms that regulate cell growth and cell death in normal tissues. In the
United States alone, there are an estimated 8 million people alive who have a
history of cancer. In addition, there was an estimated 1.2 million newly
diagnosed cases of cancer in 1998, of which, approximately 1.1 million cases
related to solid tumor cancers.
Of the estimated 1.1 million newly diagnosed solid tumor cases in 1998,
the following represent the top five diagnosed solid tumor cancers:
5-Year Survival
Estimated New Estimated Rate - All
Type of Cancer Cases Deaths Disease Stages
--------------------------------------------- ------------- --------- ----------------
Prostate cancer 184,500 39,200 89%
Breast cancer 180,300 43,900 84%
Lung cancer 171,500 160,100 14%
Colorectal cancer 131,600 56,500 62%
Urinary bladder 54,400 12,500 81%
In addition, the most deadly forms of solid tumor cancers, (those with
the lowest 5-year survival rates), were:
5-Year Survival
Estimated New Estimated Rate - All
Type of Cancer Cases Deaths Disease Stages
--------------------------------------------- ------------- --------- ----------------
Pancreatic cancer 29,000 28,900 4%
Liver cancer 13,900 13,000 6%
Esophagus cancer 36,300 35,700 11%
Lung cancer 171,500 161,100 14%
Malignant gliomas (brain cancer) 8,000 * *
* High grade gliomas such as glioblastoma multiforme and anaplastic
astrocytoma are among the most serious and aggressive types of malignant brain
tumors, with median patient survival times ranging from 9 to 12 months from
initial diagnosis.
15
Our initial Tumor Necrosis Therapy clinical treatment areas include
three of the top five most deadly forms of solid tumors cancers (pancreatic,
liver and brain), as well as prostate cancer, which has the highest estimated
number of new cases. We are currently conducting a Phase II clinical trial for
the treatment of malignant glioma (brain cancer) and have started an equivalent
Phase I trial in Mexico City for the treatment of prostate cancer, liver cancer
and pancreatic cancer. Although the information above represents estimated total
new cases, our technologies, if approved, may only treat a small percentage of
that population or certain indications within any one cancer group.
Brain cancer, which includes malignant glioma, grows rapidly, is
debilitating and is almost always fatal. Within the brain, gliomas usually occur
in the cerebral hemispheres but may also strike other areas, especially the
optic nerve, the brain stem, and particularly among children, the cerebellum.
Brain tumors are the second leading cause of cancer death in children under age
15 and in young adults up to age 34. Conventional treatments for brain tumors
include surgery, radiation treatment and/or chemotherapy.
Prostate, liver and pancreatic cancers are devastating diseases with
few treatment alternatives. These cancers, especially liver and pancreatic, are
often inoperable, progress rapidly, and have poor prognosis for survival.
Non-solid, blood borne cancers are of the immune system and include
Non-Hodgkin's B-cell lymphomas ("NHL"). NHL is usually characterized by multiple
tumors at various sites throughout the body. There were more than 55,000 new
cases expected to be diagnosed in 1998 in the United States.
OUR TECHNOLOGIES AND LICENSING ARRANGEMENTS
-------------------------------------------
COLLATERAL (INDIRECT) TARGETING AGENTS FOR SOLID TUMOR THERAPY
We have three monoclonal antibody technologies for collateral
(indirect) targeting of solid tumors for cancer therapy, Tumor Necrosis Therapy
(TNT), Vascular Targeting Agents (VTAs), and Vasopermeation Enhancement Agents
(VEAs).
TUMOR NECROSIS THERAPY (TNT). Tumor Necrosis Therapy represents an
entirely new approach to cancer therapy. Instead of targeting living cancer
cells, TNT targets dead and dying cells because such cells account for up to 50%
of the mass of a tumor and are found primarily at the tumor core. TNT binds to
DNA or DNA-associated proteins, such as histones, found within the nucleus of
every cell. TNT is only able to bind to DNA in cells having porous nuclear and
cellular membranes, since porosity is a property uniquely associated with dead
and dying cells, thus DNA functions as a highly abundant but selective target.
This DNA target is not believed to modulate as do targets associated with other
tumor-specific cell surface antigens that are commonly used as targets with
other antibody-based therapeutic modalities. Once concentrated in necrotic
regions throughout the tumor, radiolabeled TNT can potentially bombard
neighboring viable cancer cells with beta radiation for an extended period of
time.
Each successive treatment with TNT potentially kills more cancer cells,
thereby, increasing the necrotic area of the tumor. Thus, TNT potentially
becomes more effective upon subsequent doses, contrary to conventional
chemotherapy, which becomes less effective with subsequent doses due to
increased drug resistance. Additionally, since Iodine 131(radioactive isotope)
has a killing radius of 100-300 cell layers around the isotope, TNT might be
effective in most areas of the tumor having small pockets of necrosis surrounded
by viable tumor cells. In essence, TNT potentially destroys the tumor from the
inside out. The TNT targeting mechanism could be the basis for a class of new
products effective across a wide-range of solid tumor types, including brain,
lung, colon, breast, liver, prostate and pancreatic cancers.
16
Our first TNT-based product is an investigational chimeric monoclonal
antibody radiolabeled with the isotope, I131, trademarked Cotara(TM). During
March 1998, we began enrolling patients into a Phase I study of TNT for the
treatment of malignant glioma (brain cancer). The treatment protocol used an
interstitial delivery system pioneered by the National Institutes of Health
(NIH). The interstitial delivery system uses a low-pressure intra-tumoral
catheter to deliver therapeutic agents directly to the tumor in a way which
maximizes the uptake of the drug by the tumor tissue. The Phase I clinical
investigation was designed to assess the safety and tolerability of
interstitially administered TNT antibody. The protocol included the provision to
enroll up to 24 patients with recurrent supratentorial anaplastic astrocytoma
and glioblastoma multiforme ("GBM"). Patients could include those who are
candidates for surgical treatment and patients for which surgical tumor
debulking is not possible. We amended the Phase I trial protocol in July 1998 to
allow for patient-specific dosing of TNT based on the volume of the specific
brain tumor. Endpoints in the study included safety, determination of the
maximum tolerated dose, pharmacokinetic profile, and radiation dosimetry. The
Phase I clinical trial was conducted at The Medical University of South
Carolina. The results of the Phase I clinical trial showed the drug to be
relatively safe and reasonably well-tolerated under the dosing regimen.
In December 1998, we started a Phase II clinical trial for the
treatment of malignant glioma. The Phase II trial is currently being conducted
at The Medical University of South Carolina and the University of California at
Los Angeles, with five additional clinical trial sites at various stages of
contract negotiation. The protocol will include the treatment of up to 60
patients and will examine dosing and efficacy in newly diagnosed GBM, recurrent
GBM and recurrent anaplastic astriacytoma. The study will include two doses per
patient administered nine weeks apart. Doses will be divided and delivered
through two catheters placed perpendicularly to maximize delivery to all planes
of the tumor.
In addition, we have started treating patients in a Phase I equivalent
clinical trial in Mexico City using TNT for treatment of prostate, liver and
pancreatic cancers. The treatment will include up to 18 patients. TNT will be
delivered to the tumor by intratumoral administration and by intravenous
administration. The purpose of this study is to examine safety, dosimetry, and
dosing in solid tumors. The clinical trial is partially being sponsored by a
major multinational pharmaceutical company whose shares are traded on the New
York Stock Exchange.
TNT LICENSING OBLIGATIONS. During February 1996, the Company entered
into a joint venture agreement with Cambridge Antibody Technology, Inc. (CAT),
an unrelated entity, which provides for the co-sponsorship of development and
clinical testing of chimeric and human TNT antibodies. As part of the joint
venture agreement, CAT maintained the responsibility to construct human TNT
antibodies for future joint clinical development and testing. A human TNT
antibody was completed by CAT in early 1998. The agreement also provides that
equity in the joint venture and costs associated with the development of
TNT-based products would be shared equally and the Company would retain
exclusive world-wide manufacturing rights. In May 1998, the Company and CAT
elected to discontinue the co-sponsorship of the development of the TNT
antibodies and the Company assumed full responsibility to fund development and
clinical trials of the TNT antibody. As a result of the modification in the
joint venture agreement, royalties on future sales of products which use the TNT
antibody have been decreased to be no more than 12.5%. The Company and CAT are
currently in negotiations regarding modifications to the joint venture
arrangement. The Company has not generated any revenues from its TNT technology.
17
The Company has additional licensing arrangements and is currently
negotiating with certain third parties to acquire licenses needed to produce and
commercialize chimeric and human antibodies, including the Company's TNT
antibody. These licenses are generally available from the licensors to all
interested parties. The terms of the licenses, obtained and as expected to be
obtained, are not expected to significantly impact the cost structure or
marketability of chimeric or human-based products.
VASCULAR TARGETING AGENTS (VTAS). Our VTA technology was acquired in
April 1997 through the acquisition of Peregrine Pharmaceuticals, Inc. VTAs are
molecules that target the blood vessels of tumors and act to kill solid tumors
by causing a blood clot to form in these tumor blood vessels. After attaching to
the endothelial cells which line the tumor blood vessels, the VTA induces a
blood clot in the tumor blood vessels causing the flow of oxygen and nutrients
to the tumor cells to cease. Without adequate oxygen and nutrients, the tumor
dies.
VTAs act on the endothelial cells lining the blood vessels of tumors,
not on the tumor cells themselves. This method of delivery is believed to be
advantageous, when compared to the method of delivery of conventional cancer
drugs, because VTAs are not required to penetrate the tumor directly to obtain a
therapeutic response. On the other hand, conventional cancer drug agents must
migrate out of the blood vessels and into the tumor tissue to be effective.
VTAs have the potential to be effective against a wide variety of solid
tumors since every solid tumor in excess of two millimeters in size forms a
vascular network to enable it to continue to grow. Tumor vasculature is believed
to be consistent among various tumor types.
Additionally, a potential advantage of the VTA approach is that the
endothelial cells targeted by VTAs do not mutate to become drug resistant. Drug
resistance caused by the instability and mutability of cancer cells is a
significant problem with conventional therapeutic agents which must directly
target the cancer cells of the tumor.
Our scientists continue to perform preclinical studies on VTAs. In
these preclinical animal studies, VTAs have shown that within hours after
administration, clots form in the tumor vasculature and the tumor cells begin to
die. Within days, large tumor masses have been shown to disintegrate and have
left nearby healthy tissue intact and fully functional.
The VTA technology differs from conventional anti-angiogenesis therapy
in that VTAs act by shutting off the supply of oxygen and nutrients to tumor
cells by inducing clot formation in existing tumor-blood vessels. By contrast,
anti-angiogenesis compounds typically work by inhibiting the growth of new tumor
blood vessels. In inhibiting the growth of new tumor blood vessels, tumor growth
may be diminished, but the existing tumor can maintain its bulk by utilizing the
existing tumor blood vessels. The VTA approach, therefore, is designed to
provide a therapeutic effect for the debulking of existing tumors.
VTA LICENSING OBLIGATIONS. In conjunction with obtaining certain
exclusive licenses for Vascular Targeting Agents (VTAs) technologies from
Peregrine, the Company will be required to pay (i) annual patent maintenance
fees of $50,000, (ii) an aggregate of $587,500 upon attainment of defined
milestones and (iii) an aggregate of $450,000 upon commercial introduction of
the products which will be off-set against future royalty payments. In addition,
the Company must pay royalties ranging from 2% to 4% of net sales of the related
products. If the products are sublicensed, the Company must pay royalties of up
to 25% of the sublicense revenues received by the Company. No revenues have been
generated from our VTA technology. In connection with our agreement with
Schering A.G., Germany for Oncolym(R), Schering A.G., Germany has agreed to
discuss with us the development and commercialization of Vascular Targeting
Agents.
18
VASOPERMEATION ENHANCEMENT AGENTS (VEAS). Vasopermeation Enhancement
Agents use vasoactive compounds (molecules that cause tissues to become more
permeable) linked to monoclonal antibodies, such as the TNT antibodies, to
increase the vasoactive permeability at the tumor site and act to increase the
concentration of killing agents at the core of the tumor. VEAs are administered
to a cancer patient by pretreating 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 agent. 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 thereby
causing these tissues to become a "sink" for other compounds that are
subsequently given intravenously. 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. In pre-clinical studies, our scientists were able to increase
the uptake of drugs or isotopes within a tumor by 200% to 400% if a VEA was
given several hours prior to the therapeutic treatment. The therapeutic drug can
be a chemotherapy drug, radiolabeled antibody or other cancer fighting agents.
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. Our scientists are
doing preliminary studies on Vasopermeation Enhancement Agents.
VEA LICENSING OBLIGATIONS. The Company entered into a license agreement
for the VEA technology with a university for the exclusive, worldwide licensing
rights to use certain patents and technologies in exchange for fixed and
contingent payments and future minimum royalties of $80,000 annually or 6% of
net sales of the related products.
DIRECT TARGETING AGENT FOR NON-SOLID TUMOR THERAPY
ONCOLYM(R). Techniclone's first and, presently, only proprietary
monoclonal antibody cancer therapy product, Oncolym(R), is designed as a therapy
against non-Hodgkin's B-cell lymphoma cancer. Techniclone's Oncolym(R) antibody
is linked to a radioactive isotope (I131), and the combined molecule is injected
into the blood stream of the cancer patient where it recognizes and binds to the
cancerous lymphoma tumor sites, thereby delivering the radioactive isotope to
the tumor site, with minimal adverse effects on surrounding healthy tissue.
ONCOLYM(R) LICENSE TO SCHERING A.G., GERMANY. In March 1999, the
Company entered into a License Agreement with Schering A.G., Germany, whereby
Schering A.G., Germany was granted the exclusive, worldwide right to market and
distribute Oncolym(R) products, in exchange for an initial payment of
$3,000,000, a further payment of $2,000,000 following the acceptance by the FDA
for filing of the first drug approval application for Oncolym(R) in the United
States, a further payment of $7,000,000 following regulatory approval of
Oncolym(R) in the United States and two final payments of $2,500,000 each
following regulatory approval of Oncolym(R) in any country in Europe and upon
the first commercial sale of Oncolym(R) in any country in Europe. The Company
will also receive a royalty of up to twelve percent (12%) of net sales of
Oncolym(R) products. The agreement with Schering A.G., Germany is subject to
certain other conditions and may be terminated by Schering A.G., Germany for a
number of reasons as defined in the agreement, including upon thirty days'
written notice given at any time prior to receiving regulatory approval.
19
Schering A.G., Germany is a recognized worldwide leader in the
commercialization and marketing of pharmaceutical products with competence in
Oncology. Under the agreement, Schering A.G., Germany controls the clinical
development program and funds 80% of the clinical trial costs. Recently,
Schering A.G., Germany has advised us that they believe the potential success of
the Oncolym(R) product may be enhanced via a revision of the current Phase II
protocol. In this context, Schering A.G., Germany is analyzing the results of
the current Phase II clinical trial and, based on that analysis, may revise the
current protocol. As such, the current clinical trial sites will remain open for
treating existing patients, however, no new enrollment of patients will be made
under the current trial. If a revised protocol is developed by Schering A.G.,
Germany, it will be submitted to the United States Food and Drug Administration
("FDA") for additional clinical studies.
ONCOLYM(R) LICENSING OBLIGATIONS. In March 1999, the Company entered
into a Termination Agreement with Biotechnology Development, Ltd. ("BTD"),
pursuant to which the Company terminated all previous agreements with BTD and
thereby reacquired the marketing rights to Oncolym(R) products in Europe and
certain other designated foreign countries. In exchange for these rights, the
Company expensed $4,500,000 as a license fee in fiscal year 1999, consideration
for which was comprised of a secured promissory note payable in the amount of
$3,300,000 and 1,523,809 shares of common stock at a 10% discount to market as
defined in the Termination Agreement (equal to $1,200,000). In addition, the
Company issued warrants to BTD to purchase up to 3,700,000 shares of common
stock at an exercise price of $3.00 per share exercisable for a period of three
(3) years and issued additional warrants to BTD to purchase up to 1,000,000
shares of common stock at an exercise price of $5.00 per share exercisable for a
period of five (5) years.
Prior to fiscal year 1999, the Company entered into several agreements
for the licensing of Oncolym(R). Under these agreements, the Company is
obligated to make future "milestone based" payments totaling $2, 100,000 and pay
royalties of up to an aggregate 8% of net sales for a specified period of time
as defined in the agreements. The aggregate royalty rate is currently being
negotiated and is expected to be reduced to 5% of net sales with such royalty
rate being payable for a longer period of time. There can be no assurance
however, that the Company will be successful in obtaining such reduced royalty
rate.
OTHER COMPANY DEVELOPMENTS
On December 24, 1998, the Company completed the sale and subsequent
leaseback of its two facilities with an unrelated entity. The aggregate sales
price of the two facilities was $6,100,000, comprised of $4,175,000 in cash and
a note receivable of $1,925,000. In accordance with Statement of Financial
Accounting Standard (SFAS) No. 98, the Company accounted for the sale and
subsequent leaseback transaction as a sale and removed the net book value of
land, buildings and building improvements of $7,014,000 from the consolidated
financial statements and recorded a non-cash loss on sale of $1,171,000, which
included expenses of $257,000 related to the sale.
20
COMPETITION
-----------
Our competitive position is based on our proprietary technology,
know-how and U.S. patents covering our collateral (indirect) targeting agent
technologies (TNT, VTA and VEA) and our direct targeting agent technology
(Oncolym(R)) for the therapeutic treatment of human cancers. We have a number of
worldwide patents and patent applications issued and pending. We plan to compete
on the basis of the advantages of our technologies, the quality of our products,
the protection afforded by our issued patents and our commitment to research and
develop innovative technologies.
Various other companies, some or all of which have larger financial
resources than us, are currently engaged in research and development of
monoclonal antibodies and in cancer prevention and treatment. There can be no
assurance that such companies, other companies or various other academic and
research institutions will not develop and market monoclonal antibody products
or other products to prevent or treat cancer prior to the introduction of, or in
competition with, our present or future products. In addition, there are many
firms with established positions in the diagnostic and pharmaceutical industries
which may be better equipped than us to develop monoclonal antibody technology
or other products to diagnose, prevent or treat cancer and to market their
products. Accordingly, we plan to, whenever feasible, enter into joint venture
relationships with these competing firms or with other firms with appropriate
capabilities for the development and marketing of specific products and
technologies so that our competitive position might be enhanced.
Tumor Necrosis Therapy (TNT), is currently in a Phase II clinical trial
for the treatment of malignant glioma (brain cancer) and a Phase I equivalent
clinical trial for the treatment of prostate, liver and pancreatic cancers in
Mexico City. The Company knows of no similar radiolabeled compound similarly
administered, which are in clinical trials under a Company sponsored IND for
application to brain, prostate, liver and pancreatic cancers. However, there may
be alternative potential cancer therapy approaches in development by others
which may compete with the Company's TNT product, if approved for sale.
The Company's other potential product, Oncolym(R), is a treatment for
intermediate and high grade non-Hodgkin's lymphoma. There are currently two
potential competitors either using or planning to use monoclonal antibody based
therapy for the treatment of non-Hodgkin's lymphoma. These potential competitors
are Coulter Pharmaceutical, Inc. ("Coulter") and IDEC Pharmaceuticals
Corporation ("IDEC"). IDEC has a marketed drug that is on the market in the US
and Europe for the treatment of low grade lymphoma and Coulter has recently
filed a BLA seeking approval for the treatment of low grade lymphoma. Coulter
has also announced that it intends to seek to conduct clinical trials of its
antibody treatment for intermediate and/or high grade non-Hodgkin's lymphomas.
IDEC received FDA approval of this antibody in 1997 and is currently marketing
its product through a joint venture with Genentech Inc.. Other companies may
also be working on monoclonal antibody-based therapies which may compete with
Oncolym(R).
The Company believes that its product development programs will be
subject to significant competition from companies utilizing alternative
technologies as well as to increasing competition from companies that develop
and apply technologies similar to the Company's technologies. Other companies
may succeed in developing products earlier than the Company, obtaining approvals
for such products from the FDA more rapidly than the Company or developing
products that are safer and more effective than those under development or
proposed to be developed by the Company. There can be no assurance that research
and development by others will not render the Company's technology or potential
products obsolete or non-competitive or result in treatments superior to any
therapy developed by the Company, or that any therapy developed by the Company
will be preferred to any existing or newly developed technologies.
21
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 TNT, VTA, VEA and
Oncolym(R), involves many steps, including laboratory testing of those products
in animals to determine safety, efficacy and potential toxicity, the filing with
the FDA of a Notice of Claimed Investigational Exemption for Use of a New Drug
prior to the initiation of clinical testing of regulated drug and biologic
experimental products, and clinical testing of those products in humans. The
Company has filed a Notice of Claimed Investigational Exemption for Use of a New
Drug with the FDA for the production of Oncolym(R) and TNT 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 Center for Biologics Research and Review and is similar to the process
used for any new drug product intended for human use.
The pre-marketing clinical testing program required for approval of a
new drug or biologic typically involves a three-phase process. Phase I consists
of testing for the safety and tolerance of the drug with a small group of
patients, and also yields preliminary information about the effectiveness of the
drug and dosage levels. Phase II involves testing for efficacy, determination of
optimal dosage and identification of possible side effects in a larger patient
group. Phase III clinical trials consist of additional testing for efficacy and
safety with an expanded patient group. After completion of clinical studies for
a biologics product, a Biologics License Application (BLA) is submitted to the
FDA for product marketing approval and for licensing of the product
manufacturing facilities. In responding to such an application, the FDA could
grant marketing approval, request clarification of data contained in the
application or require additional testing prior to approval. The Company has
not, to date, filed a BLA for any of its products.
If approval is obtained for the sale of a new drug, FDA regulations
will also apply to the manufacturing process and marketing activities for the
product and may require post-marketing testing and surveillance programs to
monitor the effects of the product. The FDA may withdraw product approvals if
compliance with regulatory standards, including labeling and advertising, is not
maintained or if unforeseen problems occur following initial marketing. The
National Institutes of Health has issued guidelines applicable to the research,
development and production of biological products, such as the Company's product
candidates. Other federal agencies and congressional committees have indicated
an interest in implementing further regulation of biotechnology applications.
The Company cannot predict, however, whether new regulatory restrictions on the
manufacturing, marketing, and sale of biotechnology products will be imposed by
state or federal regulators and agencies.
In addition, the Company is subject to regulation under state, federal,
and international laws and regulations regarding occupational safety, laboratory
practices, the use and handling of radioactive isotopes, environmental
protection and hazardous substance control, and other regulations. The Company's
clinical trial and research and development activities, involve the controlled
use of hazardous materials, chemicals and radioactive compounds. Although the
Company believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal regulations,
the risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
financial resources of the Company. In addition, disposal of radioactive
materials used by the Company in its clinical trials and research efforts may
only be made at approved facilities.
22
The Company's product candidates, if approved, may also be subject to
import laws in other countries, the food and drug laws in various states in
which the products are or may be sold and subject to the export laws of agencies
of the United States government.
The Company believes that it is in material compliance with all
applicable laws and regulations including those relating to the handling and
disposal of hazardous and toxic wastes.
During fiscal year 1999, the Office of Orphan Products Development of
the FDA determined that Oncolym(R) and TNT qualify for orphan designation for
the treatment of intermediate and high-grade B-cell Non-Hodgkin's Lymphoma and
for the treatment of glioblastoma multiforme and anaplastic astrocytoma (brain
cancer), respectively. The 1983 Orphan Drug Act (with amendments passed by
Congress in 1984, 1985, and 1988) includes various incentives that have
stimulated interest in the development of orphan drug and biologic products.
These incentives include a seven-year period of marketing exclusivity for
approved orphan products, tax credits for clinical research, protocol
assistance, and research grants. Additionally, legislation re-authorizing FDA
user fees also created an exemption for orphan products from fees imposed when
an application to approve the product for marketing is submitted.
PATENTS AND TRADE SECRETS
-------------------------
The Company has relied on the internal achievements, as well as the
direct sponsorship of university researchers, for development of 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 technologies. It intends to pursue opportunities to license its basic
technologies and any advancements or enhancements, as well as to pursue the
incorporation of its technologies in the development of its own products.
The Company has filed several patent applications either directly or as
a co-sponsor/licensee. The Company treats particular aspects of the production
and radiolabeling of monoclonal antibodies and related technologies as trade
secrets.
Patent protection may, however, be significant in the case of newly
developed antibody-based technologies. The Company intends to pursue patent
protection for inventions related to antibody-based technologies that it cannot
protect as trade secrets. Techniclone, as licensee, co-sponsored the patent
applications for the LYM-1 and LYM-2 antibodies utilized in its Oncolym(R)
product candidate through licensing agreements with Northwestern University.
United States patents for LYM-1 and LYM-2 antibodies 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, by a United
States patent issued in May 1991 for all therapeutic applications and by a
United States patent issued in March 1999 for diagnostic and therapeutic
monitoring. An additional US patent application is pending. The foreign
counterparts of these patents have been issued by the European Patent Office and
are still pending in several Asian countries.
For its Vasopermeation Enhancement Agents (VEAs) 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 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 vasoactive compounds attached 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.
23
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.
The Company's Vascular Targeting Agent (VTA) technologies, acquired
through the acquisition of Peregrine Pharmaceuticals, Inc. ("Peregrine") in
April 1997, are covered by numerous patents and patent applications. These
technologies are licensed from the University of Texas Southwestern Medical
Center at Dallas, TX; Beth Israel Hospital, Boston, MA; the Scripps Institute,
La Jolla, CA and Johnson & Johnson. These patents and patent applications cover
the generic idea of clotting tumor vasculature as a means of cancer therapy. The
concepts covered by these patents and patent applications include clotting tumor
blood vessels either by killing the tumor blood vessels which leads to clotting
or by directly clotting the blood vessels by targeting natural clotting proteins
to the tumor blood vessels. The targeting methods described in the patents and
patent applications include markers expressed on, induced on, associated with or
otherwise localized on the tumor blood vessels.
Some of the Company's antibody production and use methods are patented
by third parties. The Company is currently negotiating with certain third
parties to acquire licenses needed to produce and commercialize chimeric and
human antibodies, including the Company's TNT antibody. These licenses are
generally available from the licensors to all interested parties. The terms of
the licenses, obtained and expected to be obtained, are not expected to
significantly impact the cost structure or marketability of chimeric or human
based products.
In general, the patent position of a biotechnology firm is highly
uncertain and no consistent policy regarding the breadth of allowed claims has
emerged from the actions of the U.S. Patent Office with respect to biotechnology
patents. Accordingly, there can be no assurance that the Company's patents,
including those issued and those pending, will provide protection against
competitors with similar technology, nor can there be any assurance that such
patents will not be infringed upon or designed around by others.
International patents relating to biologics are numerous and there can
be no assurance that current and potential competitors have not filed or in the
future will not file patent applications or receive patents relating to products
or processes utilized or proposed to be used by the Company. In addition, there
is certain subject matter which is patentable in the United States but which may
not generally be patentable outside of the United States. Statutory differences
in patentable subject matter may limit the protection the Company can obtain on
some of its products outside of the United States. These and other issues may
prevent the Company from obtaining patent protection outside of the United
States. Failure to obtain patent protection outside the United States may have a
material adverse effect on the Company's business, financial condition and
results of operations.
24
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 issued, that the
Company will be able to obtain licensing arrangements for necessary technologies
on terms acceptable to the Company. 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 typically
places restrictions in its agreements with third parties which restrict their
right to use and disclose any of the Company's proprietary technology with which
they may be involved. In addition, the Company has internal non-disclosure
safeguards, including confidentiality agreements, with its employees. There can
be no assurance, however, that others may not independently develop similar
technology or that the Company's secrecy will not be breached.
MANUFACTURING AND PRODUCTION
----------------------------
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 significant difficulty in
obtaining these raw materials and does not consider raw material availability to
be a significant factor in its business. The Company uses purified materials
with strict requirements for sterility and pyrogenicity.
The Company's TNT and Oncolym(R) antibodies are produced for clinical
trial use utilizing Current Good Manufacturing Practices ("CGMP") at our leased
pilot facility in Tustin, California. The Company has acquired additional
bioreactors and other equipment which it believes is adequate to meet current
clinical trial requirements for its TNT and Oncolym(R) products. Centralized
product testing and process controls in this facility permit the Company to
maintain uniformity and quality control of its antibodies while utilizing
economies of scale in its manufacturing processes.
If the demand for our antibody increases with additional clinical
trials, the Company's facilities would be expandable to handle increased
clinical trial antibody production requirements with a minor investment of
additional capital. -However, the Company expects that it will be required to
enter into supply agreements with contract manufacturing companies for the
commercial antibody quantities required to support the Company's antibody
product candidates, if and when approved for sale. By contracting out commercial
production requirements, the Company hopes to avoid or defer the significant
investment in facilities that would be required to self-manufacture for
commercial markets. The Company believes that adequate antibody production
expertise and capacity is competitively available in the industry from contract
manufacturers to fulfill the Company's expected future antibody needs.
Once the TNT and Oncolym(R) antibodies have passed stringent quality
control and outside testing, the antibodies are shipped to facilities for
radiolabeling, (the process of attaching the radioactive agent, Iodine-131, to
the antibody). From the radiolabeling facilities, the labeled TNT and Oncolym(R)
antibodies are shipped to the nuclear medicine department of medical centers and
hospitals for use in treating patients.
The Company has contracted with three separate radiolabeling facilities
for labeling its clinical trial material. These facilities are not currently
capable of handling significantly increased clinical trial labeling production
and labeling for the commercial market. In March 1999, the Company entered into
an agreement with MDS Nordion who has expertise in radiolabeling monoclonal
antibodies. This company is currently in the process of developing a program
which will enable our Oncolym(R) and TNT products to be labeled with I-131 in
sufficient quantities for use in expanded clinical trials and for commercial
supply. Any commercial radiolabeling supply arrangement will require the
investment of significant funds by the Company in order for a radiolabeling
vendor to develop the expanded facilities necessary to support the Company's
products.
25
MARKETING
---------
The Company intends to sell its products in the United States and
internationally in collaboration with marketing partners. In March 1999, the
Company entered into a licensing agreement with Schering A.G., Germany to market
and distribute its Oncolym(R) product. At the present time, the Company does not
have an internal sales force to market its other product candidates, if
approved. If and when the FDA approves TNT or the Company's other products under
development, the marketing of these product candidates, if approved, will be
contingent upon the Company entering into an agreement with a company with a
sales force or upon the Company recruiting, training and deploying a sales
force. The Company does not presently possess the resources or experience
necessary to market TNT or its other product candidates. Other than the
agreement with Schering A.G., Germany, the Company has no arrangements for the
distribution of its product candidates, and there can be no assurance that the
Company will be able to enter into any such arrangements in a timely manner or
on commercially favorable terms, if at all. If the Company is successful in
obtaining FDA approval for one or more of its product candidates, the Company's
ability to market the product will be contingent upon either licensing or
entering into a marketing agreement with a large company or upon it recruiting,
developing, training and deploying its own sales force. Development of an
effective sales force requires significant financial resources, time, and
expertise. There can be no assurance that the Company will be able to obtain the
financing necessary or to establish such a sales force in a timely or cost
effective manner, if at all, or that such a sales force will be capable of
generating demand for the Company's product candidates. The Company is currently
discussing additional collaboration arrangements with corporate partners to
develop the capacity to manufacture, market and sell the Company's other product
candidates.
EMPLOYEES
---------
As of July 15, 1999, the Company employed 40 full-time employees, which
included 3 Ph.D. level persons, 28 technical and support employees, and 9
administrative employees. The Company believes its relationships with its
employees are good. The Company's employees are not represented by a collective
bargaining organization and the Company has not experienced a work stoppage. The
Company expects to add additional employees during the year ending April 30,
2000, to facilitate the expansion of its clinical trial programs and other
corporate operations.
ITEM 2. PROPERTIES
----------
The Company's corporate, development, clinical trials and manufacturing
operations are located in two Company-leased office and laboratory buildings
with aggregate square footage of approximately 47,770 feet. The facilities are
adjacent to one another and are located at 14272 and 14282 Franklin Avenue,
Tustin, California 92780-7017. The Company manufactures its Oncolym(R) and TNT
antibodies at these facilities. The Company makes combined monthly lease
payments of approximately $56,250 for these facilities with a 3.35% rental
increase every two years. The lease has a twelve-year term with two five-year
extensions. Monthly rental income from sub-tenants is not significant. The
Company believes its facilities are adequate for its current needs and that
suitable additional substitute space will be available as and if needed.
26
ITEM 3. LEGAL PROCEEDINGS
-----------------
On March 18, 1999, the Company was served with notice of a lawsuit filed
in Orange County Superior Court for the State of California by a former employee
alleging a single cause of action for wrongful termination. The Company believes
this lawsuit is barred by a severance agreement and release signed by the former
employee following his termination and the Company is vigorously defending the
action. The Company's motion for summary judgement is currently pending
argument. Management does not believe that the outcome of this action will have
a material adverse effect upon the financial position or results of operations
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
There were no matters submitted to a vote of security holders during
the fiscal quarter ended April 30, 1999.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
-------------------------------------------------------------
Prior to 1991, the Company was listed on the National Market System of
The Nasdaq Stock Market. In 1991 the Company was delisted because it did not
meet certain of the financial standards established by The Nasdaq Stock Market.
Since April 1, 1996, Techniclone's common stock has been traded on the Small Cap
market of The Nasdaq Stock Market under the trading symbol "TCLN". The following
table shows the high and low sales price of Techniclone's common stock for each
quarter in the two years ended April 30, 1999:
Common Stock Sales Price
High Low
----------------- ----------------
Quarter Ended April 30, 1999 $1.44 $0.81
Quarter Ended January 31, 1999 $1.56 $0.94
Quarter Ended October 31, 1998 $2.00 $0.63
Quarter Ended July 31, 1998 $2.66 $0.66
Quarter Ended April 30, 1998 $1.13 $0.47
Quarter Ended January 31, 1998 $3.31 $0.91
Quarter Ended October 31, 1997 $4.38 $2.38
Quarter Ended July 31, 1997 $5.63 $3.63
As of July 15, 1999, the number of holders of record of the Company's
common stock was 5,833.
The Company has a limited operating history and only nominal revenues
to date. No dividends on common stock have been declared or paid by the Company.
The Company intends to employ all available funds for the development of its
business and, accordingly, does not intend to pay any cash dividends in the
foreseeable future.
27
SALES OF UNREGISTERED SECURITIES
--------------------------------
The following is a summary of transactions by the Company during the
quarterly period commencing on February 1, 1999 and ending on April 30, 1999
involving issuances and sales of the Company's securities that were not
registered under the Securities Act of 1933, as amended (the Securities Act")
On or about February 8, 1999, the Company issued to one unaffiliated
investor an aggregate of 172,841 shares of the Company's Common Stock upon
conversion of 68 outstanding shares of the Company's 5% Adjustable Convertible
Class C Preferred Stock (the "Class C Stock") and upon the exercise of
outstanding warrants to purchase 58,122 shares of Common Stock for total
consideration of $38,094. Upon conversion of the 68 shares of Class C Stock, the
Company issued warrants to such investor to purchase up to an aggregate of
28,679 shares of the Company's Common Stock at an exercise price of $0.6554 per
share which warrants were included in the total 58,122 warrants.
During March 1999, in conjunction with reacquiring certain Oncolym(R)
rights from BTD, the Company issued 1,523,809 shares of common stock to BTD for
consideration of $1,200,000 and also issued a secured promissory note to BTD in
the amount of $3,300,000, which bears simple interest at a rate of 10% per annum
and is due and payable in full on March 1, 2001. In addition, the Company
granted warrants to BTD to purchase up to 3,700,000 shares of its common stock
at an exercise price of $3.00 per share, which expire in March 2002, and
warrants to purchase up to 1,000,000 shares of its common stock at an exercise
price of $5.00 per share, which expire in March 2004.
On February 2, 1999, the Company issued an aggregate of 2,608,695
shares of the Company's common Stock to the two institutional investors under
the Equity Line, for an aggregate purchase price of $2,250,000, pursuant to an
Equity Line draw and also issued warrants to the two institutional investors to
purchase up to 260,868 shares of Common Stock at an exercise price of $.8625 per
share, which warrants are immediately exercisable and expire on December 31,
2004. The Company also issued 260,869 shares of the Company's Common Stock to
Dunwoody Brokerage Services, Inc. ("Dunwoody") as commission shares under the
Equity Line for no monetary consideration pursuant to this Equity Line draw of
$2,250,000 from the two institutional investors. In addition, the Company issued
warrants to Dunwoody to purchase up to 26,086 shares of the Company's Common
Stock at an exercise price of $0.8625 per share, which warrants are immediately
exercisable and expire on December 31, 2004.
On April 15, 1999, the Company issued an aggregate of 801,347 shares of
the Company's Common Stock to the two institutional investors under the Equity
Line, for no monetary consideration, as an adjustment to the purchase price of
one-half of the initial shares sold to the two institutional investors in June
1998, pursuant to the terms of the Equity Line. The Company also issued 80,134
shares of Common Stock to Dunwoody, for no monetary consideration, as commission
shares in connection with such adjustment. The Equity Line provides that the
Company is required to issue additional shares of Common Stock to the two
institutional investors on July 15, 1999, as an adjustment to the other one-half
of the initial shares sold in June 1998, if the market price as of such date, as
defined in the Equity Line Agreement, is less that the initial price paid for
the shares sold in June 1998. The number of shares of Common Stock the Company
is required to issue pursuant to each such adjustment is equal to the difference
between one-half of the amount of shares actually sold in June 1998 and one-half
of the amount of shares which would have been issued if the price had been the
market price as of the date of such adjustment, as defined in the Equity Line
Agreement.
28
The issuance of the securities of the Company in each of the above
transactions was deemed to be exempt from registration under the Securities Act
by virtue of Section 4(2) thereof or Regulation D promulgated thereunder, as a
transaction by an issuer not involving a public offering. The recipient of such
securities either received adequate information about the Company or had access,
through employment or other relationships with the Company, to such information.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
The following selected financial data has been derived from audited
consolidated financial statements of the Company for each of the five years in
the period ended April 30, 1999. These selected financial summaries should be
read in conjunction with the financial information contained for each of the
three years in the period ended April 30, 1999, included in the consolidated
financial statements and notes thereto, Management's Discussion and Analysis of
Results of Operations and Financial Condition, and other information provided
elsewhere herein.
29
SELECTED FINANCIAL DATA
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED APRIL 30,
1999 1998 1997 1996 1995
--------------- --------------- --------------- --------------- ---------------
REVENUES:
Licensing fees................... $ -- $ -- $ -- $ 3,000,000 $ 7,000
Interest and other income........ 380,000 534,000 346,000 143,000 --
--------------- --------------- --------------- --------------- ---------------
Total revenues.............. 380,000 534,000 346,000 3,143,000 7,000
COSTS AND EXPENSES:
Research and development......... 8,795,000 7,644,000 2,912,000 1,682,000 1,357,000
License fee...................... 4,500,000
General and administrative.......
Unrelated entities.......... 4,903,000 4,255,000 3,047,000 948,000 547,000
Affiliates.................. 163,000 266,000 171,000 137,000
Loss on disposal of property..... 1,247,000
Interest ........................ 428,000 296,000 148,000 17,000 28,000
Purchased in-process research
and development ............... -- -- 27,154,000 -- 4,850,000
--------------- --------------- --------------- --------------- ---------------
Total costs and expenses.... 19,873,000 12,358,000 33,527,000 2,818,000 6,919,000
--------------- --------------- --------------- --------------- ---------------
NET INCOME (LOSS)................ $ (19,493,000) $ (11,824,000) $ (33,181,000) $ 325,000 $ (6,912,000)
=============== =============== =============== =============== ===============
Net income (loss) before
preferred stock accretion and
dividends...................... $ (19,493,000) $ (11,824,000) $ (33,181,000) $ 325,000 $ (6,912,000)
Preferred stock accretion and
dividends:
Accretion of Class B and Class
C Preferred Stock discount.... (531,000) (2,476,000) -- (5,327,000) --
Imputed dividends for Class
B and Class C Preferred Stock. (15,000) (965,000) (544,000) (561,000) --
--------------- --------------- --------------- --------------- ---------------
NET LOSS APPLICABLE TO COMMON
STOCK............................ $ (20,039,000) $ (15,265,000) $ (33,725,000) $ (5,563,000) $ (6,912,000)
=============== =============== =============== =============== ===============
WEIGHTED AVERAGE SHARES
OUTSTANDING...................... 66,146,628 30,947,758 21,429,858 18,466,359 15,794,811
=============== =============== =============== =============== ===============
BASIC AND DILUTED LOSS PER SHARE. $ (0.30) $ (0.49) $ (1.57) $ (0.30) $ (0.44)
=============== =============== =============== =============== ===============
SELECTED FINANCIAL DATA
CONSOLIDATED BALANCE SHEET DATA
YEAR ENDED APRIL 30,
1999 1998 1997 1996 1995
---------------- ---------------- ---------------- ---------------- ----------------
Cash and Cash Equivalents.... $ 2,385,000 $ 1,736,000 $ 12,229,000 $ 4,179,000 $ 36,000
Working Capital (Deficit) ... $ (2,791,000) $ (2,508,000) $ 10,618,000 $ 7,461,000 $ (934,000)
Total Assets ................ $ 7,370,000 $ 12,039,000 $ 18,701,000 $ 10,776,000 $ 857,000
Long-Term Debt .............. $ 3,498,000 $ 1,926,000 $ 1,970,000 $ 987,000 $ 259,000
Accumulated Deficit ......... $ (92,678,000) $ (72,639,000) $ (57,374,000) $ (23,649,000) $ (18,086,000)
Stockholders' Equity (Deficit) $ (2,133,000) $ 5,448,000 $ 14,568,000 $ 8,965,000 $ (600,000)
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
---------------------------------------------------------------
OVERVIEW. Techniclone Corporation is a biopharmaceutical company
engaged in the research, development and commercialization of targeted cancer
therapeutics. We develop product candidates based primarily on our proprietary
collateral (indirect) tumor targeting technologies for the treatment of solid
tumors and a direct tumor targeting agent for the treatment of refractory
malignant lymphoma. As shown in the Company's consolidated financial statements,
the Company incurred operating losses during fiscal 1999, 1998 and 1997 and has
an accumulated deficit at April 30, 1999.
GOING CONCERN. The Company's consolidated 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 consolidated financial statements, the Company experienced a loss
of approximately $19,493,000 during the year ended April 30, 1999, had a cash
balance of approximately $2,385,000 and had an accumulated deficit of
approximately $92,678,000 at April 30, 1999. These factors, among others, raise
substantial doubt about the Company's ability to continue as a going concern.
The Company must raise additional funds to sustain research and
development, provide for future clinical trials and continue its operations
until it is able to generate sufficient additional revenue from the sale and/or
licensing of its products. The Company intends to obtain financing through one
or more methods including, obtaining additional equity or debt financing and
negotiating a licensing or collaboration agreement with respect to one or more
of its product candidates, other than Oncolym(R). There can be no assurance that
the Company will be successful in raising such funds on terms acceptable to it,
or at all, or that sufficient additional capital will be raised to complete the
research, development, and clinical testing of the Company's product candidates.
The Company's future success is dependent upon raising additional money to
provide for the necessary operations of the Company. If the Company is unable to
obtain additional financing, there would be a material adverse effect on the
Company's business, financial position and results of operations. The Company's
continuation as a going concern is dependent on its ability to generate
sufficient cash flows to meet its obligations on a timely basis, to obtain
additional financing as may be required and, ultimately, to attain profitable
operations.
YEAR ENDED APRIL 30, 1999 COMPARED TO YEAR ENDED APRIL 30, 1998
- ---------------------------------------------------------------
The Company incurred a net loss of approximately $19,493,000 for the
fiscal year ended April 30, 1999, as compared to a net loss of approximately
$11,824,000 for the fiscal year ended April 30, 1998. The increased net loss of
approximately $7,669,000 in 1999 is primarily attributable to an increase in
total costs and expenses of $7,515,000 combined with a decrease in interest and
other income of $154,000.
The increase in total costs and expenses of $7,515,000 from fiscal year
1998 to fiscal year 1999 is primarily attributable to an increase in license
fees of $4,500,000 recorded in fiscal year 1999 to re-acquire certain marketing
rights with respect to Oncolym(R) from BTD, an increase in loss on disposal of
property of $1,086,000, primarily related to the sale of the Company's two
buildings, which were subsequently leased back, an increase in research and
development expenses of $1,151,000, primarily related to increased clinical
trial costs, an increase in general and administrative expenses of $646,000,
primarily related to severance arrangements with the Company's former officers,
and an increase in interest expense of $132,000, related to greater interest
bearing debt outstanding during the year.
31
The increase in research and development expenses of $1,151,000 during
the year ended April 30, 1999 compared to the same period in the prior year
resulted primarily from increased costs to support the Company's clinical trial
programs for its Oncolym(R) and TNT products, partially offset by a decrease in
license fees paid to Alpha Therapeutic Corporation ("Alpha") of $510,000 to
re-acquire certain licensing rights with respect to Oncolym(R).
General and administrative expenses increased approximately $646,000
during the year ended April 30, 1999 in comparison to the prior year ended April
30, 1998. The increase in general and administrative expenses resulted primarily
from expenses recorded in fiscal year 1999 of $1,249,000 under severance
arrangements with the Company's former Chief Executive Officer and former V.P.
of Operations and Administration, of which $760,000 was considered a non-cash
expense. The increase in severance expense was partially offset by a decrease of
$325,000 related to additional consideration paid to the Company's Class C
Preferred stockholders in fiscal year 1998 combined with a net decrease in other
general and administrative expenses of $278,000 in fiscal year 1999.
Interest expense increased approximately $132,000 during the year ended
April 30, 1999 in comparison to the year ended April 30, 1998 due to higher
levels of interest-bearing debt outstanding during the year. During fiscal year
1999, the Company re-acquired certain Oncolym(R) rights from BTD and issued a
note payable for $3,300,000, which bears simple interest at 10% per annum and is
due and payable in full on March 1, 2001. In addition, during fiscal year 1999,
the Company entered into a short-term note agreement to finance certain
construction costs incurred to enhance the Company's manufacturing facilities.
Interest and other income decreased $154,000 during fiscal year 1999
compared to the prior year primarily due to a decrease in interest income of
$204,000 partially offset by an increase in grant revenue of $67,000 from a
major international pharmaceutical company for the TNT Phase I equivalent
clinical trial in Mexico City. The Company does not expect interest income or
product revenues to be significant in the year ending April 30, 2000.
YEAR ENDED APRIL 30, 1998 COMPARED TO YEAR ENDED APRIL 30, 1997
- ---------------------------------------------------------------
The Company incurred a net loss of $11,824,000 for the fiscal year
ended April 30, 1998, as compared to a net loss of $33,181,000 for the prior
fiscal year ended April 30, 1997. The decrease in the net loss of approximately
$21,357,000 is primarily attributable to the net effect of a one time non-cash
charge to earnings of $27,154,000 in fiscal year 1997 in connection with the
acquisition of the outstanding capital stock of Peregrine during that year. In
addition, during fiscal year 1998, research and development expenses increased
$4,732,000, general and administrative expenses increased $944,000, loss on
disposal of property increased $161,000 and interest expense increased $148,000.
Such increases were partially offset by an increase in interest and other income
of $188,000 during fiscal year 1998.
Research and development expense increased approximately $4,732,000 for
the year ended April 30, 1998, in comparison to the year ended April 30, 1997.
This increase resulted primarily from the Company's increased activities during
the year ended April 30, 1998, in preparing and conducting Phase II/III clinical
trials of Oncolym(R) and the Company's activities in preparation for its Phase I
TNT clinical trial for malignant glioma (brain cancer), which began in March
1998. In connection with preparing for and conducting clinical trials, the
Company was required to hire additional personnel, increase production and
radiolabeling capabilities, establish multiple clinical trial sites and augment
32
its validation and quality control activities to prepare for the upgrade of its
facilities to CGMP standards. Also contributing to the increase in research and
development expenses during fiscal year 1998, were fees of $510,000 incurred in
connection with the repurchase of the Oncolym(R) rights from Alpha and increased
license and legal and patent fees related to the VTA technologies acquired in
conjunction with the acquisition of Peregrine in April 1997.
General and administrative expenses incurred by the Company increased
approximately $944,000 during the year ended April 30, 1998, in comparison to
the prior year ended April 30, 1997. The increase in general and administrative
expenses during the year ended April 30, 1998, resulted primarily from increased
consulting fees associated with the acquisition of Peregrine, additional noncash
consideration paid to the Company's Class C Preferred stockholders, increased
payroll and recruiting costs associated with the hiring of a new chief executive
officer and increased legal, accounting, administrative and filing fees
associated with increased public filings and other public relations activities.
During fiscal year 1998, the Company recorded a non-cash loss on
disposal of property of $161,000 for property disposed of during the
construction of the enhanced manufacturing facility. No property disposals were
recorded in fiscal year 1997.
Interest expense increased approximately $148,000 during fiscal year
1998 as compared to fiscal year 1997 due to higher levels of interest-bearing
debt outstanding during the 1998 year. The higher level of debt was as a result
of the purchase of a second facility in October 1996 combined with financing of
equipment purchases during fiscal year 1998.
The increase in interest and other income of $188,000 from $346,000 in
fiscal year 1997 to $534,000 in fiscal year 1998 is primarily attributable to an
increase in interest income earned on cash available for investment. During
fiscal year 1998, the Company had greater amounts of cash available for
investment as a result of the completion of the Class C Preferred Stock
financing in April 1997.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During fiscal year 1999, the Company utilized $7,854,000 in cash for
operations. The Company has financed its operations to date primarily through
the sale of preferred and common stock. During fiscal year 1999, the Company
received net proceeds of $9,560,000 primarily from the sale of Class C Preferred
Stock, Common Stock and from the exercise of stock options and warrants.
During June 1998, the Company secured access to $20,000,000 under a
Regulation D Common Stock Equity Line Subscription Agreement ("Equity Line")
with two institutional investors, which expires in June 2001. Under the terms of
the Equity Line, the Company may, in its sole discretion, and subject to certain
restrictions, periodically sell (Put) shares of the Company's common stock for
up to $20,000,000. Unless an increase is otherwise agreed to, $2,250,000 of Puts
can be made every quarter, subject to share issuance volume limitations
identical to the share resale limitations set forth in Rule 144(e). In addition,
if the Company's closing bid price falls below $1.00 on any day during the ten
trading days prior to a Put, the Company's ability to access funds under the
Equity Line in such Put is limited to 15% of what would otherwise be available.
If the closing bid price of the Company's common stock falls below $0.50 or if
the Company is delisted from The Nasdaq SmallCap Market, the Company would have
no access to funds under the Equity Line.
33
Puts under the Equity Line are priced at a discount equal to the
greater of 17.5% of the lowest closing bid price during the ten trading days
immediately preceding the date on which such shares are sold to the
institutional investors or $0.20. At June 30, 1999, the Company had $12,000,000
remaining available for future Puts under the Equity Line agreement.
At the time of each Put, the investors will be issued warrants,
exercisable only on a cashless basis and expiring on December 31, 2004, to
purchase up to 10% of the amount of Common Stock issued to the investors at the
same price as the shares of Common Stock sold in the Put.
At April 30, 1999, the Company had approximately $2,385,000 in cash and
cash equivalents and a working capital deficit of approximately $2,791,000. The
Company has experienced negative cash flows from operations since its inception
and expects the negative cash flow from operations to continue for the
foreseeable future. The Company expects operating expenditures related to
clinical trials to increase in the future as the Company's clinical trial
activity increases and scale-up for clinical trial production and radiolabeling
continues. As a result of increased activities in connection with the clinical
trials for Oncolym(R) and Tumor Necrosis Therapy (TNT), and the development
costs associated with Vasopermeation Enhancement Agents (VEAs) and Vascular
Targeting Agents (VTAs), the Company expects that the monthly negative cash flow
will continue.
Without obtaining additional financing or entering into additional
licensing arrangements for the Company's other product candidates, the Company
believes that it has sufficient cash on hand and available pursuant to the
Equity Line mentioned above, assuming the Company makes an additional quarterly
draw of $2,250,000, to meet its obligations on a timely basis only through
September, 1999.
NEW ACCOUNTING STANDARDS
- ------------------------
During June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
will be effective for the Company beginning May 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires an entity recognize all derivatives as either
assets or liabilities in the statements of financial position and measure those
instruments at fair value. The Company has not determined the impact on the
consolidated financial statements, if any, upon adopting SFAS No. 133.
IMPACT OF THE YEAR 2000
- -----------------------
We are aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The year 2000 problem is
pervasive and complex. The issue is whether computer systems will properly
recognize date-sensitive information in the year 2000 due to the fact that the
programming in most computer systems use a two digit year value, which value
will rollover to "00" as of January 1, 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. We have identified substantially all of our information technology ("IT")
and non-IT systems, including major hardware and software platforms in use and
we have modified and upgraded our hardware, software of IT and non-IT systems to
be year 2000 compliant. We do not presently believe that the year 2000 problem
will pose significant operational problems for our internal computer systems or
have a negative affect on our operations. However, we cannot assure you that any
year 2000 compliance problems of our suppliers will not negatively affect our
operations. Because uncertainty exists concerning the potential costs and
effects associated with any year 2000 compliance, we intend to continue to make
efforts to ensure that third parties with whom we have relationships are year
2000 compliant. We have not incurred significant costs to date associated with
year 2000 compliance and presently believe estimated future costs will not be
material. However, actual results could differ materially from our expectations
due to unanticipated technological difficulties or project delays. If any third
parties upon which we rely are unable to address the year 2000 issue in a timely
manner, although we are uncertain as to our worst case consequences, it could
have an adverse impact on our operations, including delaying our clinical trial
programs. In order to minimize this risk, we have developed a contingency plan,
the implementation of which should be completed by November 1999, and we intend
to devote all resources required to attempt to resolve any significant year 2000
problems in a timely manner.
34
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
A significant change in interest rates would not have a material
adverse effect on the Company's financial position or results of operations due
to the amount of cash on hand at April 30, 1999, which consists of highly liquid
investments, and as the Company's debt instruments have fixed interest rates and
terms.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
Reference is made to the financial statements included in this Report
at pages F-1 through F-27.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
---------------------------------------------------------------
Not applicable.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement for the Company's 1999
annual shareholders' meeting.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement for the Company's 1999
annual shareholders' meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement for the Company's 1999
annual shareholder's meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Not applicable.
35
PART IV
-------
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
-----------------------------------------------------------------
(a) (1) Consolidated Financial Statements
The financial statements and schedules listed below are filed
as part of this Report:
Page
----
Report of Independent Auditors, Ernst & Young LLP F-1
Independent Auditors' Report, Deloitte & Touche LLP F-2
Consolidated Balance Sheets as of F-3
April 30, 1999 and 1998
Consolidated Statements of Operations F-5
for each of the three years in the period
ended April 30, 1999
Consolidated Statements of Stockholders' F-6
Equity (Deficit) for each of the
three years in the period ended
April 30, 1999
Consolidated Statements of Cash Flows F-7
for each of the three years
in the period ended April 30, 1999
Notes to Consolidated Financial Statements F-9
(2) Financial Statement Schedules
-----------------------------
II Valuation and Qualifying Accounts F-27
36
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------- ----------- ----------
3.1 Certificate of Incorporation of Techniclone Corporation, a
Delaware corporation (Incorporated by reference to Exhibit B
to the Company's 1996 Proxy Statement as filed with the
Commission on or about August 20, 1996).
3.2 Bylaws of Techniclone Corporation, a Delaware corporation
(Incorporated by reference to Exhibit C to the Company's 1996
Proxy Statement as filed with the Commission on or about
August 20, 1996).
3.3 Certificate of Designation of 5% Adjustable Convertible Class
C Preferred Stock as filed with the Delaware Secretary of
State on April 23, 1997. (Incorporated by reference to
Exhibit 3.1 contained in Registrant's Current Report on Form
8-K as filed with the Commission on or about May 12, 1997.)
4.1 Form of Certificate for Common Stock (Incorporated by
reference to the exhibit of the same number contained in
Registrants' Annual Report on Form
10-K for the year end April 30, 1988)
4.4 Form of Subscription Agreement entered into with Series B
Convertible Preferred Stock Subscribers (Incorporated by
reference to Exhibit 4.1 contained in Registrant's Report on
Form 8-K dated December 27, 1995, as filed with the
Commission on or about January 24, 1996)
4.5 Registration Rights Agreement dated December 27, 1995, by and
among Swartz Investments, Inc. and the holders of the
Registrant's Series B Convertible Preferred Stock
(incorporated by reference to Exhibit 4.2 contained in
Registrant's Current Report on Form 8-K dated December 27,
1995 as filed with the Commission on or about January 24,
1996)
4.6 Warrant to Purchase Common Stock of Registrant issued to
Swartz Investments, Inc. (Incorporated by reference to
Exhibit 4.3 contained in Registrant's Current Report on Form
8-K dated December 27, 1995 as filed with the Commission on
or about January 24, 1996)
4.7 5% Preferred Stock Investment Agreement between Registrant
and the Investors (Incorporated by reference to Exhibit 4.1
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 12, 1997.)
4.8 Registration Rights Agreement between the Registrant and the
holders of the Class C Preferred Stock (Incorporated by
reference to Exhibit 4.2 contained in Registrant's Current
Report on Form 8-K as filed with the Commission on or about
May 12, 1997.)
37
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------- ----------- ----------
4.9 Form of Stock Purchase Warrant to be issued to the holders of
the Class C Preferred Stock upon conversion of the Class C
Preferred Stock (Incorporated by reference to Exhibit 4.3
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 12, 1997.)
4.10 Regulation D Common Equity Line Subscription Agreement dated
June 16, 1998 between the Registrant and the Equity Line
Subscribers named therein (Incorporated by reference to
Exhibit 4.4 contained in Registrant's Current Report on Form
8-K dated as filed with the Commission on or about June 29,
1998)
4.11 Form of Amendment to Regulation D Common Stock Equity Line
Subscription Agreement (Incorporated by reference to Exhibit
4.5 contained in Registrant's Current Report on Form 8-K
filed with the Commission on or about June 29, 1998)
4.12 Registration Rights Agreement between the Registrant and the
Subscribers (Incorporated by reference to Exhibit 4.6
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about June 29, 1998.)
4.13 Form of Stock Purchase Warrant to be issued to the Equity
Line Subscribers pursuant to the Regulation D Common Stock
Equity Subscription Agreement (Incorporated by reference to
Exhibit 4.7 contained in Registrant's Current Report on Form
8-K as filed with the Commission on or about June 29, 1998.)
4.14 Placement Agent Agreement dated as of June 16, 1998, by and
between the Registrant and Swartz Investments LLC, a Georgia
limited liability company d/b/a Swartz Institutional Finance
(Incorporated by reference to the exhibit contained in
Registration's Registration Statement on Form S-3 (File No.
333-63773))
4.15 Second Amendment to Regulation D Common Stock Equity Line
Subscription Agreement dated as of September 16, 1998, by and
among the Registrant, The Tail Wind Fund, Ltd. and Resonance
Limited (Incorporated by reference to the exhibit contained
in Registration's Registration Statement on Form S-3 (File
No. 333-63773))
10.22 1982 Stock Option Plan (Incorporated by reference to the
exhibit contained in Registrant's Registration Statement on
Form S-8 (File No. 2-85628)) *
10.23 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan - 1986 (Incorporated by
reference to the exhibit contained in Registrant's
Registration Statement on Form S-8 (File No. 33-15102))*
38
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------- ----------- ----------
10.24 Cancer Biologics Incorporated Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan
- 1987 (Incorporated by reference to the exhibit contained in
Registrant's Registration Statement on Form S-8
(File No. 33-8664))*
10.25 Amendment to 1982 Stock Option Plan dated March 1, 1988
(Incorporated by reference to the exhibit of the same number
contained in Registrants' Annual Report on Form 10-K for the
year ended April 30, 1988)*
10.26 Amendment to 1986 Stock Option Plan dated March 1, 1988
(Incorporated by reference to the exhibit of the same number
contained in Registrant's Annual Report on Form 10-K for the
year ended April 30, 1988)*
10.31 Agreement dated February 5, 1996, between Cambridge Antibody
Technology, Ltd. and Registrant (Incorporated by reference to
Exhibit 10.1 contained in Registrant's Current Report on Form
8-K dated February 5, 1996, as filed with the Commission on
or about February 8, 1996)
10.32 Distribution Agreement dated February 29, 1996, between
Biotechnology Development, Ltd. and Registrant (Incorporated
by reference to Exhibit 10.1 contained in Registrant's
Current Report on Form 8-K dated February 29, 1996, as filed
with the Commission on or about March 7, 1996)
10.33 Option Agreement dated February 29, 1996, by and between
Biotechnology Development, Ltd. And Registrant (Incorporated
by reference to Exhibit 10.2 contained in Registrant's
Current Report on Form 8-K dated February 29, 1996, as
filed with the Commission on or about March 7, 1996)
10.35 Incentive Stock Option and Nonqualified Stock Option
Plan-1993 (Incorporated by reference to the exhibit contained
in Registrants' Registration Statement on Form S-8 (File No.
33-87662))*
10.40 1996 Stock Incentive Plan (Incorporated by reference to the
exhibit contained in Registrants' Registration Statement in
form S-8 (File No. 333-17513))*
10.41 Stock Exchange Agreement dated as of January 15, 1997 among
the stockholders of Peregrine Pharmaceuticals, Inc. and
Registrant (Incorporated by reference to Exhibit 2.1 to
Registrants' Quarterly Report on Form 10-Q for the quarter
ended January 31, 1997)
39
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------- ----------- ----------
10.42 First Amendment to Stock Exchange Agreement among the
Stockholders of Peregrine Pharmaceuticals, Inc. and
Registrant (Incorporated by reference to Exhibit 2.1
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 12, 1997)
10.43 Termination and Transfer Agreement dated as of November 14,
1997 by and between Registrant and Alpha Therapeutic
Corporation (Incorporated by reference to Exhibit 10.1
contained in Registrant's Current Report on Form 8-K as filed
with the commission on or about November 24, 1997)
10.44 Severance Agreement between Lon H. Stone and the Registrant
dated July 28, 1998 (Incorporated by reference to the exhibit
contained in Registrant's Quarterly Report on Form 10-Q for
the fiscal quarter ended October 31, 1998, as filed with the
SEC on or about December 15, 1998)
10.45 Severance Agreement between William (Bix) V. Moding and the
Registrant dated September 25, 1998 (Incorporated by
reference to the exhibit contained in Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 31,
1998, as filed with the SEC on or about December 15, 1998)
10.46 Option Agreement dated October 23, 1998 between Biotechnology
Development Ltd. and the Registrant (Incorporated by
reference to the exhibit contained in Registrant's Quarterly
Report on Form 10-Q for the fiscal quarter ended October 31,
1998, as filed with the SEC on or about December 15, 1998)
10.47 Real Estate Purchase Agreement by and between Techniclone
Corporation and 14282 Franklin Avenue Associates, LLC dated
December 24, 1998 (Incorporated by reference to Exhibit 10.47
to Registrants' Quarterly Report on Form 10-Q for the quarter
ended January 31, 1999)
10.48 Lease and Agreement of Lease between TNCA, LLC, as Landlord,
and Techniclone Corporation, as Tenant, dated as of December
24, 1998 (Incorporated by reference to Exhibit 10.48 to
Registrants' Quarterly Report on Form 10-Q for the quarter
ended January 31, 1999)
10.49 Promissory Note dated as of December 24, 1998 between
Techniclone Corporation (Payee) and TNCA Holding, LLC (Maker)
for $1,925,000 (Incorporated by reference to Exhibit 10.49 to
Registrants' Quarterly Report on Form 10-Q for the quarter
ended January 31, 1999)
40
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------- ----------- ----------
10.50 Pledge and Security Agreement dated as of December 24, 1998
for $1,925,000 Promissory Note between Grantors and
Techniclone Corporation (Secured Party) (Incorporated by
reference to Exhibit 10.50 to Registrants' Quarterly Report
on Form 10-Q for the quarter ended January 31, 1999)
10.51 Final fully-executed copy of the Regulation D Common Stock
Equity Line Subscription Agreement dated as of June 16, 1998
between the Registrant and the Subscribers named therein
10.52 Employment Agreement between Larry O. Bymaster and Registrant
dated May 12, 1998* ***
10.53 Termination Agreement dated as of March 8, 1999 by and
between Registrant and Biotechnology Development Ltd. ***
10.54 Secured Promissory Note for $3,300,000 dated March 8, 1999
between Registrant and Biotechnology Development Ltd. ***
10.55 Security Agreement dated March 8, 1999 between Registrant and
Biotechnology Development Ltd. ***
10.56 License Agreement dated as of March 8, 1999 by and between
Registrant and 23.1 Schering A.G., Germany** ***
21 Subsidiary of Registrant ***
23.1 Consent of Ernst & Young LLP, Independent Auditors ***
23.2 Consent of Deloitte & Touche LLP ***
27 Financial Data Schedule ***
- -------------------------------
* This Exhibit is a management contract or a compensation
plan or arrangement.
** Portions omitted pursuant to a request of confidentiality
filed separately with the Commission.
*** Filed herewith
(b) Reports on Form 8-K:
--------------------
Current Report on Form 8-K as filed with the Commission on March
18, 1999 reporting the dismissal of Deloitte & Touche LLP as the
Company's principal independent public accountants.
Current Report on Form 8-K as filed with the Commission on April
16, 1999 reporting the engagement of Ernst & Young LLP as the
Company's principal independent public accountants.
41
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
TECHNICLONE CORPORATION
Dated: July 26, 1999 By: /s/ Larry O. Bymaster
--------------------------------
Larry O. Bymaster, 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
- --------- -------- ----
/s/ Larry O. Bymaster President, Chief Executive July 26, 1999
- ------------------------------------ Officer and Director (Principal
Larry O. Bymaster Executive Officer)
/s/ Steven C. Burke Chief Financial Officer July 26, 1999
- ------------------------------------ and Secretary
Steven C. Burke (Principal Financial and
Principal Accounting Officer)
/s/ Thomas R. Testman Chairman of the Board July 26, 1999
- ------------------------------------
Thomas R. Testman
/s/ Rock Hankin Director July 25, 1999
- ------------------------------------
Rock Hankin
/s/ Carmelo J. Santoro, Ph.D. Director July 26, 1999
- ------------------------------------
Carmelo J. Santoro, Ph.D.
/s/ William C. Shepherd Director July 21, 1999
- ------------------------------------
William C. Shepherd
/s/ Clive R. Taylor, M.D., Ph.D. Director July 18, 1999
- ------------------------------------
Clive R. Taylor, M.D., Ph.D.
42
TECHNICLONE CORPORATION
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Techniclone Corporation
We have audited the accompanying consolidated balance sheet of Techniclone
Corporation as of April 30, 1999 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year then
ended. Our audit also included the financial statement schedule listed in the
Index at Item 14(a) for the year ended April 30, 1999. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Techniclone Corporation at April 30, 1999, and the consolidated results of its
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule for the year ended April 30, 1999, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
The accompanying financial statements have been prepared assuming that
Techniclone Corporation will continue as a going concern. As more fully
described in Note 1, the Company's recurring losses from operations and working
capital deficiency raise substantial doubt about its ability to continue as a
going concern. Management's plans in regards to these matters are also described
in Note 1. The financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of assets
or the amounts and classification of liabilities that may result from the
outcome of this uncertainty.
/s/ ERNST & YOUNG LLP
Orange County, California
July 2, 1999
F-1
TECHNICLONE CORPORATION
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Techniclone Corporation:
We have audited the accompanying consolidated balance sheet of Techniclone
Corporation and its subsidiary (the Company) as of April 30, 1998 and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for each of the two years in the period ended April 30, 1998. Our
audits also included the financial statement schedule listed in the index at
Item 14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with 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 consolidated financial statements present fairly, in all
material respects, the financial position of Techniclone Corporation and
subsidiary as of April 30, 1998, and the results of their operations and their
cash flows for each of the two years in the period ended April 30, 1998 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and working
capital deficiency raise substantial doubt about its ability to continue as a
going concern. Management's plans concerning these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
June 15, 1998
F-2
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1999 AND 1998
- ------------------------------------------------------------------------------------------------------------------
1999 1998
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,385,000 $ 1,736,000
Other receivables, net of allowance for doubtful accounts of
$201,000 (1999) and $175,000 (1998). 279,000 71,000
Inventories 57,000 46,000
Prepaid expenses and other current assets 280,000 304,000
Covenant not-to-compete with former officer 213,000 -
----------------- -----------------
Total current assets 3,214,000 2,157,000
PROPERTY:
Land - 1,051,000
Buildings and leasehold improvements 71,000 6,227,000
Laboratory equipment 2,098,000 2,174,000
Furniture, fixtures and computer equipment 838,000 921,000
Construction-in-progress - 524,000
----------------- -----------------
3,007,000 10,897,000
Less accumulated depreciation and amortization (1,067,000) (1,625,000)
----------------- -----------------
Property, net 1,940,000 9,272,000
OTHER ASSETS:
Note receivable 1,863,000 -
Note receivable from former officer - 381,000
Other, net 353,000 229,000
----------------- -----------------
Total other assets 2,216,000 610,000
----------------- -----------------
TOTAL ASSETS $ 7,370,000 $ 12,039,000
================= =================
F-3
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1999 AND 1998 (CONTINUED)
- ------------------------------------------------------------------------------------------------------------------
1999 1998
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 898,000 $ 729,000
Deferred license revenue 3,000,000 -
Accrued clinical trial site fees 691,000 -
Notes payable 106,000 2,503,000
Accrued legal and accounting fees 314,000 584,000
Accrued royalties and license fees 310,000 540,000
Due to former officers under severance agreements 329,000 -
Other current liabilities 357,000 309,000
----------------- -----------------
Total current liabilities 6,005,000 4,665,000
NOTES PAYABLE 3,498,000 1,926,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock- $.001 par value; authorized 5,000,000 shares:
Class C convertible preferred stock, shares outstanding -
1999-121 shares; 1998-4,807 shares (liquidation preference of
$121,000 at April 30, 1999) - -
Common stock-$.001 par value; authorized 120,000,000 shares; outstanding
1999 - 73,372,205 shares; 1998 -48,547,351 shares 73,000 49,000
Additional paid-in capital 90,779,000 78,423,000
Accumulated deficit (92,678,000) (72,639,000)
----------------- -----------------
(1,826,000) 5,833,000
Less notes receivable from sale of common stock (307,000) (385,000)
----------------- -----------------
Total stockholders' equity (deficit) (2,133,000) 5,448,000
----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 7,370,000 $ 12,039,000
================= =================
See accompanying notes to consolidated financial statements.
F-4
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
COSTS AND EXPENSES:
Research and development $ 8,795,000 $ 7,644,000 $ 2,912,000
License fee 4,500,000 - -
General and administrative 4,903,000 4,257,000 3,313,000
Loss on disposal of property 1,247,000 161,000 -
Interest 428,000 296,000 148,000
Purchased in-process research and development - - 27,154,000
----------------- ----------------- -----------------
Total costs and expenses 19,873,000 12,358,000 33,527,000
INTEREST AND OTHER INCOME 380,000 534,000 346,000
----------------- ----------------- -----------------
NET LOSS $ (19,493,000) $ (11,824,000) $ (33,181,000)
================= ================= =================
Net loss before preferred stock accretion and
dividends $ (19,493,000) $ (11,824,000) $ (33,181,000)
Preferred stock accretion and dividends:
Accretion of Class B and Class C preferred
stock discount (531,000) (2,476,000) -
Imputed dividends for Class B and
Class C preferred stock (15,000) (965,000) (544,000)
----------------- ----------------- -----------------
Net loss applicable to common stock $ (20,039,000) $ (15,265,000) $ (33,725,000)
================= ================= =================
Weighted average shares outstanding 66,146,628 30,947,758 21,429,858
================= ================= =================
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.30) $ (0.49) $ (1.57)
================= ================= =================
See accompanying notes to consolidated financial statements.
F-5
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
NOTES NET
ADDITIONAL RECEIVABLE STOCKHOLDERS'
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED FROM SALE OF EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMMON STOCK (DEFICIT)
----------------------------------------------------------------------------------------------------
BALANCES, MAY 1, 1996 6,800 $ - 20,048,014 $ 20,000 $ 33,070,000 $(23,649,000) $ (477,000) $ 8,964,000
Class C preferred stock
issued for cash, net of
issuance costs of $931,000 12,000 11,069,000 11,069,000
Accretion of Class B and
Class C preferred stock
dividends 544,000 (544,000)
Common stock issued upon
conversion of Class B
preferred stock (4,600) 1,587,138 1,000 (1,000)
Common stock issued for
acquisition of subsidiary 5,080,000 5,000 26,665,000 26,670,000
Common stock issued upon
exercise of stock options 533,500 1,000 272,000 273,000
Stock-based compensation 773,000 773,000
Net loss (33,181,000) (33,181,000)
--------- --------- ---------- --------- ------------- ------------- ----------- ------------
BALANCES, APRIL 30, 1997 14,200 - 27,248,652 27,000 72,392,000 (57,374,000) (477,000) 14,568,000
Accretion of Class B and
Class C preferred stock
dividends and discount 448 3,429,000 (3,441,000) (12,000)
Preferred stock issued upon
exercise of Class C
Placement Agent Warrant,
net of offering costs of
$115,000 670 555,000 555,000
Additional consideration on
Class C preferred stock 325 325,000 325,000
Common stock issued upon
conversion of Class B and
Class C preferred stock (10,836) 19,931,282 20,000 (20,000)
Common stock issued for cash
and upon exercise of
options and warrants 1,291,794 1,000 1,210,000 1,211,000
Common stock issued for
services and interest 75,623 1,000 94,000 95,000
Stock-based compensation 438,000 438,000
Reduction of notes receivable 92,000 92,000
Net loss (11,824,000) (11,824,000)
--------- --------- ---------- --------- ------------- ------------- ----------- ------------
BALANCES, APRIL 30, 1998 4,807 - 48,547,351 49,000 78,423,000 (72,639,000) (385,000) 5,448,000
Accretion of Class C
preferred stock dividends
and discount 531,000 (546,000) (15,000)
Preferred stock issued upon
exercise of Class C
Placement Agent Warrant 530 530,000 530,000
Common stock issued for cash
under Equity Line
Agreement, net of offering
costs of $678,000 6,656,705 6,000 5,066,000 5,072,000
Common stock issued upon
conversion of Class C
warrants and Equity Line
warrants 5,909,015 6,000 3,635,000 3,641,000
Common stock issued upon
conversion of Class C
preferred stock (5,216) 9,428,131 9,000 (9,000)
Common stock issued for cash
upon exercise of
options and warrants 528,034 1,000 316,000 317,000
Common stock issued for
services, license rights,
interest, and under
severance agreements 2,302,969 2,000 1,832,000 1,834,000
Stock-based compensation 455,000 455,000
Reduction of notes receivable 78,000 78,000
Net loss (19,493,000) (19,493,000)
--------- --------- ---------- --------- ------------- ------------- ----------- ------------
BALANCES, APRIL 30, 1999 121 $ - 73,372,205 $ 73,000 $ 90,779,000 $(92,678,000) $ (307,000) $(2,133,000)
========= ========= ========== ========= ============= ============= =========== ============
See accompanying notes to consolidated financial statements.
F-6
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999
- ------------------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (19,493,000) $ (11,824,000) $ (33,181,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Purchased in-process research and development - - 27,154,000
Buyback of licensing rights 4,500,000 - -
Depreciation and amortization 1,046,000 706,000 349,000
Loss on disposal of long-term assets 1,247,000 201,000 -
Stock-based compensation expense and common stock
issued for interest, services, and under severance
agreements 1,089,000 533,000 773,000
Severance expense 414,000 - -
Reserve for contract loss, net of inventory write-off - (156,000) -
Additional consideration on Class C preferred stock - 325,000 -
Changes in operating assets and liabilities, net of
effects from acquisition of subsidiaries:
Other receivables, net (161,000) 289,000 61,000
Inventories, net (11,000) 33,000 (78,000)
Prepaid expenses and other current assets 24,000 (284,000) (3,000)
Accounts payable and other accrued liabilities (200,000) 324,000 562,000
Accrued clinical trial site fees 691,000 - -
Deferred license revenue 3,000,000 - -
--------------- --------------- ---------------
Net cash used in operating activities (7,854,000) (9,853,000) (4,363,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenses paid for acquisition of subsidiary, net of
cash acquired - - (77,000)
Sale of short-term investments - - 3,899,000
Proceeds from sale of property 3,924,000 - -
Purchases of property (542,000) (2,874,000) (3,284,000)
Payments on (issuance of) notes receivable 15,000 (24,000) (357,000)
Increase in other assets (335,000) (46,000) (85,000)
--------------- --------------- ---------------
Net cash provided by (used in) investing
activities 3,062,000 (2,944,000) 96,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock 530,000 555,000 11,069,000
Net proceeds from issuance of common stock 9,030,000 1,211,000 273,000
Payment of Class C preferred stock dividends (15,000) (12,000) -
Payments on notes receivable from sale of common
stock 78,000 52,000 -
Principal payments on notes payable (4,382,000) (100,000) (45,000)
Proceeds from issuance of notes payable 200,000 598,000 1,020,000
--------------- --------------- ---------------
Net cash provided by financing activities 5,441,000 2,304,000 12,317,000
--------------- --------------- ---------------
F-7
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- -------------------------------------------------------------------------------------------------------------------
1999 1998 1997
--------------- --------------- ---------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 649,000 $ (10,493,000) $ 8,050,000
CASH AND CASH EQUIVALENTS,
Beginning of year 1,736,000 12,229,000 4,179,000
--------------- --------------- ---------------
CASH AND CASH EQUIVALENTS,
End of year $ 2,385,000 $ 1,736,000 $ 12,229,000
=============== =============== ===============
SUPPLEMENTAL INFORMATION:
Acquisition of subsidiary:
Fair value of assets acquired $ 27,154,000
Common stock issued (26,670,000)
---------------
Net liabilities assumed $ 484,000
===============
Interest paid $ 203,000 $ 258,000 $ 132,000
=============== =============== ===============
Schedule of non-cash investing and financing activities:
Purchase of laboratory equipment for notes payable $ 57,000
==============
Note receivable from sale of property $ 1,925,000
==============
For supplemental information relating to conversion of preferred stock into
common stock, common stock issued in exchange for services, forgiveness of note
receivable from officer and noncash expenses under severance arrangements,
common stock issued upon acquisition of subsidiary and other noncash
transactions, see Notes 3, 4, 5, 6, 7, 8, 9 and 10.
See accompanying notes to consolidated financial statements.
F-8
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS DESCRIPTION
ORGANIZATION - Techniclone Corporation ("Techniclone or the Company")
was incorporated in the state of Delaware on September 25, 1996. On March 24,
1997, Techniclone International Corporation, a California corporation,
(predecessor company incorporated in June 1981) was merged with and into
Techniclone Corporation. Techniclone has one wholly owned subsidiary, Peregrine
Pharmaceuticals, Inc., a Delaware corporation (Note 3).
BUSINESS DESCRIPTION - Techniclone is a biopharmaceutical company
engaged in the research, development and commercialization of targeted cancer
therapeutics. The Company develops product candidates based primarily on
proprietary collateral (indirect) tumor targeting technologies for the treatment
of solid tumors and a direct tumor targeting agent for the treatment of
refractory malignant lymphoma.
GOING CONCERN - The accompanying consolidated 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 consolidated financial statements, the Company experienced a loss
of $19,493,000 during the year ended April 30, 1999, and had a cash and cash
equivalents balance of $2,385,000 and an accumulated deficit of $92,678,000 at
April 30, 1999. The Company must raise additional funds to sustain research and
development, provide for future clinical trials and continue its operations
until it is able to generate revenue from the sale and/or licensing of its
products. The Company plans to obtain required financing through one or more
methods, including obtaining additional equity or debt financing and negotiating
additional licensing or collaboration agreements with another company. There can
be no assurance that the Company will be successful in raising such funds on
terms acceptable to it, or at all, or that sufficient additional capital will be
raised to complete the research and development of the Company's product
candidates. The Company's future success is dependent upon raising additional
monies to provide for the necessary operations of the Company. If the Company is
unable to obtain additional financing, there would be a material adverse effect
on the Company's business, financial position and results of operations. The
Company's continuation as a going concern is dependent on its ability to
generate sufficient cash flows to meet its obligations on a timely basis, to
obtain additional financing as may be required and, ultimately, to attain
profitable operations.
Subsequent to April 30, 1999, the Company received gross proceeds of
approximately $2,250,000 under the Regulation D Common Stock Equity Line
Agreement ("Equity Line Agreement") in exchange for 2,515,919 shares of the
Company's common stock, including commission shares. At June 30, 1999, the
Company had $12,000,000 available to draw upon under the Equity Line Agreement,
subject to certain limitations (Note 9).
Without obtaining additional financing, the Company believes that it has
sufficient cash on hand and available pursuant to the Equity Line Agreement,
assuming the Company makes an additional quarterly draw of $2,250,000, to meet
its obligations on a timely basis through September, 1999.
F-9
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
Peregrine Pharmaceuticals, Inc. (Peregrine). All intercompany balances and
transactions have been eliminated.
CASH EQUIVALENTS - The Company considers all highly liquid, short-term
investments with an initial maturity of three months or less to be cash
equivalents.
INVENTORIES - Inventories consist of raw materials and supplies and are
stated at the lower of first-in, first-out cost or market.
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 5 to 25 years for
buildings, building improvements and leasehold improvements and three to seven
years for laboratory equipment, furniture and fixtures, and computer equipment
and software.
IMPAIRMENT -The Company assesses recoverability of its long-term assets
by comparing the remaining carrying value to the value of the underlying
collateral or the fair market value of the related long-term asset based on
undiscounted cash flows.
PREFERRED STOCK DIVIDENDS - Dividends on Class B and Class C Stock are
accreted over the life of the preferred stock and are based on the stated
dividend rate (10% for the Class B and 5% for the Class C) plus the dividend
amount attributable to the discount at the issuance date. To the extent that
unconverted shares of Class B and Class C Stock remain outstanding, the value of
the dividend is remeasured and recorded on each date that the conversion rate
changes.
REVENUE RECOGNITION - Revenues related to licensing agreements (Note 8)
are recognized when cash has been received and all obligations of the Company
have been met, which is generally upon the transfer of the technology license or
other rights to the licensee. During fiscal year 1999, the Company received an
initial up-front license payment of $3,000,000 from Schering A.G., Germany in
exchange for the Oncolym(R) marketing and distributions rights (Note 8).
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and
cash equivalents, other receivables, accounts payable and accrued liabilities
approximate their fair values because of the short maturity of these financial
instruments. Notes receivable approximate fair value as the interest rates
charged approximate currently available market rates. Based on the borrowing
rates currently available to the Company for debt with similar terms and
maturities, the fair value of notes payable approximates the carrying value of
these liabilities.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from these estimates.
F-10
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS - Net loss per share
attributable to common stockholders is calculated by taking the net loss for the
year and deducting the dividends and Preferred Stock issuance discount accretion
on the Class B Preferred Stock and the Class C Preferred Stock during the year
and dividing the sum of these amounts by the weighted average number of shares
of common stock outstanding during the year. Because the impact of options,
warrants, and other convertible instruments are antidilutive, there is no
difference between basic and diluted loss per share amounts for the three years
in the period ended April 30, 1999. The Company has excluded the following
shares issuable upon the exercise of common stock warrants and options and
conversions of outstanding Preferred Stock and Preferred Stock dividends from
the three years ended April 30, 1999 per share calculation because their effect
is antidilutive:
1999 1998 1997
--------- --------- ---------
Common stock equivalent shares assuming issuance
of shares represented by outstanding stock
options and warrants utilizing the treasury
stock method 2,927,725 3,840,220 1,673,849
Common stock equivalent shares assuming issuance
of shares upon conversion of preferred stock and
Class C placement agent warrants utilizing the
if-converted method 613,035 24,117,127 1,119,864
The common stock equivalent shares assuming issuance of shares upon
conversion of preferred stock and Class C placement agent warrants were
calculated assuming conversion of preferred stock at the beginning of the year
or at the issuance date, if later. Additionally, the stock was assumed converted
rather than redeemed, as it is the Company's intention not to redeem the
preferred stock for cash. The preferred stock is not considered a common stock
equivalent.
INCOME TAXES - The Company utilizes the liability method of accounting
for income taxes as set forth in Statement of Financial Accounting Standards
(SFAS) No. 109, ACCOUNTING FOR INCOME TAXES. Under the liability method,
deferred taxes are determined based on the differences between the consolidated
financial statements and tax basis of assets and liabilities using enacted tax
rates. A valuation allowance is provided when it is more likely than not that
some portion or the entire deferred tax asset will not be realized.
RECLASSIFICATION - Certain amounts in the 1998 and 1997 consolidated
financial statements have been reclassified to conform to the current year
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS - Effective May 1, 1998, the Company
adopted SFAS No. 130, REPORTING COMPREHENSIVE INCOME, which establishes
standards for reporting and displaying comprehensive income and its components
in the consolidated financial statements. For the fiscal years ended April 30,
1999, 1998 and 1997, the Company did not have any components of comprehensive
income as defined in SFAS No. 130.
The Company adopted SFAS No. 131, "DISCLOSURE ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION" on May 1, 1998. SFAS No. 131 established
standards of reporting by publicly held businesses and disclosures of
information about operating segments in annual financial statements, and to a
lesser extent, in interim financial reports issued to stockholders. The adoption
of SFAS No. 131 had no impact on the Company's consolidated financial statements
as the Company operates in one industry segment engaged in the research,
development and commercialization of targeted cancer therapeutics.
During June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" which
will be effective for the Company beginning May 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires an entity recognize all derivatives as either
assets or liabilities in the statements of financial position and measure those
instruments at fair value. The Company has not determined the impact on the
consolidated financial statements, if any, upon adopting SFAS No. 133.
F-11
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
3. ACQUISITION OF SUBSIDIARY
On April 24, 1997, the Company acquired all of the outstanding stock of
Peregrine Pharmaceuticals, Inc. in exchange for 5,080,000 shares of the
Company's common stock and the assumption of net liabilities of $484,000.
Peregrine was a development stage company involved in the research and
development of Vascular Targeting Agents. The acquisition was accounted for as a
purchase. The excess of the purchase price over net tangible assets acquired
(cash and notes receivable) and liabilities assumed (accounts payable and
accrued liabilities) represents the difference between the fair value of the
Company's common stock exchanged and the fair value of net assets purchased. The
excess purchase price of $27,154,000 over the net tangible assets acquired
represents the amount paid for acquired technologies and related intangible
assets. This excess purchase price was charged to operations as of the effective
date of the acquisition as purchased in-process research and development as the
related technologies have not reached technological feasibility.
Had the acquisition of Peregrine occurred on May 1, 1996, pro forma net
loss and loss per common share for fiscal year 1997 would have been $35,127,000
and $1.33, respectively (unaudited). Revenues for fiscal year 1997 would not
have changed had the acquisition occurred on May 1, 1996.
4. NOTES RECEIVABLE
During December 1998, the Company completed the sale and subsequent
leaseback of its two facilities (Note 5) and recorded an initial note receivable
from buyer of $1,925,000. The unpaid principal balance of $1,910,000 at April
30, 1999 bears interest at 7.0% per annum through December 1, 2001 and 7.5%
thereafter and is collaterized under the Security and Pledge Agreement. The note
receivable is amortized over 20 years and is due upon the earlier of 12 years or
upon the sale of related facilities.
Note receivable from former officer of $381,000 at April 30, 1998
represents the unamortized portion of an original $350,000 note and interest
charges thereon which is collateralized by real estate. During fiscal year 1999,
the Company entered into a severance agreement with the former officer (Note 7)
whereby the Company agreed that if the former officer did not compete with the
Company during the period beginning March 1, 1998 through February 29, 2000, the
Company will, on March 1, 2000, forgive an amount equal to his principal note of
$350,000 and interest thereon. The Company is amortizing the note receivable and
accrued interest charges over the period not-to-compete as a non-cash expense
included in general and administrative expenses in the accompanying financial
statements. The covenant not-to-compete with the former officer of $213,000 at
April 30, 1999 represents the unamortized portion of the original $381,000 note
receivable and accrued interest charges.
F-12
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
5. PROPERTY
On December 24, 1998, the Company completed the sale and subsequent
leaseback of its two facilities with an unrelated entity. The aggregate sales
price of the two facilities was $6,100,000, comprised of $4,175,000 in cash and
a note receivable of $1,925,000. In accordance with SFAS No. 98, the Company
accounted for the sale and subsequent leaseback transaction as a sale and
removed the net book value of land, buildings and building improvements of
$7,014,000 from the consolidated financial statements and recorded a loss on
sale of $1,171,000, which included expenses of $257,000 related to the sale.
6. NOTES PAYABLE
During December 1998, the Company borrowed $200,000 from an unrelated
entity. The note is unsecured, bears interest at 7.0% per annum and is payable
over three years. Principal and interest payments of $6,000 are due monthly.
On March 8, 1999, the Company entered into a Termination Agreement with
Biotechnology Development Ltd. and re-acquired the Oncolym(R) distribution
rights (Note 8). In conjunction with the Termination Agreement, the Company
issued a note payable for $3,300,000 due and payable on March 1, 2001. The note
payable bears simple interest at a rate of 10% per annum, payable monthly. The
note is collateralized by all tangible assets of the Company, excluding tangible
assets not located on the Company's Tustin, California premises and those assets
previously pledged and held as collateral under separate agreements.
During fiscal year 1998, in conjunction with upgrading the Company's
manufacturing facilities, the Company issued a short-term note payable to a
construction contractor for $2,385,000. The note payable was issued in exchange
for $1,885,000 of accounts payable due to the contractor and cash proceeds of
$500,000 for working capital purposes. Under the terms of the short-term note
agreement, the Company issued 82,235 and 65,000 shares of common stock for
interest charges in fiscal year 1999 and 1998, respectively. In conjunction with
the financing, the Company issued two warrants, expiring through July 2001, to
purchase an aggregate of 335,000 shares of the Company's common stock at an
average price of $.79 per share (Note 8). The value of the warrants was based on
a Black-Scholes formula after considering the terms in the related warrant
agreements. During fiscal year 1999 and 1998, the Company recorded $115,000 and
$45,000 as interest expense for the fair value of the related warrants. In
August 1998, the note payable of $2,385,0000 was paid in full.
In April 1996 and October 1996, the Company entered into two separate
note agreements for $1,020,000 each to finance the purchase of two buildings
used as its operating and administrative facilities. The two notes, which bore
interest at LIBOR plus 4.25%, were paid in full on December 24, 1998 upon the
sale of the two facilities.
In addition, the Company has entered into various note agreements with
aggregate amounts due of $254,000 to finance laboratory equipment that bear
interest at rates between 10% and 10.9% and require aggregate monthly payments
of $6,000 through June 2002.
F-13
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
Minimum principal payments on notes payable as of April 30, 1999 are as
follows:
Year ending April 30:
2000 $ 106,000
2001 3,410,000
2002 86,000
2003 2,000
--------------
$ 3,604,000
==============
7. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE. In December 1998, the Company sold and subsequently
leased back its two facilities in Tustin, California. The lease has an original
lease term of twelve years with two 5-year renewal options and includes
scheduled rental increases of 3.35% every two years. Rent expense under the
lease agreement totaled $269,000 for fiscal year 1999. At April 30, 1999, future
minimum lease payments under the noncancelable operating lease are as follows:
Year ending April 30:
2000 $ 675,000
2001 684,000
2002 698,000
2003 707,000
2004 721,000
Thereafter 5,109,000
--------------
$ 8,594,000
==============
SEVERANCE AGREEMENTS. In July 1998, the Company entered into a
severance agreement with its former Chief Executive Officer (CEO). The severance
agreement provides for the former CEO to be paid $300,000 a year for the period
beginning March 1, 1998 through March 1, 2000. Unexercised and unvested
outstanding stock options on March 1, 1998, will vest and be paid as follows:
one-third of the unexercised, unvested options outstanding on March 1, 1998 (or
329,667 options) will vest immediately and be paid to the former CEO on December
31, 1998; one-third of the unexercised, unvested and outstanding options on
March 1, 1998 (or 329,667 options), will vest on March 1, 1999 and be paid on
December 31, 1999; and one-third of the unexercised, unvested and outstanding
options on March 1, 1998 (or 329,666 options), will vest and be paid on March 1,
2000. In addition, the Company will make income tax payments, at the bonus rate,
to the appropriate taxing authorities. During the employment period, beginning
on March 1, 1998 and ending on March 1, 2000, the former CEO will, with certain
exceptions, be eligible for Company benefits. Pursuant to the severance
agreement, the former CEO will be available to work for the Company for a
minimum of 25 hours per week. In addition, the Company agreed that if the former
CEO did not compete during the period beginning March 1, 1998 and ending
February 29, 2000, the Company will, on March 1, 2000, forgive the former CEO an
amount equal to his note of $350,000, plus all accrued interest thereon (Note
4). Through April 30, 1999, the Company expensed approximately $948,000, of
which, $595,000 was non-cash, for related severance costs, which has been
included in general and administrative expenses in the accompanying consolidated
financial statements. At April 30, 1999, future cash commitments under the
severance agreement amounted to $312,000.
F-14
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
On October 4, 1998, the Company's former Vice President of Operations
and Administration resigned to pursue other personal and business interests. In
connection with his resignation, the Company entered into a severance agreement
whereby the former Vice President of Operations and Administration will provide
consulting services to the Company as an independent consultant for a fixed and
non-cancelable period of sixteen months continuing until January 31, 2000, in
consideration of a monthly consulting fee of $12,500 and the issuance of an
aggregate of 320,000 shares of Common Stock during such period for the exercise
of outstanding stock options, without the requirement of any payment of the
exercise price ($.60 per share). As of April 30, 1999, 240,000 shares of common
stock have been issued to the former Vice President of Operations and
Administration under the severance agreement. In addition, the Company has
agreed to make tax payments totaling $65,280 to federal and state taxing
authorities to offset the income to the former Vice President of Operations and
Administration resulting from the non-payment of the exercise price for such
options. Pursuant to the agreement, the former Vice President of Operations and
Administration will be required to repay the Company the entire outstanding
principal balance and accrued interest thereon under two stock option exercise
notes totalling $154,000 on January 31, 2000. Through April 30, 1999, the
Company expensed approximately $301,000, of which, $165,000 was non-cash, for
related severance costs, which has been included in general and administrative
expenses in the accompanying consolidated financial statements. At April 30,
1999, future cash commitments under the severance agreement amounted to
$122,000.
EMPLOYMENT AGREEMENT. The Company has a two-year employment agreement
with its current Chief Executive Officer. At April 30, 1999, future fixed cash
commitments under this agreement amounts to $250,000 and $10,000 for the fiscal
years ending April 30, 2000 and 2001, respectively.
LEGAL PROCEEDINGS. On March 18, 1999, the Company was served with notice
of a lawsuit filed in Orange County Superior Court for the State of California
by a former employee alleging a single cause of action for wrongful termination.
The Company believes this lawsuit is barred by a severance agreement and release
signed by the former employee following his termination and the Company is
vigorously defending the action. The Company's motion for summary judgement is
currently pending argument. Management does not believe that the outcome of this
action will have a material adverse effect upon the financial position or
results of operations of the Company.
8. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
ONCOLYM(R)
On March 8, 1999, the Company entered into a License Agreement with
Schering A.G., Germany, whereby Schering A.G., Germany was granted the
exclusive, worldwide right to market and distribute Oncolym(R) products, in
exchange for an initial payment of $3,000,000, a further payment of $2,000,000
following the acceptance by the FDA for filing of the first drug approval
application for Oncolym(R) in the United States, a further payment of $7,000,000
following regulatory approval of Oncolym(R) in the United States and two final
payments of $2,500,000 each following regulatory approval of Oncolym(R) in any
country in Europe and upon the first commercial sale of Oncolym(R) in any
F-15
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
country in Europe. The Company will also receive a royalty of up to twelve
percent (12%) of net sales of Oncolym(R) products. Schering A.G., Germany is
required to pay eighty percent (80%) of all clinical trial expenses. The License
Agreement with Schering A.G., Germany is subject to certain other conditions and
may be terminated by Schering A.G., Germany for a number of reasons, including
upon thirty days' written notice given at any time prior to receiving regulatory
approval. If Schering A.G., Germany terminates the License Agreement Schering
A.G., Germany may remain obligated to pay for all of the costs of completing all
then ongoing clinical trials for Oncolym(R), up to $3,000,000, depending on the
basis for termination. Under the License Agreement, the Company received
$3,000,000 during fiscal year 1999, which was included in deferred license
revenue in the accompanying consolidated financial statements at April 30, 1999
and will be recognized as license revenue when all obligations of the Company
have been met. Pursuant to the License Agreement, the Company and Schering A.G.,
Germany have also agreed to a structure for proceeding with negotiations
concerning the terms of a possible licensing of the Company's Vascular Targeting
Agent ("VTA") technology in the near future.
Also in March, 1999, the Company entered into a Termination Agreement
with Biotechnology Development, Ltd. ("BTD"), pursuant to which the Company
terminated all previous agreements with BTD and thereby reacquired the marketing
rights to Oncolym(R) products in Europe and certain other designated foreign
countries. In exchange for these rights, the Company expensed $4,500,000 as a
license fee in fiscal year 1999, which was comprised of a secured promissory
note payable in the amount of $3,300,000 and shares of common stock equal to
$1,200,000, or 1,523,809 common shares. The number of shares of common stock
issued was calculated by taking $1,200,000 divided by ninety percent (90%) of
the market price of the Company's common stock as defined in the Termination
Agreement. In addition, the Company issued warrants to purchase up to 3,700,000
shares of common stock at an exercise price of $3.00 per share exercisable
through March 2002 and issued warrants to purchase up to 1,000,000 shares of
common stock at an exercise price of $5.00 per share exercisable through March
2004. The warrants were measured utilizing the Black-Scholes option valuation
model (Note 10).
In November 1997, the Company entered into a Termination and Transfer
Agreement with Alpha Therapeutic Corporation (Alpha), whereby the Company
reacquired the rights for the development, commercialization and marketing
Oncolym(R) in the United States and certain other countries, previously granted
to Alpha in October 1992. Under the terms of the Termination and Transfer
Agreement, the Company paid Alpha $260,000 upon signing of the agreement and
paid an additional $250,000 upon enrollment of the first clinical trial patient
by the Company. In addition, the Company has contingent obligations to pay (i)
$1,000,000 upon filing of a Biologics License Application ("BLA") and (ii)
$1,000,000 upon FDA approval of a BLA by the Food and Drug Administration, and
(iii) royalties equal to 2% of net sales for product sold in North, South and
Central America and Asia for five (5) years after commercialization of the
product. Under the Termination and Transfer Agreement, $510,000 was expensed in
fiscal year 1998 and no amounts were due and payable at April 30, 1999.
On October 28, 1992, the Company entered into an agreement with an
unrelated corporation (licensee) to terminate a previous license agreement
relating to Oncolym(R). The termination agreement provides for maximum payments
of $1,100,000 to be paid by the Company based on achievement of certain
milestones, including royalties on net sales. At April 30, 1999, the Company had
paid $100,000 and accrued for another $100,000 relating to the termination
agreement. There have been no sales of the related products through April 30,
1999. Future maximum commitments under the agreement are $900,000.
F-16
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
In 1985, the Company entered into a research and development agreement
with Northwestern University and its researchers to develop Oncolym(R). The
Company holds an exclusive world-wide license to manufacture and market products
using the Oncolym(R) antibodies. In exchange for the world-wide license to
manufacture and market the products, the Company will pay royalties to
Northwestern University of up to 6% of net sales (as defined in the agreement).
The Company is currently in negotiations with Northwestern University to reduce
this royalty rate to 3% of net sales and extend the period of time the reduced
royalty rate would apply.
TUMOR NECROSIS THERAPY (COTARA(TM))
In February 1996, the Company entered into a joint venture agreement
with Cambridge Antibody Technology, Inc. (CAT), an unrelated entity, which
provides for the co-sponsorship of development and clinical testing of chimeric
and human TNT antibodies. As part of the joint venture agreement, CAT maintained
the responsibility to construct human TNT antibodies for future joint clinical
development and testing. A human TNT antibody was completed by CAT in early
1998. The agreement also provided that equity in the joint venture and costs
associated with the development of TNT based products would be shared equally
and the Company would retain exclusive world-wide manufacturing rights. In May
1998, the Company and CAT elected to discontinue the co-sponsorship of the
development of the TNT antibodies and the Company assumed full responsibility to
fund development and clinical trials of the TNT antibody. As a result of the
modification in the joint venture agreement, royalties on future sales of
products which use the TNT antibody have been decreased to be no more than
12.5%. The Company and CAT are currently in negotiations regarding modifications
to the joint venture arrangement.
The Company has arrangements with certain third parties to acquire
licenses needed to produce and commercialize chimeric and human antibodies,
including the Company's TNT antibody. Management believes terms of the licenses
will not significantly impact the cost structure or marketability of chimeric or
human TNT based products.
VASCULAR TARGETING AGENTS
In April 1997, in conjunction with the acquisition of Peregrine, the
Company gained access to certain exclusive licenses for Vascular Targeting
Agents (VTAs) technologies. In conjunction with obtaining certain exclusive
licenses for Vascular Targeting Agents (VTAs) technologies from Peregrine, the
Company will be required to pay (i) annual patent maintenance fees of $50,000,
(ii) an aggregate of $587,500 upon attainment of defined milestones and (iii) an
aggregate of $450,000 upon commercial introduction of the products which will be
off-set against future royalties payments. In addition, the Company must pay
royalties ranging from 2% to 4% of net sales of the related products. If the
products are sublicensed, the Company must pay royalties up to 25% on the
sublicense revenues received by the Company. No revenues have been generated
from the Company's VTA technology. In connection with the Company's agreement
with Schering A.G., Germany for Oncolym(R), Schering A.G., Germany has agreed to
discuss with the Company the development and commercialization of VTAs.
F-17
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
VASOPERMEATION ENHANCEMENT AGENTS AND OTHER LICENSES
Prior to fiscal year 1996, the Company had entered into several license
and research and development agreements with a university for the exclusive,
worldwide licensing rights to use certain patents and technologies in exchange
for fixed and contingent payments and royalties ranging from 2% to 6% of net
sales of the related products. Some of the agreements are terminable at the
discretion of the Company while others continue through 2001. Minimum future
royalties under these agreements are $84,500 annually. Royalties related to
these agreements amounted to $84,500 for fiscal year 1999 and $86,500 for fiscal
years 1998 and 1997.
9. STOCKHOLDERS' EQUITY
CLASS B PREFERRED STOCK
During December 1995, the Company issued 8,200 shares of nonvoting
Class B preferred stock (Class B Stock), at a price of $1,000 per share, for net
proceeds of $7,138,000. The number of shares of common stock issued upon
conversion of each share of Class B Stock is determined by (i) taking ten
percent (10%) of One Thousand Dollars ($1,000) pro-rated on the basis of a 365
day year, by the number of days the Class B Stock is outstanding plus (ii) One
Thousand Dollars ($1,000), (iii) divided by the lower of $3.06875, the fixed
conversion price, or 85% of the average closing bid price for the Company's
common stock for the five trading days immediately preceding the conversion date
(the "Conversion Price"). At May 1, 1997, there were 6,800 shares of Class B
preferred stock outstanding. During fiscal years 1998 and 1997, 2,200 and 4,600
shares of Class B Stock were converted into 4,388,982 and 1,587,138 common
shares, respectively. The Company recorded $224,000 and $536,000 in Class B
Stock dividends during the fiscal years ended April 30, 1998 and 1997,
respectively. At April 30, 1998, there were no remaining shares of Class B Stock
outstanding.
CLASS C PREFERRED STOCK
On April 25, 1997, the Company entered into a 5% Preferred Stock
Investment Agreement and sold 12,000 shares of 5% Adjustable Convertible Class C
Preferred Stock (the Class C Stock) for net proceeds of $11,069,000. The holders
of the Class C Stock do not have voting rights, except as provided under
Delaware law, and the Class C Stock is convertible into common stock.
Commencing on September 26, 1997, the Class C Stock was convertible at
the option of the holder into a number of shares of common stock of the Company
determined by dividing $1,000 plus all accrued but unpaid dividends by the
Conversion Price. The Conversion Price is the lower of $.5958 (Conversion Cap)
per share or the average of the lowest trading price of the Company's common
stock for the five consecutive trading days ending with the trading day prior to
the conversion date reduced by an increasing percentage discount. The discount
ranged from 13% beginning on November 26, 1997 and reached a maximum discount
percentage of 27% on July 26, 1998.
In conjunction with the 5% Preferred Stock Investment Agreement, the
Placement Agent was granted a warrant to purchase up to 1,200 shares of Class C
Stock at $1,000 per share. During fiscal year 1999 and 1998, the Placement Agent
purchased 530 and 670 shares of Class C Stock for gross proceeds of $530,000 and
$670,000, respectively.
F-18
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
In accordance with the Agreement, upon conversion of the Class C Stock
into common stock, the preferred stockholders were granted warrants to purchase
one-fourth of the number of shares of common stock issued upon conversion. The
warrants are exercisable at $0.6554, or 110% of the Conversion Cap and expire in
April 2002. No value has been ascribed to these warrants, as the warrants are
considered non-detachable. During fiscal years 1999 and 1998, warrants to
purchase 2,357,019 and 3,885,515 shares were issued upon conversion of 5,216 and
8,636 shares of Class C Stock, respectively. During fiscal year ended April 30,
1999, 6,207,290 warrants were exercised on a combined cash and cashless basis in
exchange for 5,894,733 shares of common stock and proceeds to the Company of
$3,641,000. Under the terms of the warrant agreement, the Company has the right
to redeem the warrants for $.01 per share, provided that the Company's closing
bid price exceeds amounts specified in the agreement for specified periods. At
April 30, 1999, 35,244 Class C warrants were outstanding (Note 10).
Beginning September 30,1997, the dividends on the Class C Stock are
payable quarterly in shares of Class C Stock or, at the option of the Company,
in cash, at the rate of $50.00 per share per annum. During fiscal year 1999,
1998 and 1997, the Company recorded $15,000, $742,000 and $8,000 in Class C
Stock dividends, respectively. The dividends recorded of $742,000 during fiscal
year 1998 included 448 shares of Class C Stock issued as dividend shares.
During fiscal year 1998, the Registration Statement required to be
filed by the Company pursuant to the agreement was not declared effective by the
180th day following the Closing Date, and therefore, the Company issued an
additional 325 shares of Class C Stock, calculated in accordance with the terms
of the agreement.
During fiscal year 1999 and 1998, 5,216 and 8,636 shares of Class C
Stock were converted into 9,428,131 and 15,542,300 common shares.
The Class C Stock agreement included a provision for conversion of the
preferred stock into common stock at a discount during the term of the
agreements. As a result of these conversion features, the Company is accreting
an amount from accumulated deficit to additional paid-in capital equal to the
Preferred Stock discount. The Preferred Stock discount was computed by taking
the difference between the fair value of the Company's common stock on the date
the Class C Preferred Stock agreement was finalized and the conversion price,
assuming the maximum discount allowable under the terms of the agreement,
multiplied by the number of common shares into which the preferred stock would
have been convertible into (assuming the maximum discount allowable). The
Preferred Stock discount is being amortized over the period from the date of
issuance of the Preferred Stock to the Conversion or discount period (or sixteen
months) using the effective interest method. If preferred stock conversions
occur before the maximum discount is available, the discount amount is adjusted
to reflect the actual discount. During fiscal year 1999 and 1998, the Company
recorded $531,000 and $2,475,000 for the Class C Stock discount, respectively.
COMMON STOCK EQUITY LINE AGREEMENT
During June 1998, the Company secured access to $20,000,000 under a
Common Stock Equity Line ("Equity Line") with two institutional investors,
expiring in June 2001. Under the terms of the Equity Line, the Company may, in
its sole discretion, and subject to certain restrictions, periodically sell
("Put") shares of the Company's common stock for up to $20,000,000 upon the
effective registration of the Put shares, which occurred on January 15, 1999.
After effective registration for the Put shares, unless an increase is otherwise
agreed to, $2,250,000 of Puts can be made every quarter, subject to share
F-19
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
issuance volume limitations identical to the share resale limitations set forth
in Rule 144(e). In addition, if the Company's closing bid price falls below
$1.00 on any day during the ten trading days prior to the Put, the Company's
ability to access funds under the Equity Line in the Put is limited to 15% of
what would otherwise be available. If the closing bid price of the Company's
common stock falls below $0.50 or if the Company is delisted from The Nasdaq
SmallCap Market, the Company would have no access to funds under the Equity
Line.
In accordance with Emerging Issues Task Force Issue No. 96-13,
"Accounting for Derivative Financial Instruments", contracts that require a
company to deliver shares as part of a physical settlement should be measured at
the estimated fair value on the date of the initial Put. As such, the Company
had an independent appraisal performed to determine the estimated fair market
value of the various financial instruments included in the Equity Line and
recorded the related financial instruments as reclassifications between equity
categories. Reclassifications were made for the estimated fair market value of
the warrants issued and estimated Commitment Warrants to be issued under the
Equity Line of $1,140,000 and the estimated fair market value of the reset
provision of the Equity Line of $400,000 as additional consideration and have
been included in the accompanying financial statements. The above recorded
amounts were offset by $700,000 related to the restrictive nature of the common
stock issued under the initial tranche in June 1998 and the estimated fair
market value of the Equity Line Put option of $840,000.
The Equity Line provided for immediate funding of $3,500,000 in
exchange for 2,749,090 shares of common stock, including commission shares.
One-half of this amount, or $1,750,000, is subject to adjustment at three months
after the effective date of the registration statement registering these shares
with the second half subject to adjustment six months after such effective date
of the registration of these shares. At each adjustment date, if the market
price at the three or six month period ("Adjustment Price") is less than the
initial price paid for the common stock, the Company will be required to issue
additional shares of its common stock equal to the difference between the amount
of shares actually issued and the amount of shares which would have been issued
if the purchase price had been the Adjustment Price. On April 15, 1999, the
Company issued 881,481 shares of common stock covering the initial three month
adjustment date.
Future Puts under the Equity Line are priced at a discount equal to the
greater of 17.5% of the lowest closing bid price during the ten trading days
immediately preceding the date on which such shares are sold to the
institutional investors or $0.20.
At the time of each Put, the investors will be issued warrants,
exercisable only on a cashless basis and expiring on December 31, 2004, to
purchase up to 10% of the amount of common stock issued to the investor at the
same price as the purchase of the shares sold in the Put. During fiscal year
1999, the Company issued 566,953 warrants under the Equity Line at an average
exercise price of $1.14. During February 1999, the Company issued 14,282 shares
of common stock upon the cashless exercise of 52,173 Equity Line warrants.
On February 2, 1999, the Company exercised a Put option under the
Equity Line and received gross proceeds of $2,250,000 in exchange for 2,869,564
shares of common stock, including commission shares.
F-20
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
If the Company does not exercise the full amount of its Put rights,
then the Company will issue Commitment Warrants on the first, second, and third
anniversary of the Equity Line. The number of Commitment Warrants to be issued
on each anniversary date will be equal to ten percent (10%) of the quotient of
the difference of $6,666,666, $13,333,333 and $20,000,000 (Commitment Amounts),
respectively, less the actual cumulative total dollar amount of Puts which have
been exercised by the Company prior to such anniversary date divided by the
market price of the Company's common stock.
OTHER EQUITY ARRANGEMENTS
In April 1999, the Company issued 1,523,809 shares of common stock
under a Termination Agreement with Biotechnology Development, Ltd., pursuant to
which the Company terminated all previous agreements with BTD and thereby
reacquired the marketing rights to the Oncolym(R) products in Europe and certain
other designated foreign countries (Note 8).
During fiscal year 1999, the Company issued a total of 569,667 shares
of common stock under two separate severance agreements (Note 7).
In fiscal year 1999, the Company issued 25,000 shares of common stock
to a director of the Company in exchange for consulting services and issued
30,000 shares of common stock to a former officer of the Company as a bonus for
achieving certain milestones. During fiscal year 1999 and 1998, the Company
issued 72,258 and 10,623 shares of its common stock to an unrelated entity in
exchange for services rendered. The issuance of shares of common stock in
exchange for services or as a bonus were recorded based on the more readily
determinable value of the services received or the fair value of the common
stock issued.
In April 1998, through a private placement, the Company sold 1,120,065
shares of restricted common stock for proceeds of $625,000. Of the restricted
shares issued, 84,034 shares were sold to a former officer of the Company. In
conjunction with the private placement, the Company granted warrants to purchase
280,015 shares of its common stock at $1.00 per share. The warrants expire in
April 2001.
In conjunction with the purchase of Peregrine (Note 3), during May
1997, the Company issued 143,979 shares of common stock in exchange for $550,000
to a previous stockholder of Peregrine.
Notes receivable from the sale of common stock at April 30, 1999, are
due from a former officer and a former director of the Company. The notes bear
interest at 6% per annum and are collateralized by personal assets of the
holders. The notes are due in fiscal year 2000. During April 1998, an employee
and member of the Company's Scientific Advisory Board exchanged a note
receivable of $40,000 for consulting services to the Company for full payment of
the loan. Payments on all other notes have been made in accordance with the
terms of the note agreements.
In accordance with the Company's preferred stock agreement, Equity Line
agreement, option plans and other commitments to issue common stock, the Company
has reserved approximately 34,731,000 shares of its common stock at April 30,
1999 for future issuance. Of this amount, approximately 21,114,000 common shares
have been reserved for future issuance under the Equity Line, primarily related
to the future available Put's of $14,250,000 as of April 30, 1999 (which assumes
a market price of the Company's common stock of $1.00 per share, as defined in
the agreement).
10. STOCK OPTIONS AND WARRANTS
The Company has five stock incentive plans. The plans were adopted or
assumed in conjunction with a merger in December 1982 (1982 Plan), January 1986
(1986 Plan), June 1994 (1993 Plan), April 1995 (CBI Plan) and September 1996
(1996 Plan). The plans provide for the granting of options to purchase shares of
the Company's common stock at prices not less than the fair market value of the
stock at the date of grant and generally expire ten years after the date of
grant.
F-21
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
The 1996 Plan originally provided for the issuance of options to
purchase up to 4,000,000 shares of the Company's common stock. The number of
shares for which options may be granted under the 1996 Plan automatically
increases for all subsequent common stock issuances by the Company in an amount
equal to 20% of such subsequent issuances up to a maximum of 10,000,000 options
as long as the total shares allocated to the 1996 Plan do not exceed 20% of the
Company's authorized stock. As a result of issuances of common stock by the
Company subsequent to the adoption of the 1996 Plan, the number of shares for
which options may be granted has increased to 10,000,000 at April 30, 1999.
Options granted generally vest over a period of four years with a maximum term
of ten years. Option activity for each of the three years ended April 30, 1999
is as follows:
1999 1998 1997
--------------------------- ------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
BALANCE,
Beginning of year 4,477,326 $0.70 4,058,250 $3.02 2,237,750 $0.66
Granted 3,910,541 $1.36 796,909 $1.21 2,419,000 $4.63
Exercised (1,127,701) $0.54 (17,750) $1.00 (533,500) $0.51
Canceled (872,499) $1.62 (360,083) $3.45 (65,000) $2.31
----------- ----------- -----------
BALANCE,
End of year 6,387,667 $1.00 4,477,326 $0.70 4,058,250 $3.02
=========== =========== ===========
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
Additional information regarding options outstanding as of April 30,
1999 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------------------
WEIGHTED AVERAGE
RANGE OF PER REMAINING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
SHARE EXERCISE NUMBER OF SHARES CONTRACTUAL LIFE PER SHARE SHARES PER SHARE
PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------------- ------------------- -------------------- -------------------- ----------------- --------------------
$ 0.27 - $ 0.60 2,896,826 6.24 $ 0.57 2,031,537 $ 0.56
$ 0.97 - $ 1.59 3,470,841 9.23 $ 1.33 287,500 $ 1.43
$ 4.00 20,000 7.31 $ 4.00 20,000 $ 4.00
------------------- -----------------
$ 0.27 - $ 4.00 6,387,667 7.87 $ 1.00 2,339,037 $ 0.69
=================== =================
At April 30, 1999, options to purchase 6,387,667 shares of the
Company's common stock were outstanding, of which, 2,339,037 options were
exercisable. Options to purchase 4,103,132 and 69,795 shares were available for
grant under the Company's 1996 and 1993 Plans, respectively. There are no
remaining shares available for grant under the 1982, 1986 or CBI Plans.
In March 1998, the Company experienced a decline in the market value of
its common stock and repriced certain options to key employees, directors and
consultants to $.60 per share. The repricing was considered necessary to enable
the Company to retain key employees, directors and consultants.
Stock-based compensation expense recorded during each of the three
years in the periods ended April 30, 1999 primarily relates to stock option
grants made to consultants and has been measured utilizing the Black-Scholes
option valuation model. Total compensation expense related to stock option
grants made to nonemployees or directors of the Company during fiscal year 1999,
1998 and 1997 amounted to $430,000, $263,000 and $508,000, respectively, and is
being amortized through May 2002, the estimated period of service.
F-22
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
The Company utilizes the guidelines in Accounting Principles Board
Opinion No. 25 for measurement of stock-based transactions for employees. Had
the Company utilized a fair value model for measurement of stock-based
transactions for employees and amortized the expense over the vesting period,
pro forma information would be as follows:
1999 1998 1997
-------------- -------------- --------------
Pro forma net loss $ (22,570,000) $ (17,466,000) $ (35,606,000)
Pro forma net loss per share $ (0.34) $ (0.56) $ (1.66)
The fair value of the options granted in fiscal years 1999, 1998 and
1997 were estimated at the date of grant using the Black-Scholes option pricing
model, assuming an average expected life of approximately four years, a
risk-free interest rate of 6.39% and a volatility factor ranging from 86% to
92%. The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. Option valuation models require the input of highly
subjective assumptions, including the expected stock volatility. Because the
Company's options have characteristics significantly different from those of
traded options and because changes in the subjective input assumptions can
materially affect the fair values estimated, in the opinion of management, the
existing models do not necessarily provide a reliable measure of the fair value
of its options. The weighted average estimated fair value in excess of the grant
price for employee stock options granted during fiscal years 1999, 1998 and 1997
was $0.90, $2.27 and $3.48, respectively.
As of April 30, 1999, warrants to purchase an aggregate of 6,847,349
shares of the Company's common stock were outstanding, including 35,244 warrants
issued upon conversion of the Class C Stock (Note 9). The warrants are
exercisable at prices ranging between $.56 and $5.00 per share with an average
exercise price of $2.81 per share. The value of the warrants was based on a
Black Scholes formula after considering terms in the related warrant agreements.
During fiscal year 1999, 5,486,953 warrants were issued, 52,173
warrants were exercised and 10,000 warrants had expired, excluding warrants
issued upon conversion of the Class C Stock (Note 9). Of the 5,486,953 warrants
issued during fiscal year 1999, the Company issued warrants to purchase up to
3,700,000 shares of common stock at an exercise price of $3.00 per share
exercisable for a period of three (3) years and issued warrants to purchase up
to 1,000,000 shares of common stock at an exercise price of $5.00 per share
exercisable for a period of five (5) years under the License Termination
Agreement with BTD (Note 8). In addition, the Company issued BTD 125,000
warrants at an exercise price of $3.00 per share for an extension of time to
reacquire the Oncolym(R) marketing rights in Europe and certain other foreign
countries. The Company also issued a warrant in July 1998 to purchase 95,000
shares of the Company's common stock at $1.38 per share related to the extension
of payment terms on a payable to a contractor (Note 6). Also during fiscal year
1999, under the Common Stock Equity Line (Note 9), the Company issued 566,953
warrants at prices ranging from $0.86 to $1.375. The Common Stock Equity Line
warrants expire on December 31, 2004 and are only exercisable on a cashless
basis. During fiscal year 1999, 52,173 warrants issued under the Common Stock
Equity Line were exercised in exchange for 14,282 shares of the Company's common
stock.
F-23
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
During fiscal year 1998, excluding the warrants granted to the Class C
Stockholders (Note 9), the Company granted warrants to purchase 1,020,015 shares
of the Company's common stock at prices ranging between $0.56 and $1.00 per
share in conjunction with various financing arrangements. Of the 1,020,015
shares provided for purchase under the warrants granted in fiscal year 1998,
280,015 related to a private placement (Note 9), 240,000 related to the
extension of payment terms on a payable to a contractor and working capital line
(Note 6) and 500,000 related to the extension of a line of credit commitment
with BTD. The line of credit commitment with BTD provided for borrowings of up
to $2,000,000 under a line of credit that expired on May 31, 1998. In exchange
for providing this commitment, even though the Company did not borrow under this
arrangement, BTD received a warrant, expiring in March 2003, to purchase 500,000
shares of the Company's common stock at $1.00 per share. The value of the above
warrants were treated as a cost of the offering or as interest expense, as
applicable, in the accompanying consolidated financial statements. During fiscal
year 1998, 20,000 warrants expired and 10,000 warrants were exercised.
In conjunction with the conversion of Class C Stock, the Company issued
the preferred shareholders warrants to purchase common shares at $.6554 per
share and a warrant to the Placement Agent for the purchase of 1,200 shares of
Class C Stock (Note 9). The Company estimated the difference between the grant
price and the fair value of the placement agent warrants on the date of grant to
be approximately $862,000 and has been treated as a cost of the offering in the
accompanying consolidated financial statements.
11. INCOME TAXES
The provision for income taxes consists of the following:
1999 1998 1997
-------------- -------------- --------------
Provision for income taxes at statutory rate $ (6,628,000) $ (4,020,000) $ (11,282,000)
Acquisition of in process research and
development - 44,000 10,047,000
Permanent differences 21,000 22,000 105,000
State income taxes, net of federal benefit (585,000) (683,000) (995,000)
Other 318,000 - -
Change in valuation allowance 6,874,000 4,637,000 2,125,000
-------------- -------------- ---------------
Provision $ - $ - $ -
============== ============== ================
F-24
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Significant components of the
Company's deferred tax assets at April 30, 1999 and 1998 are as follows:
1999 1998
----------------- -----------------
Net operating loss carryforwards $ 15,603,000 $ 11,635,000
Stock-based compensation 619,000 477,000
General business and research and development credits 118,000 56,000
Deferred revenue 1,110,000 -
Accrued license note payable 1,221,000 -
Accrued liabilities 615,000 244,000
----------------- -----------------
19,286,000 12,412,000
Less valuation allowance (19,286,000) (12,412,000)
----------------- -----------------
Net deferred taxes $ - $ -
================= =================
At April 30, 1999, the Company and its subsidiary have federal net
operating loss carryforwards of $42,962,000 and tax credit carryforwards of
$118,000. During fiscal year 1999, net operating loss carryforwards of $895,000
expired with the remaining net operating losses expiring through 2019. The net
operating losses of $2,986,000 applicable to its subsidiary can only be offset
against future income of its subsidiary. The tax credit carryforwards generally
expire in 2008 and are available to offset future taxes of the Company or its
subsidiary.
Due to ownership changes in the Company's common stock, there will be
limitations on the Company's ability to utilize its net operating loss
carryforwards in the future. The impact of the restricted amount has not been
calculated as of April 30, 1999.
12. RELATED PARTY TRANSACTIONS
Certain former stockholders and directors, through their separate
businesses, have provided the Company with various legal, accounting and
consulting services. There were no related party expenses incurred in fiscal
year 1999. A summary of such professional fees for fiscal years 1998 and 1997
are as follows:
1998 1997
Professional fees paid $ 213,000 $ 282,000
Professional fees expensed $ 163,000 $ 266,000
Professional fees payable at April 30 $ - $ 50,000
F-25
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999 (CONTINUED)
- --------------------------------------------------------------------------------
13. BENEFIT PLAN
During fiscal year 1997, the Company adopted a 401(k) benefit plan
(Plan) for all employees who are over age 21, work at least 24 hours per week
and have three or more months of continuous service. The Plan provides for
employee contributions of up to a maximum of 15% of their compensation or
$10,000. The Company made no matching contributions to the Plan for the fiscal
year 1999, 1998 and 1997.
14. SUBSEQUENT EVENTS
Subsequent to April 30, 1999 and through June 15, 1999 the Company
granted approximately 2,383,332 stock options to employees of the Company under
the Company's 1996 Stock Option Plan at an exercise price of $1.06.
F-26
TECHNICLONE CORPORATION SCHEDULE II
VALUATION OF QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 1999
- --------------------------------------------------------------------------------
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ---------------------------------------------- --------- -------- ---------- ---------
Lower of cost or market inventory reserve for
the year ended April 30, 1997 $ 27,000 $ 99,000 $ (80,000) $ 46,000
Lower of cost or market inventory reserve for
the year ended April 30, 1998 $ 46,000 $ - $ (46,000) $ -
Lower of cost or market inventory reserve for
the year ended April 30, 1999 $ - $ - $ - $ -
Valuation reserve for other receivable for
the year ended April 30, 1997 $ 175,000 $ - $ - $ 175,000
Valuation reserve for other receivable for
the year ended April 30, 1998 $ 175,000 $ - $ - $ 175,000
Valuation reserve for other receivable for
the year ended April 30, 1999 $ 175,000 $ 26,000 $ - $ 201,000
F-27