SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-17085
TECHNICLONE CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 95-3698422
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
14282 Franklin Avenue, Tustin, California 92780-7017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (714) 508-6000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED, SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.)
89,676,960 shares of Common Stock
outstanding as of March 1, 2000
TECHNICLONE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE THIRD QUARTER ENDED JANUARY 31, 2000
TABLE OF CONTENTS
THE TERMS "WE", "US", "OUR," AND "THE COMPANY" AS USED IN THIS FORM ON 10-Q
REFERS TO TECHNICLONE CORPORATION, TECHNICLONE INTERNATIONAL CORPORATION, ITS
FORMER SUBSIDIARY, CANCER BIOLOGICS INCORPORATED, WHICH WAS MERGED INTO THE
COMPANY IN JULY, 1994 AND ITS WHOLLY-OWNED SUBSIDIARY PEREGRINE PHARMACEUTICALS,
INC., WHICH WAS ACQUIRED IN APRIL, 1997.
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements ....................................................... 3
Consolidated Balance Sheets at January 31, 2000 and April 30, 1999 ......... 3
Consolidated Statements of Operations for the three and nine month periods
ended January 31, 2000 and 1999 ............................................ 5
Consolidated Statement of Stockholders' Equity for the nine months ended
January 31, 2000............................................................ 6
Consolidated Statements of Cash Flows for the nine months ended January 31,
2000 and 1999............................................................... 7
Notes to Consolidated Financial Statements ................................. 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................. 16
Company Overview ........................................................... 16
Other Risk Factors of Our Company .......................................... 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................. 27
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 27
Item 2. Changes in Securities and Use of Proceeds .................................. 27
Item 3. Defaults Upon Senior Securities ............................................ 28
Item 4. Submission of Matters to a Vote of Security Holders ........................ 28
Item 5. Other Information .......................................................... 28
Item 6. Exhibits and Reports on Form 8-K............................................ 29
2
PART I FINANCIAL INFORMATION
----------------------------
ITEM 1. FINANCIAL STATEMENTS
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TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 2000 AND APRIL 30, 1999
- -----------------------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30,
2000 1999
----------------- ---------------
UNAUDITED
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,671,000 $ 2,385,000
Other receivables, net of allowance for doubtful accounts of
$363,000 (2000) and $201,000 (1999) 127,000 279,000
Inventories 49,000 57,000
Prepaid expenses and other current assets 269,000 280,000
Covenant not-to-compete with former officer 39,000 213,000
----------------- ---------------
Total current assets 3,155,000 3,214,000
PROPERTY:
Laboratory equipment 2,250,000 2,098,000
Leasehold improvements 73,000 71,000
Furniture, fixtures and computer equipment 869,000 838,000
----------------- ---------------
3,192,000 3,007,000
Less accumulated depreciation and amortization (1,453,000) (1,067,000)
----------------- ---------------
Property, net 1,739,000 1,940,000
OTHER ASSETS:
Note receivable, net of allowance for doubtful note of
$1,825,000 (2000) and zero (1999) - 1,863,000
Other, net 147,000 353,000
----------------- ---------------
Total other assets 147,000 2,216,000
----------------- ---------------
TOTAL ASSETS $ 5,041,000 $ 7,370,000
================= ===============
3
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JANUARY 31, 2000 AND APRIL 30, 1999 (CONTINUED)
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JANUARY 31, APRIL 30,
2000 1999
----------------- ---------------
UNAUDITED
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 1,537,000 $ 898,000
Deferred license revenue 3,000,000 3,000,000
Accrued clinical trial site fees 919,000 691,000
Notes payable 108,000 106,000
Accrued legal and accounting fees 192,000 314,000
Accrued royalties and license fees 368,000 310,000
Other current liabilities 659,000 686,000
----------------- ---------------
Total current liabilities 6,783,000 6,005,000
NOTES PAYABLE 3,416,000 3,498,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock- $.001 par value; authorized 5,000,000 shares:
Class C convertible preferred stock, shares outstanding -
no shares (2000); 121 shares (1999) - -
Common stock-$.001 par value; authorized 150,000,000 shares;
outstanding - 87,557,600 shares (2000); 73,372,205 shares
(1999) 88,000 73,000
Additional paid-in capital 98,884,000 90,779,000
Accumulated deficit (104,130,000) (92,678,000)
----------------- ---------------
(5,158,000) (1,826,000)
Less notes receivable from sale of common stock - (307,000)
----------------- ---------------
Total stockholders' deficit (5,158,000) (2,133,000)
----------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 5,041,000 $ 7,370,000
================= ===============
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See accompanying notes to consolidated financial statements
4
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED JANUARY 31, 2000 AND 1999 (UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------------------- ----------------------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
COSTS AND EXPENSES:
Research and development $ 1,786,000 $ 2,223,000 $ 6,528,000 $ 6,380,000
General and administrative 1,064,000 1,137,000 3,034,000 3,609,000
Loss on disposal of
property (non-cash) - 1,171,000 - 1,177,000
Provision for uncollectable
note receivable (non-cash) - - 1,887,000 -
Interest 103,000 33,000 279,000 369,000
------------------ ------------------ ------------------ ------------------
Total costs and expenses 2,953,000 4,564,000 11,728,000 11,535,000
Interest and other income 154,000 129,000 278,000 290,000
NET LOSS $ (2,799,000) $ (4,435,000) $ (11,450,000) $ (11,245,000)
================== ================== ================== ==================
Net loss before preferred stock
accretion and dividends $ (2,799,000) $ (4,435,000) $ (11,450,000) $ (11,245,000)
Preferred stock accretion and
dividends:
Imputed dividends on Class
C Preferred Stock - (3,000) (2,000) (14,000)
Accretion of Class C
Preferred Stock Discount - - - (531,000)
------------------ ------------------ ------------------ ------------------
Net Loss Applicable to
Common Stock $ (2,799,000) $ (4,438,000) $ (11,452,000) $ (11,790,000)
================== ================== ================== ==================
Weighted Average Shares
Outstanding 81,885,308 67,222,176 78,390,042 64,469,856
================== ================== ================== ==================
BASIC AND DILUTED
LOSS PER SHARE $ (0.03) $ (0.07) $ (0.15) $ (0.18)
================== ================== ================== ==================
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See accompanying notes to consolidated financial statements
5
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED)
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NOTES
ADDITIONAL RECEIVABLE NET
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED FROM SALE OF STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMMON STOCK DEFICIT
---------------------------------------------------------------------------------------------------
BALANCES - May 1, 1999 121 $ - 73,372,205 $ 73,000 $ 90,779,000 $ (92,678,000) $ (307,000) $ (2,133,000)
Accretion of Class C preferred
stock dividends (2,000) (2,000)
Common stock issued upon
conversion of Class C
preferred stock (121) 312,807 -
Common stock issued upon
exercise of Class C warrants
and Equity Line warrants 343,950 1,000 31,000 32,000
Common stock issued for cash
upon exercise of stock
options and other warrants 2,550,351 3,000 2,152,000 2,155,000
Common stock issued under the
Equity Line and Subscription
Agreement for cash 10,115,789 10,000 4,463,000 4,473,000
Stock issued for services and
under severance agreement 862,498 1,000 686,000 687,000
Stock-based compensation 773,000 773,000
Payments on notes receivable
from sale of common stock 307,000 307,000
Net loss (11,450,000) (11,450,000)
---------------------------------------------------------------------------------------------------
BALANCES - January 31, 2000 - $ - 87,557,600 $ 88,000 $ 98,884,000 $(104,130,000) $ - $ (5,158,000)
===================================================================================================
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See accompanying notes to consolidated financial statements
6
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 AND 1999 (UNAUDITED)
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NINE MONTHS ENDED JANUARY 31,
2000 1999
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,450,000) $ (11,245,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Provision for uncollectable note receivable 1,887,000 -
Loss on disposal of assets - 1,177,000
Depreciation and amortization 386,000 738,000
Stock-based compensation and common stock issued for
interest, services and under severance agreements 1,460,000 887,000
Severance expense 174,000 421,000
Changes in operating assets and liabilities:
Other receivables 93,000 1,000
Inventories, net 8,000 (58,000)
Prepaid expenses and other current assets 11,000 (83,000)
Other assets 206,000 -
Accounts payable and accrued legal and accounting fees 517,000 (71,000)
Accrued clinical trial site fees 228,000 453,000
Accrued royalties and license termination fees 58,000 (237,000)
Other accrued expenses and current liabilities (27,000) (201,000)
------------------ ------------------
Net cash used in operating activities (6,449,000) (8,218,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (185,000) (421,000)
Proceeds from the sale of property - 3,924,000
Other assets 35,000 (131,000)
------------------ ------------------
Net cash (used in) provided by investing activities (150,000) 3,372,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 6,660,000 6,959,000
Proceeds from issuance of Class C Preferred Stock - 530,000
Payments received on notes receivable from sale of common
stock 307,000 27,000
Proceeds from issuance of note payable - 200,000
Principal payments on notes payable (80,000) (4,352,000)
Payment of Class C preferred stock dividends (2,000) (14,000)
------------------ ------------------
Net cash provided by financing activities 6,885,000 3,350,000
------------------ ------------------
7
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 AND 1999 (UNAUDITED) (CONTINUED)
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NINE MONTHS ENDED JANUARY 31,
2000 1999
------------------ ------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 286,000 $ (1,496,000)
CASH AND CASH EQUIVALENTS, beginning of period 2,385,000 1,736,000
------------------ ------------------
CASH AND CASH EQUIVALENTS, end of period $ 2,671,000 $ 240,000
================== ==================
SUPPLEMENTAL INFORMATION:
Interest paid $ 213,000 $ 148,000
================== ==================
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See accompanying notes to consolidated financial statements
8
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED)
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying unaudited financial statements
in this quarterly report have been prepared in accordance with the instructions
to Form 10-Q under section 13 or 15(d) of the Securities Act of 1934. The
consolidated financial statements included herein should be read in conjunction
with the consolidated financial statements of the Company, included in the
Company's Annual Report on Form 10-K for the year ended April 30, 1999, filed
with the Securities and Exchange Commission on July 28, 1999.
The unaudited financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. As shown in the financial
statements, the Company experienced losses in fiscal 1999 and during the first
nine months of fiscal 2000 and has an accumulated deficit of $104,130,000 at
January 31, 2000. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern.
The unaudited consolidated financial statements contain all adjustments
(consisting of only normal recurring adjustments) which, in the opinion of
management, are necessary to present fairly the consolidated financial position
of the Company at January 31, 2000 and 1999, and the consolidated results of its
operations and its consolidated cash flows for the nine month periods ended
January 31, 2000 and 1999. Results of operations for the interim periods covered
by this Report may not necessarily be indicative of results of operations for
the full fiscal year.
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 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 assurances 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 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 successful operations.
The Company believes it has sufficient cash on hand, and combined with
amounts available pursuant to the Equity Line Agreement (assuming aggregate
future draws of $5,413,000) and anticipated amounts to be received from signed
letters of intent to enter into collaboration agreements with SuperGen, Inc. and
Oxigene, Inc., to meet its obligations on a timely basis through the first
calendar quarter of 2001. The Company's ability to access funds under the Equity
Line Agreement is subject to the satisfaction of certain conditions as further
described in Note 3 to the accompanying financial statements. Each letter of
intent provides for an exclusive period for the completion of a definitive
agreement and will be subject to customary closing conditions. Although the
Company believes it will enter into definitive agreements and will receive the
related up-front payments under the terms as defined in the letters of intent,
there can be no assurance that definitive agreements will be executed.
9
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED) (CONTINUED)
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RECLASSIFICATION. Certain reclassifications were made to the prior
period balances to conform them to the current period presentation.
INVENTORIES. Inventories consist of raw materials and supplies and are
stated at the lower of first-in, first-out cost or market.
NOTE RECEIVABLE. During December 1998, the Company completed the sale
and subsequent leaseback of its two facilities and recorded an initial note
receivable from the buyer of $1,925,000. In accordance with the related lease
agreement, if the Company is in default under the lease agreement, the note
receivable shall be deemed to be immediately satisfied in full and the buyer
shall have no further obligation to the Company for such note receivable.
Although the Company had made all payments under the lease agreement and had not
defaulted under any terms of the lease agreement, the Company established a 100%
provision for the note receivable in the amount of $1,887,000, which was
recorded during the quarter ended October 31, 1999 due to the amount of cash on
hand during December 1999. The Company will continue to adjust the estimated
provision for the note receivable as payments are received. The Company has
received all payments through March 1, 2000.
NET LOSS PER SHARE. Net loss per share is calculated by adding the net
loss for the three and nine month periods to the Preferred Stock dividends and
Preferred Stock issuance discount accretion on the Class C Preferred Stock
during the three and nine month periods divided by the weighted average number
of shares of Common Stock outstanding during the same period. Shares issuable
upon the exercise of common stock warrants and options have been excluded from
the per share calculation for the three and nine month periods ended January 31,
2000 and 1999 because their effect is antidilutive.
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 three and nine month periods
ended January 31, 2000 and 1999, 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.
10
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
During June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" which
will be effective for the Company beginning May 1, 2001. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts, and for
hedging activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the statements of financial position and measure those
instruments at fair value. The Company has not determined the impact on the
consolidated financial statements, if any, upon adopting SFAS No. 133.
2. NOTES PAYABLE
On December 1, 1999, the Company defaulted on its monthly interest
payment of $27,500 to Biotechnology Development Ltd. on a $3,300,000 note
payable and did not file a registration statement with the Securities and
Exchange Commissions to register 1,523,809 shares of common stock and warrants
to purchase up to 4,825,000 shares of common stock by December 8, 1999 due to
the limited amount of cash on hand at that time. The note payable and shares of
common stock were issued to Biotechnology Development Ltd. upon the Company
re-acquiring certain Oncolym(R) distribution rights. The original note payable
bore simple interest at a rate of 10% per annum, payable monthly, and is due on
March 1, 2001. The note was 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. On December 29, 1999, the Company obtained a waiver
from Biotechnology Development Ltd. for the deferral of interest payments for up
to nine months and an extension of time to register 1,523,809 shares of common
stock and warrants to purchase up to 4,825,000 shares of common stock until the
Company's next registration statement filing. In exchange for this waiver, the
Company agreed to (i) increase the rate of interest from 10% per annum to 12%
per annum on the note payable of $3,300,000 effective December 1, 1999, (ii)
replace the current collateral with the rights to the TNT technology (iii)
extend the expiration date of 5,325,000 warrants to December 1, 2005 and (iv)
only in the case of a merger, acquisition, or reverse stock split, re-price up
to 5,325,000 warrants to an exercise price of $0.34 per share. Biotechnology
Development Ltd. is a limited partnership controlled by Mr. Edward Legere, a
member of the Board of Directors since December 29, 1999.
3. STOCKHOLDERS' EQUITY
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. Under the
Equity Line, $2,250,000 of Puts can be made every quarter, which amount may be
increased up to $5,000,000 by mutual agreement between the Company and the
institutional investors. 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
11
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED) (CONTINUED)
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access funds under the Equity Line in the Put is limited to 15% of what would
otherwise be available and 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
March 1, 2000, the Company had $5,413,000 available for future Puts under the
Equity Line.
Future Puts under the Equity Line are priced at a discount equal to the
greater of $0.20 or 17.5% off the lowest closing per share bid price during the
ten trading days immediately preceding the date on which such shares are sold to
the institutional investors.
At the time of each Put, the institutional investors are 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.
Placement agent fees under each draw of the Equity Line are issued to
Dunwoody Brokerage Services, Inc., which are equal to 10% of the common shares
and warrants issued to the institutional investors plus an overall cash
commission equal to 8% of the gross draw amount. Mr. Eric Swartz, a member of
the Board of Directors, maintains a contractual right to 50% of the shares and
warrants issued under the Equity Line in the name of Dunwoody Brokerage
Services, Inc.
To maintain the Company operations during a period of time when the
Company's stock was trading around $0.50 per share, the Company issued 2,683,910
shares of common stock in exchange for gross proceeds of $675,000 under two
separate draws under the Equity Line, which occurred during the quarter ended
January 31, 2000. On one Equity Line draw, the Company obtained a limited,
one-time waiver from the institutional investors, whereby the investors reduced
the minimum bid price requirement under the Equity Line Agreement from $0.50 per
share during the ten trading days immediately prior to the closing date for such
funding to $0.40 per share during such ten-day period.
On November 19, 1999, in consideration of a commitment by Swartz
Private Equity, LLC to fund a $35,000,000 equity line financing over a three
year term, the Company issued Swartz Private Equity, LLC a five-year warrant to
purchase up to 750,000 shares of the Company's Common Stock at an initial
exercise price of $0.46875 per share subject to reset provisions as defined in
the agreement. This agreement was entered into and approved by the previous
Board of Directors. Mr. Eric Swartz, a member of the Board of Directors,
maintains a 50% ownership in Swartz Private Equity, LLC.
On December 29, 1999, Swartz Investments, LLC and Biotechnology
Development Ltd. agreed to provide interim funding to the Company for up to
$500,000 to continue the operations of the Company and to avoid the Company from
filing for protection from its creditors. During this period of time, the
closing stock price was $0.41 per share, the Company had minimal amount of cash
12
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
on hand, significant payables to vendors and patent attorneys, and the Company
was near a time of being delisted from The NASDAQ Stock Market. On January 6,
2000, the Company entered into the final agreement, a Regulation D Subscription
Agreement, whereby the Company received $500,000 in exchange for an aggregate of
2,000,000 shares of common stock and issued warrants to purchase up to 2,000,000
shares of common stock at $0.25 per share. Mr. Eric Swartz, a member of the
Board of Directors, maintains a 50% ownership in Swartz Investments, LLC.
Biotechnology Development Ltd. is controlled by Mr. Edward Legere. Mr. Legere
was appointed to the Board of Directors on December 29, 1999.
During the quarter ended January 31, 2000, the Company issued 2,001,767
shares of common stock upon the exercise of outstanding options and warrants in
exchange for gross proceeds of $1,825,000. There are no further options or
warrants outstanding to previous officers, board members or other employees of
the Company.
During the quarter ended January 31, 2000, the Company issued 203,165
shares of common stock to various service vendors of the Company as payment of
liabilities aggregating $311,000. The issuance of shares of common stock in
exchange for services were recorded based on the more readily determinable value
of the services received or the fair value of the common stock issued.
4. STOCK OPTIONS
During December 1999, the Company had a minimal amount of cash on hand
and certain employees of the Company were deferring a percentage of their
salary. In addition, the Company had significant payables to vendors and patent
attorneys and the Company was near a time of being delisted from The NASDAQ
Stock Market. Also, the Company was aware of numerous employees who had job
opportunities with companies who had stronger financial resources. In order for
the Company to continue, the Board of Directors felt it was imperative for the
Company to maintain certain key employees who were familiar with the Company's
technologies, clinical trials and business activities. Therefore, on December
22, 1999, the Board of Directors granted 4,170,000 options to various employees,
consultants and two Board members at exercise prices ranging from $0.34 to
$30.00 per share. The majority of the options granted will vest upon the
achievement of Company milestones as defined by the Board of Directors. Key
milestones as defined by the Board will be based on significant licensing
transactions, financing activities, meeting key clinical trial milestones, and
research and development activities. The options were granted to purchase shares
of the Company's common stock at prices not less than the fair market value of
the stock at the date of grant and generally expire ten years after the date of
grant.
13
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
5. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
On November 29, 1999, the Company entered into a 90-day option
agreement with a multinational pharmaceutical company to potentially license a
specific use of the TNT technology for a nonrefundable $50,000 option fee. The
Company is in continued negotiations with the multinational pharmaceutical
company. There can be no assurances that the Company will be successful in
entering into such licensing transaction on terms that are mutually acceptable.
On January 12, 2000, the Company signed a letter of intent to license a
segment of its Vascular Targeting Agent (VTA) technology, specifically related
to Vascular Endothelial Growth Factor (VEGF), with SuperGen, Inc. in exchange
for an upfront payment and milestone payments aggregating approximately
$8,000,000 plus a royalty on net sales. The transaction is subject to further
medical, technical, business, financial and legal due diligence and will be
subject to customary closing conditions. There can be no assurance that the
Company will enter into a definitive agreement.
On January 27, 2000, the Company executed its option agreement with the
University of Texas Southwestern Medical Center, Dallas (University) to obtain
an exclusive world-wide license for a novel anti-angiogenesis antibody named 2C3
and its derivatives. The antibody is an anti-VEGF (Vascular Endothelial Growth
Factor) antibody with the ability to block the binding of a growth factor to
receptors found on tumor vasculature, the effect is to inhibit tumor vessel
growth. The license agreement is currently being drafted by the University.
During February 2000, the Company entered into an exclusive worldwide
licensing transaction with the University of Southern California for its
Permeability Enhancing Protein (PEP) in exchange for an up-front payment plus
milestone payments and a royalty on net sales. The PEP technology is a piece of
the Company's Vasopermeability Enhancing (VEA) technology, which is designed to
increase the uptake of chemotherapeutic agents into tumors. PEP is designed to
be used in conjunction the VEA technology platform.
6. CONTINGENCY
On March 18, 1999, the Company was served with notice of a lawsuit
filed in Orange County Superior Court for the State of California (Superior
Court) 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 defending the action. On September 13, 1999, the Superior
Court granted Techniclone a Motion for Summary Judgement and the Company was not
obligated for any damages. On November 12, 1999, a Notice of Entry of Judgement
was filed by the Superior Court. Subsequently, the former employee appealed the
Summary Judgement. The Company will continue to defend the action.
14
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2000 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
7. SUBSEQUENT EVENTS
During February 2000, the Company received gross proceeds of $4,325,000
in exchange for 1,596,255 shares of common stock under the Equity Line. Dunwoody
Brokerage Services, Inc. was issued 145,114 shares of common stock and warrants
to purchase up to 14,510 shares of common stock as placement agent fees under
the Equity Line.
In early March 2000, the Company signed a Letter of Intent to jointly
develop and commercialize the Company's Vascular Targeting Agent (VTA)
technology with Oxigene, Inc. Oxigene, Inc. will make available to the project
its next generation of tubulin-binding compounds for use in combination with the
VTA technology. The joint venture arrangement will include an upfront licensing
fee and milestone payments to the Company as well as substantial funding of
development expenses related to commercializing a VTA product by Oxigene, Inc.
The Company and Oxigene, Inc. will also share royalties and certain fees
generated by the joint venture. The letter of intent provides for an exclusive
period for the completion of a definitive agreement. The transaction is subject
to further medical, technical, business, financial and legal due diligence and
will be subject to customary closing conditions. There can be no assurance that
the Company will enter into a definitive agreement.
Subsequent to January 31, 2000, the Company has made significant
payments and reduced the amounts owed for accounts payable and other current
liabilities. As of March 9, 2000, the Company reduced its accounts payable
balance by $1,419,000 from $1,587,000 as of January 31, 2000 to approximately
$168,000 as of March 9, 2000. In addition, accrued clinical trial site fees were
reduced by $268,000 from $919,000 as of January 31, 2000 to approximately
$651,000 as of March 9, 2000. The remaining clinical trial site fees will be
paid by the Company once the clinical trial sites have submitted all necessary
paperwork and supporting documentation. After the above payments were made, the
Company had approximately $4,724,000 in cash and cash equivalents as of March 9,
2000.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
The following discussion contains, in addition to historical
information, forward-looking statements that involve risks and uncertainties.
Actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below and included
in the Company's Annual Report on Form 10-K for the year ended April 30, 1999,
filed with the Securities and Exchange Commission on July 28, 1999 and Quarterly
Reports on Form 10-Q for the quarters ended July 31, 1999 and October 31, 1999,
filed with the Securities and Exchange Commission on September 10, 1999 and
December 15, 1999, respectively.
COMPANY OVERVIEW. Techniclone Corporation is a biopharmaceutical
company engaged in the research, development and commercialization of targeted
cancer therapeutics. We are developing product candidates based primarily on
collateral (indirect) tumor targeting for the treatment of solid tumors. In
addition, we are in collaboration with Schering A.G. to develop a direct
tumor-targeting agent (Oncolym(R)) for the treatment of Non-Hodgkins Lymphoma
(NHL).
Collateral targeting is a strategy that has been developed to take
advantage of characteristics common to all solid tumors. These common tumor
characteristics include all solid tumors in excess of 2mm in size which must
develop a blood supply in order to continue growing. While all solid tumors in
excess of 2mm in size do develop a blood supply, they do not develop an adequate
blood supply. The lack of an adequate blood supply results in starvation and
eventually death of tumor cells farthest from the tumor blood vessels. These
dying and dead tumor cells are known as the necrotic core of the tumor. The
inadequate formation of blood vessels to carry blood into and out of the tumor
results in the build-up of pressure inside the tumor. This pressure build-up
makes it difficult to deliver adequate amounts of cancer chemotherapeutics into
the tumor and to the living tumor cells that are the target.
The most clinically advanced of the Collateral Targeting Agents is
known as Tumor Necrosis Therapy (TNT), which utilizes monoclonal antibodies
(targeting molecules that bind to specific structures) that recognize markers
found in the necrotic core of solid tumors. TNT antibodies are potentially
capable of carrying a variety of agents including radiation, chemotherapeutic
agents and cytokines to the interior of solid tumors. A Phase II clinical trial
for a Tumor Necrosis Therapy agent (called Cotara(TM)) for the treatment of
malignant glioma (brain cancer) is currently being conducted at The Medical
University of South Carolina, Temple University, University of Utah-Salt Lake
City and Carolina Neurosurgery & Spine Association. In addition, our Tumor
Necrosis Therapy agent is being used in a Phase I equivalent clinical trial for
the treatment of pancreatic, prostrate and liver cancers at a clinical trial
site in Mexico City.
The second type of Collateral Targeting Agents that we are developing
are Vascular Targeting Agents (VTAs). VTAs utilize monoclonal antibodies that
recognize markers found on tumor blood vessels. The monoclonal antibody carries
an effector molecule that creates a blockage within the blood vessels that
supply oxygen and nutrients to the tumor cells. Cutting off the blood supply to
the tumor results in tumor cell death, potentially destroying the tumor. VTAs
are currently in pre-clinical development in collaboration with researchers at
the University of Texas Southwestern Medical Center at Dallas.
16
The third type of Collateral Targeting Agents that Techniclone is
currently developing are known as Vasopermeation Enhancement Agents (VEA). VEAs
currently use the same targeting agent as TNT to deliver an agent that makes the
blood vessels inside the tumor more leaky (permeable). The increased
permeability of the tumor blood vessels makes it possible to deliver an
increased concentration of killing agents into the tumor where it can
potentially kill the living tumor cells. VTAs are currently in pre-clinical
development in collaboration with researchers at the University of Southern
California Medical Center.
Techniclone has taken steps to protect its position in the field of
Collateral Targeting Agents. Techniclone currently has exclusive rights to over
30 issued US and Foreign patents protecting various aspects of Collateral
Targeting. In addition, Techniclone still has outstanding U.S. and foreign
patent applications that will potentially provide further protection for its
Collateral Targeting Agents. Techniclone is currently in pre-clinical or
clinical development of three Collateral Targeting Agents for the treatment of
solid tumors.
On March 8, 1999, Techniclone entered into a license agreement with
Schering A.G., a major multinational pharmaceutical company, with respect to the
development, manufacture and marketing of its direct tumor targeting agent
candidate, Oncolym(R). Under the agreement, Schering A.G. controls the clinical
development program and funds 80% of the clinical trial costs. The current Phase
II/III clinical trial has been stopped by Schering A.G. Schering A.G. has
advised the Company that they currently anticipate starting a Phase I/II dosing
trial for 18 patients under a new dosing regiment during the second calendar
quarter of 2000.
RECENT DEVELOPMENTS. The management team and the Board of Directors of
Techniclone Corporation has changed dramatically since November 3, 1999. During
November 1999, four of the Company's five Board members, Larry O. Bymaster,
Rockell Hankin, William C. Shepherd and Thomas R. Testman, resigned. Mr. Eric
Swartz and Mr. Carlton Johnson were appointed as new members of the Board. On
December 29, 1999, the Board appointed Mr. Edward Legere to serve on the Board
of Directors. Currently, the Board is comprised of the following four members:
Mr. Carlton Johnson, Mr. Edward Legere, Mr. Eric Swartz, and Mr. Clive Tayor,
M.D. Also in November 1999, Mr. Bymaster resigned as President Chief Executive
Officer and Mr. Steven C. Burke resigned as Chief Financial Officer and
Corporate Secretary. The Board appointed Dr. John N. Bonfiglio, the Company's
Vice President of Technology and Business Development, as Interim President. The
Company is currently operating with approximately 15 employees compared to
approximately 50 employees who were employed by the Company in October 1999.
With the recent changes in management and the Board of Directors, the
Company has adopted a new strategic business plan. During the quarter ended
January 31, 2000, the Company's new management and Board of Directors conducted
a thorough evaluation of the Company's business plans, operations and funding
requirements. In the past five years, significant financial resources of the
Company have been spent on GMP (Good Manufacturing Practices) manufacturing
infrastructure, corporate facility improvements, staffing and other support
activities. Based on our evaluation of the Company, management and the Board of
Directors have implemented the following plan for the Company:
17
CORPORATE STRUCTURE. The objective of the new management and Board of
Directors is to focus the Company's resources almost exclusively on clinical
trials, licensing and early product development. The Company's new plan started
with the elimination of the in-house manufacturing activities, which reduced the
level of support staff and fixed overhead costs that it had incurred in the
past. The Company will also outsource various clinical trial activities, which
will allow the Company to better predict and manage its costs on a project
specific basis. The Company will continue to outsource its research efforts
through its agreements with the University of Southern California and the
University of Texas Southwestern Medical Center at Dallas. The Company has
maintained a core group of employees that will plan, coordinate and monitor all
product development and clinical trial activities being conducted by outside
parties. In addition, the core group of employees will also maintain the product
development activities and technology transfer activities associated with
outsourcing manufacturing.
MANUFACTURING. Operating a GMP manufacturing facility requires highly
specialized personnel and equipment which must be maintained on a continual
basis. Although the Company believes it has derived substantial benefits from
its manufacturing operations, management and the Board of Directors believe that
maintaining a GMP manufacturing facility is not an efficient use of Company
resources at this time. The Company plans on utilizing contract manufacturers
with excess capacity to provide cost effective GMP manufacturing of its Oncolym,
Cotara(TM) and future products under development. The Company has manufactured a
sufficient antibody supply to meet its current clinical trial needs for its
Oncolym(R) and Cotara(TM) technologies. The Company has maintained key
development personnel who will be responsible for developing analytical methods
and processes that will facilitate the transfer of technology to contract
manufactures. The Company has prepared for the smooth transfer of manufacturing
technology to contract manufacturers and it does not anticipate any delays in
its ongoing projects.
As part of this new manufacturing strategy, the Company has arranged to
have the owner list the manufacturing facility and related equipment for sale.
As the building and related manufacturing improvements are owned by TNCA, LLC,
only the proceeds from the sale of manufacturing equipment will be paid directly
to the Company. In addition, if the manufacturing facility is sold by TNCA, LLC,
the Company would receive approximately $936,000 as payment on a note receivable
from TNCA, LLC. The note receivable was received upon to the sale and subsequent
leaseback of the Company's facilities in December 1998. To date, the Company has
realized a significant reduction of monthly fixed overhead expenses from the
discontinuation of the manufacturing operations. The Company anticipates
additional reductions in fixed overhead costs related to the cessation of
manufacturing activities and the disposal or subleasing of the manufacturing
facility.
LICENSING. The Company has considered licensing an important part of
its strategic plan. On March 8, 1999, the Company entered into a licensing
agreement for its Oncolym(R) technology with Schering, A.G. As part of the
Oncolym licensing agreement, Schering, A.G. was granted a 90-day exclusive
negotiating period for licensing the Company's VTA technology. The 90-day
exclusive negotiating period expired without the Company and Schering A.G.
entering into an agreement for its VTA technology.
18
The current management and the Board of Directors do not believe that
the exclusive licensing of its TNT and VTA technology platforms is the optimal
way to exploit these technologies. Because of the broad patent coverage and
potential for multiple products based on these technology platforms, management
and the Board of Directors do not plan on pursuing exclusive licensing
agreements for the TNT and VTA technologies. Since it is difficult, if not
impossible, to predict the effectiveness of a given anti-cancer compound, the
Company does not believe it is wise to develop just one product for each of its
broad platform technologies.
As part of this new licensing strategy, on January 12, 2000, the
Company signed a letter of intent with SuperGen, Inc., to license a segment of
its Vascular Targeting Agent (VTA) technology, specifically related to Vascular
Endothelial Growth Factor (VEGF) in exchange for an upfront payment and
milestone payments aggregating approximately $8,000,000 plus a royalty on net
sales. In addition, in early March 2000, the Company signed a letter of intent
to jointly develop and commercialize the overall Vascular Targeting Agent (VTA)
technology platform with Oxigene, Inc. The joint venture arrangement will
include an upfront licensing fee and milestone payments to the Company as well
as substantial funding related to developing a VTA product. The Company and
Oxigene, Inc. will also share royalties and certain fees generated by the joint
venture. Oxigene, Inc. will also make available to the joint venture, its next
generation of tubulin-binding compounds for use in combination with the VTA
technology. The Company anticipates it can license additional segments of the
VTA technology, which the joint venture does not plan on actively developing.
The overall goal of the Company's licensing strategy is to develop as
many corporate relationships as possible for the development of its platform
technologies, thus increasing the chances that one or several anti-cancer
products will be commercialized utilizing its technologies. The Company believes
there are numerous opportunities for non-exclusive licensing of its TNT and VTA
platform technologies. In addition, by granting non-exclusive licensing to other
companies, the Company maintains the ability to develop its own products for
commercialization, such as Cotara(TM). This approach should increase the revenue
potential of these two promising platform technologies as well as permit the
Company to commercialize its own proprietary anti-cancer product.
CLINICAL TRIALS. Moving forward, the most critical aspect of the
Company's business plan will be centered around clinical trials with the
Company's various technologies. The Company plans to expand its clinical studies
for its Cotara(TM) monoclonal antibody. Cotara(TM) is currently in a U.S.
multi-center clinical trial for the treatment of brain cancer. Because of
Cotara's(TM) ability to selectively target multiple cancer types, the Company
intends to expand its clinical studies to additional cancer types. The
additional clinical studies will be initiated as the Company obtains the
financial resources to support such activities.
In addition, Schering A.G. has advised the Company that they currently
anticipate starting a dosing trial for 18 patients under a new dosing regiment
during the second calendar quarter of 2000 to the treatment of Non-Hodgkins
Lymphoma (NHL) using the Company's Ocolym(R) technology.
19
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2000 AND 1999
The following is a historical summary of the Company's operational burn
rate for the quarter ended January 31, 2000 compared to the same period in the
prior year. As shown in the schedule below, the Company's operational burn rate
has decreased $1,090,000 or approximately 42% in the current quarter ended
January 31, 2000 compared to the same period in the prior year. As further shown
in the below schedule, the average monthly operational burn rate has decreased
$363,000 per month for each month in the quarter ended January 31, 2000 compared
to the same average monthly periods in the prior year. In addition, the
Company's recurring monthly fixed expenses for salaries, facilities and related
overhead charges and general and administrative expenses (monthly fixed burn
rate) were approximately $316,000 per month for the quarter ended January 31,
2000 compared to approximately $435,000 per month for the same period in the
prior year or a savings of $119,000 per month. The Company has listed its excess
space for sublease and upon the Company subleasing such space, the Company
expects the monthly fixed burn rate to continue to decrease in comparison to the
same periods in the prior year. However, our total operational burn rate will
vary substantially from quarter to quarter based on patient enrollment rates of
our clinical trial programs, and the funding of non-recurring items, which may
include but are not limited to, items associated with product development,
contract manufacturing and contract radiolabeling and the related commercial
scale-up efforts of contract manufacturing and contract radiolabeling.
QUARTER ENDED JANUARY 31,
--------------------------------------
2000 1999
----------------- ----------------
Net loss $ (2,799,000) $ (4,435,000)
Less non-cash expenses:
Loss on disposal of assets - 1,170,000
Depreciation and amortization 131,000 227,000
Stock issued for interest, services and
under severance agreements 687,000 364,000
Stock-based compensation 467,000 71,000
----------------- ----------------
Net quarterly operational burn rate (cash
consumption rate) $ (1,514,000) $ (2,603,000)
================= ================
Net average monthly operational burn rate
(cash consumption rate) $ (505,000) $ (868,000)
================= ================
Net Loss. The Company's net loss, before preferred stock discount
accretion and dividends, for the current quarter ended January 31, 2000
decreased $1,636,000 in comparison to the same period in the prior year. This
current quarter decrease in net loss is due to a $1,611,000 decrease in total
costs and expenses combined with an increase in interest and other income of
$25,000.
Total Costs and Expenses. The decrease in total costs and expenses of
$1,611,000 during the current quarter compared to the same period in the prior
quarter resulted primarily from the one-time prior-year quarter non-cash charge
of $1,171,000 recorded in December 1998 in connection with the sale and
subsequent leaseback of the Company's two facilities. This decrease was combined
with a current quarter decrease in research and development expenses of $437,000
and a decrease in general and administrative expenses of $73,000, which were
offset by an increase in interest expense of $70,000.
20
Research and Development Expenses. The decrease in research and
development expenses of $437,000 during the current quarter ended January 31,
2000 primarily relates to a decrease in personnel, manufacturing, consulting,
radiolabeling and travel expenses offset by an increase in clinical trial,
sponsored research and building lease expenses. The decrease in the above
expense resulted primarily from the Company's direct efforts to reduce its cash
expenses related to internal research and development and manufacturing while
continuing its clinical trial programs and university research and development.
On October 18, 1999, the Company decreased the number of employees from
approximately 50 employees to 25 employees in an effort to reduce the Company's
burn rate or cash consumption rate and to preserve its then cash on hand. The
majority of the personnel reductions came from the Manufacturing Department and
ancillary departments to support the clinical manufacturing of its antibodies
under development. The Company believes it can contract out certain
manufacturing and research services previously performed in-house at a reduced
cost compared to the internal personnel and overhead costs to run such programs.
General and Administrative Expenses. The decrease in general and
administrative expenses of $73,000 during the quarter ended January 31, 2000
compared to the quarter ended January 31, 1999 resulted primarily from a
decrease in consulting fees, severance expenses, personnel costs and other
reductions in general expenses of $468,000. On November 3, 1999, the Company's
former Chief Executive Officer and Chief Financial Officer resigned with a
quarterly aggregate base salary of $109,000 and such positions were replaced
with internal positions, thus decreasing the quarterly general and
administrative personnel costs. The current quarter decrease in the above
expenses was offset by an increase in stock-based compensation expense (a
non-cash expense) of $395,000. The Company expects general and administrative
expenses (excluding stock-based compensation) to decrease in future quarters
compared to the same period in prior quarters as all severance agreements have
been completed and as the Company has decreased its overall headcount and
aggregate gross salaries in the Administration Department.
Interest Expense. The increase in interest expense of approximately
$70,000 for the quarter ended January 31, 2000 compared to the same period in
the prior year is primarily due to an increase in interest charges on a
$3,300,000 note payable to Biotechnology Development Ltd. related to the buyback
of the Oncolym(R) rights on March 8, 1999 as such amounts were not incurred in
the same quarter of the previous year.
Interest and Other Income. The increase in interest and other income of
$25,000 during the three month period ended January 31, 2000 compared to the
same period in the prior year is primarily due a $50,000 nonrefundable option
fee received in November 1999 for a 90-day option agreement with a multinational
pharmaceutical company to potentially license a specific use of the TNT
technology primarily offset by a decrease in rental income. The Company's excess
space is currently being listed for sale by the owner of the buildings and is
also being listed for sublease by the Company. If the Company is able to
sublease the excess space, rental income will increase in future months which
will reduce the Company's overall burn rate. The Company does not expect to
generate product sales for at least the next year.
21
NINE MONTHS ENDED JANUARY 31, 2000 AND 1999
Net Loss. The Company's net loss for the nine months ended January 31,
2000 increased $205,000 compared to the nine months ended January 31, 1999. The
increased loss for the current nine-month period was due to a $193,000 increase
in total costs and expenses combined with a $12,000 decrease in interest and
other income.
Total Costs and Expenses. The Company's total costs and expenses
increased $193,000 for the nine months ended January 31, 2000 compared to the
same period in the prior year. This nine month increase in expenses resulted
primarily from recording a non-cash expense for the estimated provision of an
uncollectable note receivable of $1,887,000 in October 1999 combined with an
increase in research and development expenses of $148,000. These amounts were
offset by a current nine month period decrease in general and administrative
expenses of $575,000 and a decrease in interest expense of $90,000. In addition,
during the prior quarter ended January 31, 1999, the Company recorded a loss on
the sale and subsequent lease-back of the Company's two facilities and other
property of $1,177,000, which was not incurred during the current nine month
period.
Research and Development Expenses. The increase in research and
development expenses of $148,000 during the nine months ended January 31, 2000
primarily relates to increased research fees from MDS Nordion associated with
the development of a commercial radiolabeling facility combined with an increase
in sponsored research for the development of the Vascular Targeting Agent
technology. Also, the Company incurred increased costs to reengineer the
Company's TNT clone, which will significantly increase the manufacturing
production yields and will significantly reduce future antibody costs. In
addition, during the nine months ended January 31, 2000, the Company incurred
increased building lease expense related to the sale and subsequent leaseback of
the Company's facilities in December 1998 partially offset by a corresponding
decrease in depreciation expense on the related building. The above increase in
costs were partially off-set by a decrease in research and development costs for
the quarter ended January 31, 2000 as described above.
General and Administrative Expenses. General and administrative
expenses decreased approximately $575,000 for the nine months ended January 31,
2000 compared to the same period in the prior year primarily due to decreases in
shareholder meeting costs, consulting fees, legal fees, travel expenses,
severance and personnel expenses, and others expenses aggregating $1,096,000,
which was offset by an increase in stock-based compensation (a non-cash
expenses) of $521,000.
Interest Expense. Interest expense decreased $90,000 during the
nine-month period ended January 31, 2000 compared to the same period in the
prior year primarily due to interest charges on construction costs incurred in
the prior year nine month period related to manufacturing facility enhancements
combined with mortgage interest on the Company's facilities, both of which were
not incurred in the current nine-month period. Such decrease was partially
offset by an increase in interest charges on a $3,300,000 note payable to
Biotechnology Development Ltd. related to the buyback of the Oncolym(R) rights
on March 8, 1999.
Interest and Other Income. The decrease in interest and other income of
$12,000 during the nine months ended January 31, 2000 is primarily due to a
decrease in rental income offset by a $50,000 nonrefundable option fee received
in November 1999 for a 90-day option agreement with a multinational
pharmaceutical company to potentially license a specific use of the TNT
technology.
22
LIQUIDITY AND CAPITAL RESOURCES. The Company experienced losses in
fiscal 1999 and during the first nine months of fiscal 2000 and has an
accumulated deficit of $104,130,000 at January 31, 2000. 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 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 assurances 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 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 successful operations. Management knows
that additional capital must be raised in the near term to support the Company's
continued operations and other short-term cash needs.
The Company believes it has sufficient cash on hand and combined with
amounts available pursuant to the Equity Line Agreement (assuming aggregate
future draws of $5,413,000) and anticipated amounts to be received from signed
letters of intent to enter into collaboration agreements with SuperGen, Inc. and
Oxigene, Inc. to meet its obligations on a timely basis through the first
calendar quarter of 2001. The Company's ability to access funds under the Equity
Line Agreement is subject to the satisfaction of certain conditions as further
described in Note 3 to the accompanying financial statements. The letters of
intent provides for an exclusive period for the completion of a definitive
agreement and will be subject to customary closing conditions. Although the
Company believes it will enter into definitive agreements and will receive the
related up-front payments under the terms as defined in the letters of intent,
there can be no assurance that definitive agreements will be reached.
We have significant commitments to expend additional funds for
preclinical development, clinical trials, radiolabeling contracts, license
contracts and consulting. If we obtain the necessary funding, we expect
operating expenditures related to clinical trials to increase in the future as
our clinical trial activity increases and scale-up for clinical trial production
continues. We have experienced negative cash flows from operations since our
inception, and we expect the negative cash flows from operations to continue for
the foreseeable future. We expect that the monthly negative cash flow will
continue for at least the next year as a result of activities in connection with
the Phase II clinical trials of Cotara(TM) and the equivalent Phase I clinical
trials of Cotara(TM) in Mexico and the development costs associated with
Vasopermeation Enhancement Agents ("VEAs") and Vascular Targeting Agents
("VTAs").
There can be no assurance that we will be successful in raising such
funds on terms acceptable to us, or at all, or that sufficient capital will be
raised to complete the research and development of our product candidates.
23
COMMITMENTS. At January 31, 2000, we had no capital commitments,
although we have significant obligations, most of which are contingent, for
payments to licensors for technologies and in connection with the acquisition of
the Oncolym(R) rights previously owned by Alpha Therapeutic Corporation
("Alpha").
OTHER RISK FACTORS OF OUR COMPANY. The biotechnology industry includes
many risks and challenges. Our challenges may include, but are not limited to:
uncertainties associated with completing pre-clinical and clinical trials for
our technologies; the significant costs to develop our products as all of our
products are currently in development, preclinical studies or clinical trials
and no revenue has been generated from commercial product sales; obtaining
additional financing to support our operations and the development of our
products; obtaining regulatory approval for our technologies; complying with
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 capital commitments, or clinical trial costs and general
economic conditions. For additional information regarding the industry and
Company challenges are discussed in the Company's Annual Report on Form 10-K for
the year ended April 30, 1999, filed with the Securities and Exchange Commission
on July 28, 1999 and Quarterly Reports on Form 10-Q for the quarters ended July
31, 1999 and October 31, 1999, filed with the Securities and Exchange Commission
on September 10, 1999 and December 15, 1999, respectively.
24
Other risks to consider may include, but are not limited to, the
following:
IF OUR RELATIONSHIP WITH SCHERING A.G. TERMINATES, IT COULD ADVERSELY AFFECT OUR
BUSINESS.
In March 1999, we entered into a license agreement with Schering A.G.,
for the worldwide development, marketing and distribution of our direct tumor
targeting agent product candidate, Oncolym(R). Under the agreement, Schering
A.G. has assumed control of the clinical development program, regulatory
approvals in the United States and all foreign countries and sales and marketing
of this product candidate. Schering A.G. 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. to apply its expertise and know-how to the development,
launch and sale of this product candidate. If Schering A.G. decides to
discontinue the development of this product candidate and terminates our license
agreement, we may have to discontinue development, commercialization and
clinical testing of this product candidate, which could negatively affect our
operations and financial performance. We cannot guarantee that Schering A.G.
will devote the resources necessary to successfully develop and/or market any
product candidate.
THE LIQUIDITY OF OUR COMMON STOCK WILL BE ADVERSELY AFFECTED IF OUR COMMON STOCK
IS DELISTED FROM THE NASDAQ SMALLCAP MARKET.
The Common Stock of the Company is presently traded on The Nasdaq
SmallCap Market. To maintain inclusion on The Nasdaq SmallCap Market, we must
continue to have either net tangible assets of at least $2,000,000, market
capitalization of at least $35,000,000, or net income (in either our latest
fiscal year or in two of our last three fiscal years) of at least $500,000. In
addition, we must meet other requirements, including, but not limited to, having
a public float of at least 500,000 shares and $1,000,000, a minimum closing bid
price of $1.00 per share of Common Stock (without falling below this minimum bid
price for a period of 30 consecutive trading days), at least two market makers
and at least 300 stockholders, each holding at least 100 shares of Common Stock.
At various times from October 19, 1999 through January 6, 2000, we had failed to
meet the $35,000,000 market capitalization requirement. In addition, from
September 9, 1999 through January 6, 2000, the closing bid price of our Common
Stock was less than $1.00 per share. Since January 7, 2000, the Company has been
in compliance with the market capitalization and minimum bid price requirements.
If we are delisted by the The Nasdaq SmallCap Market, the market value of the
Common Stock could fall and holders of Common Stock would likely find it more
difficult to dispose of the Common Stock.
THE SALE OF SUBSTANTIAL SHARES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
As of March 1, 2000, we had approximately 89,677,000 shares of Common
Stock outstanding. All shares under the Class C Preferred Stock Agreement had
been converted as of January 31, 2000. We could issue approximately an
additional 17,078,000 shares of Common Stock upon the exercise of outstanding
options and warrants at an average exercise price of $1.73 for proceeds of up to
approximately $29,545,000.
25
During June 1998, we 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. 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). If the Company is able to access funds under the Equity
Line, the Company had $5,413,000 available for future Puts. Future Puts under
the Equity Line are priced at a discount equal to the greater of $0.20 or 17.5%
off the lowest closing per share bid price during the ten trading days
immediately preceding the date on which such shares are sold to the
institutional investors. 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. If we are able
to draw upon the Equity Line, we may issue up to approximately an additional
794,000 shares of Common Stock (assuming a market price of our Common Stock of
$10.00 per share) at our sole option, from time to time, in exchange for an
aggregate purchase price of $5,413,000, which includes commission shares and
warrants equal to 10% of the shares of Common Stock issued under such agreement,
which must be exercised on a cashless basis only.
The exercise price of outstanding options and warrants and the purchase
price for the shares of Common Stock and warrants to be issued under the
Regulation D Common Stock Equity Line Subscription Agreement are at a
significant discount to the market price. The sale and issuance of these shares
of Common Stock, as well as subsequent sales of shares of Common Stock in the
open market, may cause the market price of 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
76,000 shares per day to as many as 29 million shares per day over the past
year, and is likely to continue to be highly volatile. The market price of the
Common Stock may be significantly impacted by many factors, including
announcements of technological innovations or new commercial products by us or
our competitors, disputes concerning patent or proprietary rights, publicity
regarding actual or potential medical results relating to products under
development by us or our competitors and regulatory developments and product
safety concerns in both the United States and foreign countries. These and other
external factors have caused and may continue to cause the market price and
demand for 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.
26
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF OUR COMPUTER SYSTEMS AND THE COMPUTER
SYSTEMS OF OUR SUPPLIERS ARE NOT YEAR 2000 COMPLIANT.
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company expensed less than $50,000 in connection with remediating its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, its internal systems, or the products and services of third
parties. The Company will continue to monitor its mission critical computer
applications and those of its suppliers and vendors throughout the year 2000 to
ensure that any latent Year 2000 matters that may arise are addressed promptly.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
A significant change in interest rates would not have a material
adverse affect on the Company's financial position or results of operations due
to the amount of cash on hand at January 31, 2000, which consists of highly
liquid investments, and as the Company's debt instruments have fixed interest
rates and terms. In addition, the Company does not invest in derivative
instruments.
PART II OTHER INFORMATION
ITEM 1. 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 (Superior
Court) 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 defending the action. On September 13, 1999, the Superior
Court granted Techniclone a Motion for Summary Judgement and the Company was not
obligated for any damages. On November 12, 1999, a Notice of Entry of Judgement
was filed by the Superior Court. Subsequently, the former employee appealed the
Summary Judgement. The Company will continue to defending the action.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ------- ------------------------------------------
The following is a summary of transactions by the Company during the
quarterly period commencing on November 1, 1999 and ending on January 31, 2000
involving issuance and sales of the Company's securities that were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
On various dates during the quarter ended January 31, 2000, the Company
issued an aggregate of 2,683,910 shares of the Company's Common Stock to the two
institutional investors and the placement agent under the Equity Line, for an
aggregate purchase price of $675,000, pursuant to an Equity Line draw and also
issued warrants to the two institutional investors and placement agent to
purchase up to 268,389 shares of Common Stock, which warrants are immediately
exercisable on a cashless basis only and expire on December 31, 2004.
27
On various dates during the quarter ended January 31, 2000, the Company
issued an aggregate of 276,552 shares of the Company's Common Stock to two
institutional investors upon the cashless exercise of 360,630 warrants issued
under the Equity Line.
On various dates during the quarter ended January 31, 2000, the Company
issued to three unaffiliated investors an aggregate of 261,934 shares of the
Company's Common Stock upon conversion of 91 outstanding shares of the Company's
5% Adjustable Convertible Class C Preferred Stock (the "Class C Stock"). Upon
conversion of the 91 shares of Class C Stock, the Company issued warrants to
such investor to purchase up to an aggregate of 65,483 shares of the Company's
Common Stock at an exercise price of $0.6554 per share.
On various dates during January 2000, the Company issued 2,000,000
shares of common stock and warrants to purchase up to 2,000,000 shares of common
stock at an exercise price of $0.25 per share to two affiliated investors under
an Investment Agreement dated January 6, 2000 in exchange for $500,000.
On various dates during the quarter ended January 31, 2000, the Company
issued to 120,455 shares of common stock to five private placement investors
upon the exercise of 120,455 warrants at an exercise price of $1.00 per share.
The warrants were issued in conjunction with a private placement entered into in
April 1998.
The issuances of the securities of the Company in the above
transactions were deemed to be exempt from registration under the Securities Act
by virtue of Section 4(2) thereof or Regulation D promulgated thereunder, as a
transaction by an issuer not involving a public offering. The recipient of such
securities either received adequate information about the Company or had access,
through employment or other relationships with the Company, to such information.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None
- ------- --------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None
- ------- ----------------------------------------------------
ITEM 5. OTHER INFORMATION. None.
- ------- ------------------
28
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
- ------- --------------------------------
(a) Exhibits:
Exhibit Number Description
-------------- -----------
10.64 Regulation D Subscription Agreement dated January 6,
2000 between Registrant and Subscribers, Swartz
Investments, LLC and Biotechnology Development, LTD.
10.65 Registration Right Agreement dated January 6, 2000
between Registrant and Subscribers of the Regulation D
Subscription Agreement dated January 6, 2000.
10.66 Form of Warrant to be issued to Subscribers pursuant to
the Regulation D Subscription Agreement dated January 6,
2000.
10.67 Warrant to purchase 750,000 shares of Common Stock of
Registrant issued to Swartz Private Equity, LLC dated
November 19, 1999.
27 Financial Data Schedule.
(b) Reports on Form 8-K:
Current Report on Form 8-K as filed with the Commission on
November 4, 1999 reporting the resignation of three Board
members: Larry O. Bymaster, Rockell N. Hankin, and Thomas R.
Testman, Chairman. The remaining Board members had appointed
Mr. Eric Swartz and Mr. Carl Johnson as new members of the
Board. Mr. Eric Swartz maintains a contractual right to 50% of
the shares and warrants issued under the Equity Line in the
name of Dunwoody Brokage Services, Inc. Mr. Johnson is
securities counsel for an affiliated office of Dunwoody
Brokerage Services, Inc. The Company also announces that Mr.
Bymaster resigned as President and Chief Executive Officer and
Mr. Steven C. Burke resigned as Chief Financial Officer and
Corporate Secretary, both to pursue other personal and
business interests. Mr. John N. Bonfiglio was appointed
Interim President. The Company also announced that it received
a written proposal from Dunwoody Brokerage Services, Inc.
stating that Dunwoody was highly confident that it could
provide a bridge financing facility of up to five million. The
Company also announced that it had reached an agreement in
principal in regard to a common stock equity line facility of
up to $35 million. Mr. Eric Swartz maintains a 50% ownership
in Swartz Private Equity, LLC.
Current Report on Form 8-K as filed with the Commission on
November 23, 1999 reporting the receipt of approximately
$305,000 from two institutional investors under the Common
Stock Equity Line Subscription Agreement subject to a one-time
waiver agreement from the institutional investors whereby the
low closing bid price requirement of the Company's common
stock was reduced from $0.50 per share to $0.40 per share
during the 10-day pricing period.
29
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TECHNICLONE CORPORATION
By: /s/ John N. Bonfiglio
-------------------------------------
Interim President
By: /s/ Paul J. Lytle
-------------------------------------
V.P. of Finance (signed both as
an officer duly authorized to sign on
behalf of the Registrant and chief
accounting officer)
30