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, 1999
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.)
70,898,581 shares of Common Stock
as of February 28, 1999
TECHNICLONE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 1999
TABLE OF CONTENTS
THE TERMS "WE", "US", "OUR," AND "THE COMPANY" AS USED IN THIS FORM ON 10-Q
REFERS TO TECHNICLONE CORPORATION, TECHNICLONE INTERNATIONAL CORPORATION, ITS
FORMER SUBSIDIARY, CANCER BIOLOGICS INCORPORATED, WHICH WAS MERGED INTO THE
COMPANY ON JULY 26, 1994 AND ITS WHOLLY-OWNED SUBSIDIARY PEREGRINE
PHARMACEUTICALS, INC.
PART I FINANCIAL INFORMATION
PAGE
A Cautionary Statement Regarding Forward-Looking Statements......... 3
Item 1. Our Financial Statements ........................................... 4
Consolidated Balance Sheets at April 30, 1998 and January 31, 1999 . 4
Consolidated Statements of Operations for the three and nine months
ended January 31, 1998 and 1999 .................................... 6
Consolidated Statement of Stockholders' Equity for the nine months
ended January 31, 1999 ............................................. 7
Consolidated Statements of Cash Flows for the nine months ended
January 31, 1998 and 1999 .......................................... 8
Notes to Consolidated Financial Statements ......................... 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................. 18
Company Overview ................................................... 18
Other Risk Factors of Our Company .................................. 24
Item 3. Quantitative and Qualitative Disclosures About Market Risk ......... 36
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................... 37
Item 2. Changes in Securities and Use of Proceeds .......................... 37
Item 3. Defaults Upon Senior Securities .................................... 37
Item 4. Submission of Matters to a Vote of Security Holders ................ 37
Item 5. Other Information .................................................. 37
Item 6. Exhibits and Reports on Form 8-K.................................... 38
2
PART I FINANCIAL INFORMATION
A CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS. Except for
historical information contained herein, this Quarterly Report on Form 10-Q
contains certain forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act. In light of the
important factors that can materially affect results, including those set forth
elsewhere in this Form 10-Q, the inclusion of forward-looking information should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved. We will encounter
competitive, technological, financial and business challenges making it more
difficult than expected to continue to develop, market and manufacture our
products. Our challenges may include, but are not limited to, competitive
conditions within the industry, which may change adversely; upon development of
our products, demand for our products may weaken; the market may not accept our
products; we may not be able 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. In addition, 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 for our technologies; obtaining additional
financing to support our operations; 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 commitments, or clinical trial costs, general
economic conditions and other factors. The 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 our results of operations.
3
ITEM 1. OUR FINANCIAL STATEMENTS
- ------- ------------------------
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1998 AND JANUARY 31, 1999 (UNAUDITED)
- ---------------------------------------------------------------------------------------------
APRIL 30, JANUARY 31,
1998 1999
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1) $ 1,736,000 $ 240,000
Other receivables, net 71,000 120,000
Inventories, net 46,000 104,000
Prepaid expenses and other current assets 304,000 387,000
------------- -------------
Total current assets 2,157,000 851,000
PROPERTY (Note 2):
Land 1,051,000
Buildings and improvements 6,227,000
Laboratory equipment 2,174,000 2,732,000
Furniture, fixtures and computer equipment 921,000 931,000
Construction-in-progress 524,000 13,000
------------- -------------
10,897,000 3,676,000
Less accumulated depreciation and amortization (1,625,000) (1,657,000)
------------- -------------
Property, net 9,272,000 2,019,000
OTHER ASSETS:
Patents, net 211,000 178,000
Note receivable (Note2) 1,875,000
Note receivable from shareholder and former director (Note 4) 381,000 271,000
Other 18,000 149,000
------------- -------------
Total other assets 610,000 2,473,000
------------- -------------
$ 12,039,000 $ 5,343,000
============= =============
See accompanying notes to consolidated financial statements
4
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1998 AND JANUARY 31, 1999 (UNAUDITED) (CONTINUED)
- ------------------------------------------------------------------------------------------------------
APRIL 30, JANUARY 31,
1998 1999
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 729,000 $ 968,000
Notes payable, current 2,503,000 110,000
Accrued patient fees 453,000
Accrued legal and accounting fees 584,000 274,000
Accrued license termination fees 350,000 100,000
Accrued royalties and sponsored research 190,000 203,000
Accrued payroll and related costs 141,000 149,000
Other current liabilities 168,000 270,000
------------- -------------
Total current liabilities 4,665,000 2,527,000
NOTES PAYABLE 1,926,000 224,000
COMMITMENTS (Note 4)
STOCKHOLDERS' EQUITY (Note 3):
Preferred stock- $.001 par value; authorized 5,000,000 shares:
Class C convertible preferred stock, shares outstanding -
April 1998, 4,807 shares; January 1999, 189 shares
(liquidation preference of $190,000 at January 31, 1999)
Common stock-$.001 par value; authorized 120,000,000 shares;
outstanding April 1998 - 48,547,351 shares;
January 1999 - 67,817,894 shares 49,000 68,000
Additional paid-in capital 78,423,000 87,311,000
Accumulated deficit (72,639,000) (84,429,000)
------------- -------------
5,833,000 2,950,000
Less notes receivable from sale of common stock (385,000) (358,000)
------------- -------------
Total stockholders' equity 5,448,000 2,592,000
------------- -------------
$ 12,039,000 $ 5,343,000
============= =============
See accompanying notes to consolidated financial statements
5
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 1998 AND 1999 (UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
----------------------------- -----------------------------
1998 1999 1998 1999
COSTS AND EXPENSES:
Research and development $ 1,928,000 $ 2,223,000 $ 5,324,000 $ 6,380,000
General and administrative 928,000 1,137,000 3,493,000 3,609,000
Loss on disposal of property (non-cash) 161,000 1,171,000 161,000 1,177,000
Interest 51,000 33,000 154,000 369,000
------------- ------------- ------------- -------------
Total costs and expenses 3,068,000 4,564,000 9,132,000 11,535,000
Interest and other income 107,000 129,000 471,000 290,000
------------- ------------- ------------- -------------
NET LOSS $ (2,961,000) $ (4,435,000) $ (8,661,000) $(11,245,000)
============= ============= ============= =============
Net loss before preferred stock accretion
and dividends $ (2,961,000) $ (4,435,000) $ (8,661,000) $(11,245,000)
Preferred stock accretion and dividends:
Imputed dividends on Class B and
Class C Preferred Stock (271,000) (3,000) (853,000) (14,000)
Accretion of Class C Preferred
Stock Discount (716,000) (2,294,000) (531,000)
------------- ------------- ------------- -------------
Net Loss Applicable to Common Stock $ (3,948,000) $ (4,438,000) $(11,808,000) $(11,790,000)
============= ============= ============= =============
Weighted Average Shares Outstanding 27,873,599 67,222,176 27,560,325 64,469,856
============= ============= ============= =============
BASIC AND DILUTED LOSS PER
SHARE (Note 1) $ (0.14) $ (0.07) $ (0.43) $ (0.18)
============= ============= ============= =============
See accompanying notes to consolidated financial statements
6
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
NOTES
ADDITIONAL RECEIVABLE NET
PREFERRED STOCK COMMON STOCK PAID-IN ACCUMULATED FROM SALE OF STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT COMMON STOCK EQUITY
---------------------------------------------------------------------------------------------------
BALANCES, May 1, 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 (545,000) (14,000)
Preferred stock issued upon
exercise of Class C Placement
Agent Warrant 530 530,000 530,000
Common stock issued upon
conversion of Class C
preferred stock (5,148) 9,313,412 9,000 (9,000)
Common stock issued upon
exercise of Class C warrants 5,836,611 6,000 3,597,000 3,603,000
Common stock issued for cash
upon exercise of stock options 435,700 261,000 261,000
Common stock issued under the
Equity Line for cash (Note 4) 2,905,660 3,000 3,092,000 3,095,000
Common stock issued for
services, interest and under
severance agreements 779,160 1,000 519,000 520,000
Stock-based compensation 367,000 367,000
Payment on notes receivable 27,000 27,000
Net loss (11,245,000) (11,245,000)
---------------------------------------------------------------------------------------------------
BALANCES, January 31, 1999 189 $ - 67,817,894 $ 68,000 $87,311,000 $(84,429,000) $(358,000) $ 2,592,000
===================================================================================================
See accompanying notes to consolidated financial statements
7
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 1998 AND 1999 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
JANUARY 31
-----------------------------
1998 1999
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (8,661,000) $(11,245,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 468,000 738,000
Loss on disposal of assets (Note 2) 161,000 1,177,000
Inventory write-off, net of reserve for contract losses (53,000)
Stock-based compensation and common stock issued for interest,
services and under severance agreements 443,000 887,000
Additional consideration on Class C Preferred Stock 333,000
Severance expense 421,000
Changes in operating assets and liabilities:
Other receivables 164,000 1,000
Inventories, net (97,000) (58,000)
Prepaid expenses and other current assets (249,000) (83,000)
Accounts payable and accrued legal and accounting fees 1,913,000 (71,000)
Accrued patient fees 453,000
Accrued license termination fees (250,000)
Accrued royalties and sponsored research fees (245,000) 13,000
Other accrued expenses and current liabilities 157,000 (201,000)
------------- -------------
Net cash used in operating activities (5,666,000) (8,218,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (4,283,000) (421,000)
Proceeds from sale of property (Note 2) 3,924,000
Increase in other assets (97,000) (131,000)
------------- -------------
Net cash provided by (used in) investing activities (4,380,000) 3,372,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 586,000 6,959,000
Proceed from issuance of Class C Preferred Stock 530,000
Proceeds from notes receivable payment 27,000
Proceeds from issuance of notes payable 98,000 200,000
Principal payments on notes payable (72,000) (4,352,000)
Payment of Class C dividends and offering costs (125,000) (14,000)
------------- -------------
Net cash provided by financing activities 487,000 3,350,000
See accompanying notes to consolidated financial statements
8
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 1998 AND 1998 (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
JANUARY 31,
-----------------------------
1998 1999
NET DECREASE IN CASH AND CASH EQUIVALENTS
$ (9,559,000) $ (1,496,000)
CASH AND CASH EQUIVALENTS,
beginning of period 12,229,000 1,736,000
------------- -------------
CASH AND CASH EQUIVALENTS,
end of period $ 2,670,000 $ 240,000
============= =============
SUPPLEMENTAL INFORMATION:
Interest paid $ 153,000 $ 148,000
============= =============
Schedule of non-cash investing and financing activities:
Acquisition of laboratory equipment under a capital lease $ 57,000
=============
Note receivable (Note 2) $ 1,925,000
=============
See accompanying notes to consolidated financial statements
9
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED)
- --------------------------------------------------------------------------------
1) SUMMARY OF OUR SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The accompanying 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 1998 and during the first nine months of fiscal 1999 and has an
accumulated deficit of $84,429,000 at January 31, 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 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, 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 flow to
meet its obligations on a timely basis, to obtain additional financing as may be
required and, ultimately, to attain successful operations.
At January 31, 1999, the Company had cash and cash equivalents of
$240,000. On February 2, 1999, the Company exercised its Put option and received
gross proceeds of $2,250,000 in exchange for 2,869,564 shares of common stock
pursuant to a Regulation D Common Stock Equity Line Subscription Agreement the
(the "Equity Line Agreement") (Notes 3 and 5). In addition, on March 8, 1999,
the Company entered into a licensing agreement with an unrelated entity for the
licensing of Oncolym(R) in exchange for an up-front license payment of
$3,000,000 (Note 5). The Company believes it has sufficient cash on hand and
available pursuant to the Equity Line Agreement (assuming only one future
quarterly draw of $2,250,000 in May 1999) to meet its obligations on a timely
basis through June 1999. Management believes that additional capital must be
raised to support the Company's continued operations and other short-term cash
needs.
See accompanying notes to consolidated financial statements
10
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
The Company's ability to access funds under the Equity Line
Agreement is subject to the satisfaction of certain conditions and the failure
to satisfy these conditions may limit or preclude the Company's ability to
access such funds, which could adversely affect the Company's business,
immediate liquidity, financial position and results of operations unless
additional financing sources are available.
The accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at January 31, 1999, and the consolidated
results of its operations and its consolidated cash flows for the three and nine
month periods ended January 31, 1999 and 1998. Although the Company believes
that the disclosures in the financial statements are adequate to make the
information presented not misleading, certain information and footnote
disclosures normally included in the consolidated financial statements have been
condensed or omitted pursuant to rules and regulations of the Securities and
Exchange Commission. The consolidated financial statements included herein
should be read in conjunction with the consolidated financial statements of the
Company, included in the Company's Annual Report on Form 10-K for the year ended
April 30, 1998, filed with the Securities and Exchange Commission on July 29,
1998.
Certain reclassifications were made to the 1998 balances to conform
them to the 1999 presentation.
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.
NET LOSS PER SHARE. Net loss per share is calculated by adding the
net loss for the quarter and nine month period to the Preferred Stock dividends
and Preferred Stock issuance discount accretion on the Class B Preferred Stock
and the Class C Preferred Stock during the quarter and nine month period divided
by the weighted average number of shares of common stock outstanding during the
quarter and nine month period. Shares issuable upon the exercise of common stock
warrants and options have been excluded from the quarter and nine month period
ended January 31, 1999 and 1998 per share calculation because their effect is
antidilutive. Accretion of the Class B and Class C Preferred Stock dividends and
issue discount amounted to $3,000 and $987,000 for the quarter ended January 31,
1999 and 1998, respectively, and $545,000 and $3,147,000 for the nine month
periods ended January 31, 1999 and 1998, respectively.
See accompanying notes to consolidated financial statements
11
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS. In May 1998, the Company adopted Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income". SFAS No. 130 established standards for the reporting and displaying of
comprehensive income. Comprehensive income is defined as all changes in a
Company's net assets except changes resulting from transactions with
shareholders. It differs from net income in that certain items currently
recorded to equity would be a part of comprehensive income. The adoption of this
standard had no effect on the Company's consolidated financial statements.
The Company adopted Financial Accounting Standards Board (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 shareholders. The adoption of SFAS No. 131 had no impact on the
Company's consolidated unaudited financial statements or related disclosures for
the three and nine month periods ended January 31, 1999 and 1998.
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 April 1, 2000. 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 that 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.
2) PROPERTY
On December 24, 1998, the Company completed the sale and subsequent
leaseback of its two facilities located in Tustin, California with an unrelated
entity (buyer/landlord). The aggregate sales price of the two facilities was
$6,100,000, which was comprised of $4,175,000 in cash and a note receivable for
$1,925,000. In connection with the sale/leaseback transaction, the Company
recorded a non-cash loss on disposal of property of approximately $1,171,000,
included in the accompanying consolidated financial statements.
The note receivable of $1,925,000, included in other assets in the
accompanying consolidated financial statements, bears interest at a rate of 7%
per annum and is collaterized under the Pledge and Security Agreement dated
December 24, 1998. Principal and interest payments of $15,441 are due monthly
based on a 20-year amortization. The note receivable is due upon the earlier of
the sale of the property or at the end of the initial lease term of twelve
years.
The leaseback is a Triple Net Lease, whereas the Company is
responsible for all expenses incurred in the maintenance of the building
including property taxes and insurance. The initial lease term is twelve years
with two five-year extension options. The initial base rent is $56,250 per
month, with rent increases of 3.35% every two years.
See accompanying notes to consolidated financial statements
12
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
Concurrent with the sale/leaseback transaction, the Company borrowed
$200,000 from the buyer/landlord. The note payable bears interest at 7% per
annum and is uncollateralized. Principal and interest payments of $6,175 are due
monthly through December 2001.
3) STOCKHOLDERS' EQUITY
During June 1998, the Company secured access of up to $20,000,000
under the Equity Line Agreement, expiring in June 2001. Under the terms of the
Equity Line Agreement, 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 issuance volume limitations identical to
those set forth in Rule 144(e). At the time of each Put, the investors will be
issued a warrant, expiring on December 31, 2004, to purchase up to 10% of the
amount of common stock issued to the investor at the same price at the time of
the Put.
Also in June 1998, the Company sold 2,749,090 shares of the
Company's common stock under the Equity Line Agreement, including commission
shares, for gross proceeds to the Company of $3,500,000. One-half of this amount
($1,750,000) is subject to adjustment on April 15, 1999 or three months after
the effective date of the registration statement registering these shares with
the second half ($1,750,000) subject to adjustment on July 15, 1999 or six
months after such effective date of the registration of these shares (the "Reset
Provision"). 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 which would
have been issued if the price had been the Adjustment Price for $1,750,000. The
Company will also be required to issue additional warrants at each three month
and six month period for 10% of any additional shares issued.
Future Puts under the Equity Line will be priced at (i) 82.5% of the
lowest closing bid price during the ten trading days (the "10 day low closing
bid price") immediately preceding the date on which such shares are sold to the
Institutional Investors, or (ii) if 82.5% of such 10 day low closing bid price
results in a discount of less than twenty cents ($0.20) per share from such 10
day low closing bid price, such 10 day low closing bid price minus twenty cents
($0.20).
In December 1998, the Company issued an additional 156,570 shares of
common stock under the Equity Line related to the initial $3,500,000 tranche for
mutual consideration.
See accompanying notes to consolidated financial statements
13
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
On February 2, 1999, the Company exercised a Put option under the
Equity Line Agreement and received gross proceeds of $2,250,000 in exchange for
2,869,564 shares of common stock, including commission shares. As of March 1,
1999, the Company had $14,250,000 available for future Puts under the Equity
Line Agreement pursuant to the terms in the agreement.
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 Agreement. 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.
In accordance with the 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 Agreement
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 $400,000 as additional consideration and have been included
in the accompanying unaudited 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.
4) COMMITMENTS
In July 1998, the Company renegotiated a severance agreement with
its former Chief Executive Officer (CEO). The Company's former CEO's employment
agreement provided that the Company make immediate and substantial cash
expenditure upon his termination. The Company did not have sufficient cash
resources to fulfill its obligations under the former CEO's employment
agreement. Accordingly, at the direction of the Board of Directors, the Company
negotiated a new Severance Agreement with its former CEO to conserve cash. The
new Severance Agreement provides for its 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 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,
will vest on March 1, 1999 and be paid on December 31, 1999; and one-third of
See accompanying notes to consolidated financial statements
14
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
the unexercised, unvested and outstanding options on March 1, 1998, will vest
and be paid on March 1, 2000. In addition, the Company will make appropriate
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, as part of the
former CEO's agreement to modify his existing severance package, 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, pay
the former CEO an amount equal to his note of $350,000, plus all accrued
interest thereon, which will be used to retire the respective note. During the
nine months ended January 31, 1999, the Company expensed approximately $756,000
for related severance pay which has been included in general and administrative
expenses in the accompanying consolidated financial statements.
On October 4, 1998, Mr. William Moding resigned from his position as
Vice President, Operations and Administration to pursue other personal and
business interests. In connection with Mr. Moding's resignation, the Company
entered into a revised severance agreement with Mr. Moding pursuant to which Mr.
Moding 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 the payment to Mr. Moding of a
monthly consulting fee of $12,500 and the issuance of an aggregate of 320,000
shares of Common Stock during such period for the exercise of outstanding stock
options, without the requirement of any payment by Mr. Moding of the exercise
price ($.60 per share). In addition, the Company has agreed to make tax payments
totaling $65,280 to federal and state taxing authorities on behalf of Mr. Moding
to offset the income to Mr. Moding resulting from the non-payment of the
exercise price for such options and to pay Mr. Moding all accrued and unused
vacation pay and accrued back pay relating to salary deferral for the period
from March 21, 1998 through October 3, 1998. Pursuant to the revised agreement,
Mr. Moding will be required to repay the Company the entire outstanding
principal balance and accrued interest thereon under two stock option exercise
notes by no later than January 31, 2000 and to execute a standard form security
agreement relating to the stock option exercise notes to pledge Mr. Moding's
interest in the stock options and his personal assets as backup collateral to
secure his obligations under the two stock option exercise notes. From inception
of the revised severance agreement through January 31, 1999, the Company
expensed approximately $259,000 for related severance costs, which has been
included in general and administrative expenses in the accompanying consolidated
financial statements.
See accompanying notes to consolidated financial statements
15
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
5) SUBSEQUENT EVENTS
On February 2, 1999, the Company exercised a Put option under the
Equity Line Agreement and received gross proceeds of $2,250,000 in exchange for
2,869,564 shares of common stock, including commission shares. As of March 1,
1999, the Company had $14,250,000 available for future Put under the Equity Line
Agreement pursuant to the terms in the agreement (Note 3).
On March 8, 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 LYM products in Europe and certain other designated foreign countries,
in exchange for (i) the issuance to BTD of a Secured Promissory Note in the
principal face amount of $3,300,000 bearing simple interest at the rate of ten
percent (10%) per annum, with interest payable monthly in advance and the full
principal amount due and payable on March 1, 2001, (ii) the issuance of 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, (iii) the issuance of
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 and (iv) the
issuance of shares of Common Stock equal in value to $1,200,000, based on a
value per share equal to ninety percent (90%) of the market price of the common
stock. Pursuant to a related Security Agreement, the Company granted a security
interest to BTD in and to all assets of the Company, excluding inventory,
furniture, fixtures and equipment which are used in the commercialization of
Oncolym(R) which are not located on the Company's Tustin, California premises or
which serve as security to any other entity and further excluding any and all
intangible property and intellectual property of the Company and any and all
rights with respect thereto and any goodwill associated therewith.
Also on March 8, 1999, the Company entered into a License Agreement
with Schering AG, Germany. Under the terms of the agreement, Schering AG,
Germany was granted the exclusive, worldwide right to market and distribute LYM
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
equal to twelve percent (12%) of net sales of Oncolym(R) products (which is
subject to reduction, on a country-by-country basis, to six percent (6%) if
there is a generic form of the Oncolym(R) product being sold in such country),
which may be reduced by one percentage point if the FDA does not consent to an
extension of the existing Phase II trials of Oncolym(R) as a Phase III clinical
trial by June 30, 1999. Pursuant to the terms of the agreement, the Company is
required to pay for all pre-clinical expenses up to $500,000 incurred after
March 8, 1999, and fifty percent (50%) of all such expenses incurred in excess
of $500,000, with the other fifty percent of such expenses to be paid by
Schering AG, Germany. The Company is also required to pay for twenty percent
(20%) of the clinical development expenses and existing trial expenses
associated with Oncolym(R), and Schering AG, Germany is required to pay for the
other eighty percent (80%) of such expenses. Each party will pay for all of its
See accompanying notes to consolidated financial statements
16
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 1999 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
internal costs relating to existing trials. Pursuant to the agreement, the
Company and Schering AG, 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. The continued
effectiveness of the agreement with Schering AG, Germany is subject to certain
other conditions and may be terminated by Schering AG, Germany if (i) there are
issues of safety or patient tolerability, (ii) Schering AG, Germany determines
in its reasonable scientific or business discretion prior to receiving
regulatory approval that the Oncolym(R) product is not acceptable for reasons of
efficacy or risk/benefit therapeutic ratio, (iii) the FDA does not permit the
extension or conversion of the Phase II trials of Oncolym(R) as a Phase III
clinical trial by June 30, 1999, (iv) Schering AG, Germany determines, using its
reasonable judgment based on data from or the results of the first Phase III
clinical trials of Oncolym(R) that such results do not support the submission of
Oncolym(R) for regulatory approval, (v) the Company fails to deliver or it
becomes reasonably clear that the Company will fail to deliver in time
appropriate quantities of clinical supplies of antibody or Oncolym(R) product
such that the clinical development of Oncolym(R) will be delayed by three (3)
months or more, (vi) if the Company has not concluded a definitive agreement
providing for a radiolabeling site for the production of Oncolym(R) products by
September 1, 1999, or (vii) at any time after receiving regulatory approval upon
twelve months notice to the Company. However, if the agreement is terminated by
Schering AG, Germany due to issues of safety or patient tolerability, or
Schering AG, Germany determines in its reasonable scientific or business
discretion prior to receiving regulatory approval that the Oncolym(R) product is
not acceptable for reasons of efficacy or risk/benefit therapeutic ratio or
determines, using its reasonable judgment based on data from or the results of
the first Phase III clinical trials of Oncolym(R), that such results do not
support the submission of Oncolym(R) for regulatory approval, Schering AG,
Germany will remain obligated to pay for 80% of the non-cancellable third party
costs in regard to clinical trials underway at the time of such termination, up
to $1,500,000 (other than a termination after receiving regulatory approval).
Schering AG, Germany may also terminate the agreement upon thirty days' written
notice given at any time prior to receiving regulatory approval, but will remain
obligated to pay for all of the costs of completing all then ongoing clinical
trials for Oncolym(R), up to $3,000,000.
See accompanying notes to consolidated financial statements
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
GOING CONCERN. The accompanying financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. As shown
in the financial statements, we experienced losses in fiscal 1998 and during the
first nine months of fiscal 1999 and we have an accumulated deficit at January
31, 1999 of $84,429,000. These factors, among others, raise substantial doubt
about our ability to continue as a going concern.
We must raise additional funds to sustain research and development,
provide for future clinical trials and continue our operations until we are able
to achieve profitability based on revenue from the sale and/or licensing of its
products. We plan to obtain required financing through one or more methods
including, obtaining additional equity or debt financing and negotiating
additional licensing or collaboration agreements with another company. There can
be no assurance that we will be successful in raising such funds on terms
acceptable to us, or at all, or that sufficient additional capital will be
raised to complete the research, development, and clinical testing of our
product candidates. 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. Our
continuation as a going concern is dependent on our ability to generate
sufficient cash flow to meet our obligations on a timely basis, to obtain
additional financing as may be required and, ultimately, to attain successful
operations.
Management believes that additional capital must be raised to
support the Company's continued operations and other short-term cash needs. The
Company believes that it has sufficient cash on hand and available pursuant to
the financing commitments under the Equity Line of Credit (assuming only one
future quarterly draw of $2,250,000 in May 1999) to meet its obligations on a
timely basis through June 1999. Our ability to access funds under the Equity
Line Agreement is subject to the satisfaction of certain conditions and the
failure to satisfy these conditions may limit or preclude the Company's ability
to access such funds, which could adversely affect the our business, immediate
liquidity, financial position and results of operations unless additional
financing sources are available.
COMPANY OVERVIEW. We are engaged in the research, development and
commercialization of novel cancer therapeutics in two principal areas - direct
tumor targeting agents for the treatment of refractory malignant lymphoma and
collateral tumor targeting agents for the treatment of solid tumors.
DIRECT TUMOR TARGETING AGENTS. Our most advanced direct tumor
targeting agent candidate, Oncolym(R), is an investigational murine monoclonal
antibody radiolabeled with I131 which is being studied in a Phase II/III trial
for the treatment of intermediate and high-grade relapsed or refractory B-cell
non-Hodgkins lymphoma ("NHL"). The clinical trials for Oncolym(R) are currently
being held at participating medical centers, including M.D. Anderson Cancer
Center, George Washington University Medical Center, Iowa City VA Medical
Center, Queen's Medical Center-Hawaii, University of Illinois at Chicago Medical
Center, The Medical University of South Carolina, Beth Israel Deaconess Medical
Center-Boston, Cleveland Clinic and University of Miami Hospital. We currently
anticipate adding up to eight additional clinical trial sites for Oncolym(R).
Following the completion of the clinical trials, we expect to file an
application with the United States Food and Drug Administration ("FDA") to
market Oncolym(R) in the United States.
18
COLLATERAL TUMOR TARGETING AGENTS. Collateral tumor targeting may be
described as the therapeutic strategy of targeting peripheral structures and
cell types, other than the viable cancer cells directly, as a means to treat
solid tumors. Our three leading advanced collateral targeting agents for solid
tumors are Tumor Necrosis Therapy ("TNT"), Vascular Targeting Agents ("VTAs"),
and Vasopermeation Enhancement Agents ("VEAs").
o TNT is a universal tumor targeting therapy potentially capable of
treating a wide range of solid tumors. Radiolabeled TNT agents are
believed to act by binding to dead or dying cells at the core of the
tumor and irradiating the tumor from the inside out. TNT is
potentially capable of carrying a wide variety of therapeutic agents
to the interior of solid tumors. Our first TNT-based product is an
investigational, chimeric monoclonal antibody radiolabeled with the
I131 isotope. During March 1998, we began enrolling patients into a
Phase I study of TNT for the treatment of malignant glioma (brain
cancer). We have since filed a protocol with the FDA for a Phase II
study of TNT for the treatment of malignant glioma, which commenced
in December 1998. The clinical trials are currently being conducted
at The Medical University of South Carolina with additional clinical
sites underway. We have also received an unrestricted grant to
conduct Phase I/II systemic trials of TNT for prostate, pancreatic
and liver cancers at a clinical site in Mexico City.
o VTAs are believed to act by destroying the vasculature of solid
tumors. VTAs are multi-functional molecules that target the
capillaries and blood vessels of solid tumors. Once there, these
agents block the flow of oxygen and nutrients to the underlying
tissue by creating a blood clot in the tumor. In preclinical trials,
VTAs have caused clots in animals and within hours of the clot's
formation, the tumor begins to die and necrotic regions are formed.
Since every tumor in excess of 2mm in size forms an expanding
vascular network during tumor growth, VTAs could be effective
against all types of solid tumors. Our scientists are doing
preliminary studies on VTAs. The VTA technology was acquired in
April of 1997 through our acquisition of Peregrine Pharmaceuticals,
Inc.
o VEAs use vasoactive compounds (molecules that cause tissues to
become more permeable) linked to monoclonal antibodies, such as the
TNT antibody, to increase the vasoactive permeability at the tumor
site and are believed to act by increasing the concentration of
killing agents at the core of the tumor. In pre-clinical studies,
our scientists were able to increase the uptake of drugs or isotopes
within a tumor by between 150% and 420% if a vasoactive agent was
given several hours prior to the therapeutic treatment. The
therapeutic drug can be a chemotherapy drug, a radioactive isotope
or other cancer fighting agent. 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.
19
RESULTS OF OPERATIONS. The Company's net loss of $4,435,000, before
preferred stock discount accretion and dividends, for the quarter ended January
31, 1999 represents an increase in net loss of $1,474,000 in comparison to the
net loss of $2,961,000 for the prior year quarter ended January 31, 1998. This
increase in the net loss for the quarter ended January 31, 1999 is due to an
increase in total costs and expenses of $1,496,000 offset by an increase in
interest and other income of $22,000. The Company's net loss of $11,245,000 for
the nine months ended January 31, 1999 represents an increased loss of
$2,584,000 over the nine months ended January 31, 1998. The increased loss for
the nine months ended January 31, 1999 is due to a $2,403,000 increase in total
costs and expenses combined with a $181,000 decrease in interest and other
income.
The Company's total costs and expenses increased approximately
$1,496,000 during the three months ended January 31, 1999 compared to the three
months ended January 31, 1998. This increase in total costs and expenses
resulted primarily an increase in non-cash charges of $1,010,000 from the sale
and disposal of property, of which $1,171,000 was recorded in December 1998 in
connection with the sale and subsequent leaseback of the Company's two
facilities. In addition, during the three months ended January 31, 1999,
research and development expenses increased $295,000, general and administrative
expenses increased $209,000, and interest expense decreased $18,000, in
comparison to the three months ended January 31, 1998. The Company's total costs
and expenses increased $2,403,000 for the nine months ended January 31, 1999
compared to the same period in the prior year. This nine-month increase resulted
from a $1,056,000 increase in research and development expenses, a $1,016,000
increase in non-cash charges from the sale and disposal of property, a $116,000
increase in general and administrative expenses and a $215,000 increase in
interest expense.
The increase in research and development expenses of approximately
$295,000 and $1,056,000 during the three and nine months ended January 31, 1999,
respectively, primarily relates to increased clinical trial costs associated
with the Phase II/III clinical trials of Oncolym(R), the Phase I and Phase II
clinical trials of Tumor Necrosis Therapy ("TNT") and the start-up costs to
commence Phase I/II clinical trials of TNT in Mexico. The increase in clinical
trial costs resulted from increased patient fees, manufacturing and
radiolabeling costs, and travel and consulting fees. In addition, internal
research and development activities increased, including activities related to
manufacturing and radiopharmaceutical scale-up and increased efforts to validate
the manufacturing facility which caused a corresponding increase in related
costs.
The increase in general and administrative expenses of $209,000
during the quarter ended January 31, 1999 compared to the quarter ended January
31, 1998 resulted primarily from severance expenses associated with the
Company's former Chief Executive Officer and former Vice President of
Operations and Administration and increased legal fees associated with the sale
and subsequent leaseback of the Company's facilities. Such increases were
partially offset by a decrease in consulting fees, a decrease in insurance
related costs and a decrease in stock-based compensation expense. General and
administrative expenses increased approximately $116,000 for the nine months
ended January 31, 1999 compared to the same period in the prior year. Such
increase was primarily due to the aforementioned increase in severance expenses
and legal fees associated with the sale and subsequent leaseback of the
Company's facilities which were partially offset by a non-recurring Class C
preferred stock penalty of $276,000 recorded in the nine months ended January
31, 1998 combined with a decrease in consulting fees associated with Peregrine
Pharmaceuticals, Inc., a decrease in recruiting fees, a decrease in insurance
related expenses and a decrease in stock-based compensation expense.
20
The increase in non-cash charges from the sale and disposal of
property of $1,010,000 and $1,016,000 for the three and nine month periods ended
January 31, 1999, respectively, compared to the same period in the prior year is
primarily due to the non-cash loss of $1,171,000 recorded on the sale and
subsequent leaseback of the Company's facilities in December 1998 with an
unrelated entity (buyer/landlord). The aggregate sales price of the two
facilities was $6,100,000, which was comprised of $4,175,000 in cash and a note
receivable for $1,925,000. The leaseback is a Triple Net Lease, whereas the
Company is responsible for all expenses incurred in the maintenance of the
building including property taxes and insurance. The initial lease term is
twelve years with two five-year extension options. The initial base rent is
$56,250 per month, with rent increases of 3.35% every two years.
The decrease in interest expense of $18,000 for the three months
ended January 31, 1999 compared to the same period in the prior year is
primarily due to a lower level of interest bearing debt outstanding during the
quarter. The lower level of debt outstanding is due to the payoff of building
debt in conjunction with the sale and subsequent leaseback of the Company's
facilities in December 1998. The increase in interest expense of $215,000 for
the nine months ended January 31, 1999 compared to the same period in the prior
year is primarily due to interest incurred on construction loans owed to one of
the Company's contractors related to enhancements to the Company's manufacturing
facility. For the nine months ended January 31, 1999, approximately $115,000 was
included in interest expense for the estimated fair value of 335,000 warrants
granted to the above contractor for an extension of time to pay the outstanding
construction loans. The construction loans were paid in full in August 1998.
The increase in interest and other income of $22,000 during the
three months ended January 31, 1999 compared to the same period in the prior
year is primarily due to initial funding received of $67,000 during the quarter
ended January 31, 1999 from an unrestricted $200,000 grant from an unrelated
entity to perform TNT clinical trials in Mexico. This unrestricted grant of
$67,000 was offset by a decrease in interest income $45,000. The decrease in
interest and other income for the nine months ended January 31, 1999 of $181,000
compared to the same period in the prior year, is primarily attributable to a
decrease in interest income of $236,000 and a decrease in other income of
$12,000 offset by an increase in grant funding of $67,000 to perform TNT
clinical trials in Mexico. Interest income decreased during the three and nine
month periods ended January 31, 1999 due to a lower level of cash funds
available for investment. Interest income is not expected to be significant
during the remainder of the fiscal year due to the expected level of future cash
balances. The Company does not expect to generate product sales for at least the
next year.
Management believes that research and development costs will
increase as the Company continues to expand its clinical trial activities and
increases production and radiolabeling capabilities for its Oncolym(R) and TNT
antibodies.
LIQUIDITY AND CAPITAL RESOURCES. At January 31, 1999, we had
$240,000 in cash and cash equivalents and a working capital deficit of
$1,676,000. We experienced losses in fiscal 1998 and during the first nine
months of fiscal 1999 and had an accumulated deficit of approximately
$84,429,000 at January 31, 1999. On February 2, 1999, we exercised a put option
and received gross proceeds of $2,250,000 in exchange for 2,869,564 shares of
common stock pursuant to a Regulation D Common Stock Equity Line Subscription
Agreement the (the "Equity Line Agreement"). In addition, on March 8, 1999, we
entered into a licensing agreement with an unrelated entity for the licensing of
Oncolym(R) in exchange for an up-front payment of $3,000,000. We believe we have
sufficient cash on hand and available pursuant to the Equity Line Agreement
(assuming only one future quarterly draw of $2,250,000 in May 1999) to meet our
obligations on a timely basis through June 1999. We also believe that additional
capital must be raised to support the Company's continued operations and other
short-term cash needs.
21
Our ability to access funds under the Equity Line Agreement is
subject to the satisfaction of certain conditions and the failure to satisfy
these conditions may limit or preclude our ability to access such funds, which
could adversely affect the our business, immediate liquidity, financial position
and results of operations unless additional financing sources are available.
We have significant commitments to expend additional funds for
radiolabeling contracts, license contracts, severance arrangements and
consulting. 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 flow 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
increased activities in connection with the Phase II/III clinical trials for
Oncolym(R), the Phase I and Phase II clinical trials of TNT, the Phase I/II
clinical trials of TNT in Mexico and the development costs associated with
Vasopermeation Enhancement Agents ("VEAs") and Vascular Targeting Agents
("VTAs"). We believe that it will be necessary for us to raise additional
capital to sustain research and development and provide for future clinical
trials. Additional funds must be raised to continue our operations until we are
able to generate sufficient additional revenue from the sale and/or licensing of
our products. 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.
The increased clinical trial activities and the manufacturing and
radiolabeling scale-up efforts have impacted the Company's losses and cash
consumption rate ("burn rate"). We believe we can only reduce the burn rate
significantly if we reduce programs substantially or delay clinical trials and
continued development of the scale-up efforts. We believe that we will continue
to experience losses and negative cash flow from operations for the foreseeable
future as we increase activities associated with the Phase II/III clinical
trials for Oncolym(R), the Phase I and Phase II clinical trials for TNT and the
Phase I/II clinical trials of TNT in Mexico and activities associated with our
research and development of our other technologies.
COMMITMENTS. At January 31, 1999, we had fixed commitments of
approximately $1,540,000 related to radiolabeling contracts, severance
arrangements, employment agreements and consulting agreements. In addition, we
have additional significant obligations, most of which are contingent, for
payments to licensors for its technologies and in connection with the
acquisition of the Oncolym(R) rights previously owned by Alpha Therapeutic
Corporation ("Alpha") and Biotechnology Development Ltd. ("BTD").
22
On March 8, 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 LYM products in Europe and certain other designated foreign countries,
in exchange for (i) the issuance to BTD of a Secured Promissory Note in the
principal face amount of $3,300,000 bearing simple interest at the rate of ten
percent (10%) per annum, with interest payable monthly in advance and the full
principal amount due and payable on March 1, 2001, (ii) the issuance of 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, (iii) the issuance of
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 and (iv) the
issuance of shares of Common Stock equal in value to $1,200,000, based on a
value per share equal to ninety percent (90%) of the market price of the common
stock. Pursuant to a related Security Agreement, the Company granted a security
interest to BTD in and to all assets of the Company, excluding inventory,
furniture, fixtures and equipment which are used in the commercialization of
Oncolym(R) which are not located on the Company's Tustin, California premises or
which serve as security to any other entity and further excluding any and all
intangible property and intellectual property of the Company and any and all
rights with respect thereto and any goodwill associated therewith.
Also on March 8, 1999, the Company entered into a License Agreement
with Schering AG, Germany. Under the terms of the agreement, Schering AG,
Germany was granted the exclusive, worldwide right to market and distribute LYM
products in exchange for an initial payment of $3,000,000 which the Company
received upon execution of the agreement, 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 equal to twelve
percent (12%) of net sales of Oncolym(R) products (which is subject to
reduction, on a country-by-country basis, to six percent (6%) if there is a
generic form of the Oncolym(R) product being sold in such country), which may be
reduced by one percentage point if the FDA does not consent to an extension of
the existing Phase II trials of Oncolym(R) as a Phase III clinical trial by June
30, 1999. Pursuant to the terms of the agreement, the Company is required to pay
for all pre-clinical expenses up to $500,000 incurred after March 8, 1999, and
fifty percent (50%) of all such expenses incurred in excess of $500,000, with
the other fifty percent of such expenses to be paid by Schering AG, Germany. The
Company is also required to pay for twenty percent (20%) of the clinical
development expenses and existing trial expenses associated with Oncolym(R), and
Schering AG, Germany is required to pay for the other eighty percent (80%) of
such expenses. Each party will pay for all of its internal costs relating to
existing trials. Pursuant to the agreement, the Company and Schering AG, Germany
have also agreed to a structure for proceeding with negotiations concerning the
terms of a possible licensing of the Company's VTA technology in the near
future. The continued effectiveness of the agreement with Schering AG, Germany
is subject to certain other conditions and may be terminated by Schering AG,
Germany if (i) there are issues of safety or patient tolerability, (ii) Schering
AG, Germany determines in its reasonable scientific or business discretion prior
to receiving regulatory approval that the Oncolym(R) product is not acceptable
for reasons of efficacy or risk/benefit therapeutic ratio, (iii) the FDA does
not permit the extension or conversion of the Phase II trials of Oncolym(R) as a
Phase III clinical trial by June 30, 1999, (iv) Schering AG, Germany determines,
using its reasonable judgment based on data from or the results of the first
Phase III clinical trials of Oncolym(R) that such results do not support the
submission of Oncolym(R) for regulatory approval, (v) the Company fails to
deliver or it becomes reasonably clear that the Company will fail to deliver in
time appropriate quantities of clinical supplies of antibody or Oncolym(R)
product such that the clinical development of Oncolym(R) will be delayed by
23
three (3) months or more, (vi) if the Company has not concluded a definitive
agreement providing for a radiolabeling site for the production of Oncolym(R)
products by September 1, 1999, or (vii) at any time after receiving regulatory
approval upon twelve months notice to the Company. However, if the agreement is
terminated by Schering AG, Germany due to issues of safety or patient
tolerability, or Schering AG, Germany determines in its reasonable scientific or
business discretion prior to receiving regulatory approval that the Oncolym(R)
product is not acceptable for reasons of efficacy or risk/benefit therapeutic
ratio or determines, using its reasonable judgment based on data from or the
results of the first Phase III clinical trials of Oncolym(R), that such results
do not support the submission of Oncolym(R) for regulatory approval, Schering
AG, Germany will remain obligated to pay for 80% of the non-cancellable third
party costs in regard to clinical trials underway at the time of such
termination, up to $1,500,000 (other than a termination after receiving
regulatory approval). Schering AG, Germany may also terminate the agreement upon
thirty days' written notice given at any time prior to receiving regulatory
approval, but will remain obligated to pay for all of the costs of completing
all then ongoing clinical trials for Oncolym(R), up to $3,000,000.
OTHER RISK FACTORS OF OUR COMPANY
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY. Our actual
operating results may fluctuate significantly in the future. Many factors may
cause these fluctuations, including worldwide economic and political conditions
and industry specific factors. If we are to remain competitive, we must develop
and produce commercially viable products at competitive prices in a timely
manner, and must maintain access to external financing sources until we can
generate revenue from licensing transactions or sales of products. Our ability
to obtain financing and to manage expenses and our cash depletion rate ("burn
rate") is the key to the continued development of product candidates and the
completion of ongoing clinical trials. Our burn rate will vary substantially
from quarter to quarter as we fund non-recurring items associated with clinical
trials, product development, antibody manufacturing and radiolabeling 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 burn rate.
WE ARE IN THE EARLY STAGES OF PRODUCT DEVELOPMENT. Since our
inception, we have been engaged in the development of drugs and related
therapies for the treatment of people with cancer. Our product candidates are
generally in the early stages of development, with only two product candidates
currently in clinical trials. Revenues from product sales have been
insignificant and throughout our history there have been minimal revenues from
product royalties. 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. We cannot guarantee that
our product development efforts, including clinical trials, will be successful,
that required regulatory approvals for the indications being studied can be
obtained, that our product candidates can be manufactured and radiolabeled at an
acceptable cost and with appropriate quality or that any approved products can
be successfully marketed.
24
WE WILL REQUIRE ADDITIONAL CAPITAL IN THE FUTURE. 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 experienced negative
cash flows from operations since inception and expect the negative cash flow
from operations to continue for the foreseeable future. We currently have
commitments to expend additional funds for radiolabeling contracts, license
contracts, severance arrangements, employment agreements, consulting agreements,
and for the repurchase of Oncolym(R) marketing rights from Alpha Therapeutic
Corporation and Biotechnology Development, Ltd. We expect operating expenditures
related to clinical trials to increase in the future as clinical trial activity
increases and scale-up for clinical trial production continues. As activities in
connection with the Phase II/III clinical trials for Oncolym(R) and the Phase II
clinical trials for TNT increase and the development costs associated with VEAs
and VTAs increase, we expect that the monthly negative cash flow will continue.
Without obtaining additional financing and/or negotiating additional licensing
or collaboration agreements with other companies, we expect that current sources
of financing available to us will be sufficient to fund our operations and to
meet our obligations on a timely basis through June 1999. Our ability to access
funds under our Regulation D Common Stock Equity Line Subscription Agreement
with two institutional investors is subject to the satisfaction of certain
conditions and the failure to satisfy these conditions may limit or preclude our
ability to access such funds, which could negatively affect our financial
position unless additional financing sources are available.
We will require additional funds to sustain our research and
development efforts, provide for future clinical trials, expand our
manufacturing and radiolabeling capabilities, and continue our operations until
we able to generate sufficient revenue from the sale and/or licensing of our
products. We will need to obtain additional funding through one or more methods
including obtaining additional equity or debt financing and/or negotiating
additional licensing or collaboration agreement with another company. We cannot
be certain whether we can obtain the 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, your stock ownership will be
diluted. Further, these new securities may have rights, preferences or
privileges senior to yours. If we are unable to raise additional funds when
necessary, we may have to reduce or discontinue development or clinical testing
of some or all of our product candidates or enter into financing arrangements on
terms which we would not otherwise accept.
WE HAVE HAD SIGNIFICANT LOSSES AND ANTICIPATE FUTURE LOSSES. We have
experienced significant losses since inception. As of January 31, 1999, our
accumulated deficit was approximately $84,429,000. 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 scale-up of manufacturing
and radiolabeling capabilities. We expect losses to fluctuate substantially from
quarter to quarter. All of our products are currently in development,
preclinical studies or clinical trials, and no significant revenues have been
generated from 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 the next year. There can be no guarantee that we will ever generate
product revenues sufficient to become profitable or to sustain profitability.
25
THE VIABILITY OF OUR TECHNOLOGY AND PRODUCTS IS UNCERTAIN. Our
future success is significantly dependent on our ability to develop and test
workable products for which we will seek FDA approval 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. Although we are optimistic that we
will be able to complete development of one or more products, there are many
risk and uncertainties inherent in developing pharmaceutical products. For
example:
o Our research and development activities may not be successful;
o Our proposed products may not prove to be effective in clinical
trials;
o Patient enrollment in the clinical trials may be delayed or
prolonged significantly, thus delaying the trials;
o Our product candidates may cause harmful side effects during
clinical trials;
o Our product candidates may take longer than anticipated to progress
through clinical trials;
o Our product candidates may prove impracticable to manufacture in
commercial quantities at a reasonable cost and/or with acceptable
quality;
o Our competitors may produce products which are superior to our
products;
o We may not be able to obtain all necessary governmental clearances
and approvals to market our products;
o Our product candidates may not prove to be commercially viable or
successfully marketed; and
o We may encounter unanticipated problems, including development,
manufacturing, distribution, financing and marketing difficulties.
Any of these factors could negatively affect our financial position
and results of operations.
WE HAVE LIMITED DATA TO DATE WITH RESPECT TO OUR PRODUCT CANDIDATES.
The results of initial preclinical and clinical testing of the products we are
currently developing are not necessarily indicative of results that will be
obtained from subsequent or more extensive preclinical studies and clinical
testing. The clinical data gathered to date with respect to Oncolym(R) are
primarily from a Phase II dose escalation trial, which was designed to develop
and refine the therapeutic protocol to determine the maximum tolerated dose of
total body radiation and to assess the safety and efficacy profile of a
treatment with a radiolabeled antibody. Further, the data from this Phase II
dose escalation trial was compiled from testing conducted at a single site and
with a relatively small number of patients. We will need to do substantial
additional development and clinical testing prior to seeking any regulatory
approval for commercialization of Oncolym(R). There can be no guarantee that
clinical trials of Oncolym(R), TNT or other product candidates under development
will demonstrate the safety and efficacy of such products to the extent
necessary to obtain regulatory approvals for the indications being studied, or
at all. Companies in the pharmaceutical and biotechnology industries have
suffered significant setbacks in advanced clinical trials, even after obtaining
promising results in earlier trials. The failure to adequately demonstrate the
safety and efficacy of Oncolym(R), TNT or any other therapeutic product under
development could delay or prevent regulatory approval of the product, which
would negatively affect our financial position and results of operations.
26
THERE ARE MANY RISKS ASSOCIATED WITH OBTAINING REGULATORY APPROVALS.
Testing, manufacturing, radiolabeling, 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.
In the United States, pharmaceutical products are regulated by the FDA under the
Federal Food, Drug, and Cosmetic Act and other laws, including, in the case of
biologics, the Public Health Service Act. We presently believe that our products
will be regulated by the FDA as biologics. Manufacturers of biologics may also
be subject to state regulation.
There are numerous steps required before a biologic may be approved
for marketing in the United States, generally including:
o preclinical laboratory tests and animal tests;
o submission to the FDA of an Investigational New Drug ("IND")
application for human clinical testing, which must become effective
before human clinical trials may commence;
o adequate and well-controlled human clinical trials to establish the
safety and efficacy of the product;
o submission to the FDA of a Product License Application ("PLA") or a
Biologics License Application ("BLA");
o submission to the FDA of an Establishment License Application
("ELA");
o FDA review of the ELA and the PLA or BLA; and
o satisfactory completion of an FDA inspection of the manufacturing
facility or facilities at which the product is made to assess
compliance with Current Good Manufacturing Practices ("CGMP").
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. We cannot guarantee that Phase I, Phase II
or Phase III testing will be completed successfully within any specific time
period, if at all, with respect to any of our product candidates. Furthermore,
the FDA 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.
The results of preclinical and clinical studies, together with
detailed information on the manufacture and composition of a product candidate,
are submitted to the FDA as a PLA or BLA requesting approval to market the
product candidate. Before approving a PLA or BLA, the FDA will inspect the
facilities at which the product is manufactured, and will not approve the
marketing of the product candidate unless CGMP compliance is satisfactory. The
FDA may deny a PLA or BLA if applicable regulatory criteria are not satisfied,
require additional testing or information and/or require post-marketing testing
and surveillance to monitor the safety or efficacy of a product. There can be no
assurance that approval of any PLA or BLA we submit will be granted by the FDA
on a timely basis or at all. Also, if regulatory approval of a product is
granted, such approval may entail limitations on the indicated uses for which it
may be marketed.
Both before and after FDA approval is obtained, violations of
regulatory requirements, including the preclinical and clinical testing process,
or the PLA or BLA review process may result in various adverse consequences,
including the FDA's delay in approving or refusing to approve a product,
withdrawal of an approved product from the market and/or the imposition of
criminal penalties against the manufacturer and/or license holder. For example,
license holders are required to report certain adverse reactions to the FDA, and
to comply with certain requirements concerning advertising and promotional
labeling for their products. Also, quality control and manufacturing procedures
must continue to conform to CGMP regulations after approval, and the FDA
periodically inspects manufacturing facilities to assess compliance with CGMP.
Accordingly, manufacturers must continue to expend time, monies and effort in
the area of production and quality control to maintain CGMP compliance. In
addition, discovery of problems may result in restrictions on a product and/or
its manufacturer, including withdrawal of the product from the market. Also, new
government requirements may be established that could delay or prevent
regulatory approval of our product candidates.
27
We will also be subject to a variety of foreign regulations
governing clinical trials and sales of our products. Whether or not FDA approval
has been obtained, approval of a product candidate by the comparable regulatory
authorities of foreign countries must be obtained prior to the commencement of
marketing of the product in those countries. The approval process varies from
country to country and the time may be longer or shorter than that required for
FDA approval. At least initially, we intend, to the extent possible, to rely on
licensees to obtain regulatory approval for marketing our products in foreign
countries.
THERE ARE MANY RISKS ASSOCIATED WITH THE COMMERCIAL PRODUCTION OF
OUR PRODUCTS. In order to conduct clinical trials on a timely basis, obtain
regulatory approval and be commercially successful, we must scale-up our
manufacturing and radiolabeling processes so that those product candidates can
be manufactured and radiolabeled in commercial quantities. To date, we have
expended significant funds for the scale-up of our antibody manufacturing
capabilities for clinical trial requirements for our Oncolym(R) and TNT product
candidates and for refinement of the radiolabeling processes. We intend to use
existing antibody manufacturing capacity to meet the clinical trial requirements
for our Oncolym(R) and TNT product candidates and to support the initial
commercialization of Oncolym(R). In order to provide additional capacity, we
must successfully negotiate an agreement with contract antibody manufacturers to
have these products produced, the cost of which is estimated to be approximately
one to three million dollars in start-up costs and additional production costs
on a "per run basis". We believe we can successfully negotiate an agreement with
one or more contract radiolabeling companies to provide radiolabeling services
to meet commercial demands. Such a contract would, however, require a
substantial investment (estimated at five to nine million dollars over the next
two years) for equipment and related production area enhancements required by
these vendors, and for vendor services associated with technology transfer
assistance, scale-up and production start-up, and for regulatory assistance. We
anticipate that production of our products in commercial quantities will create
technical and financial challenges. We have limited manufacturing experience,
and cannot make any guarantee as to our ability to scale-up 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 and radiolabeling or our ability to reach an acceptable
agreement with one or more contract manufacturers to produce and radiolabel
Oncolym(R), TNT, or any of our other product candidates, in clinical or
commercial quantities. Our failure to scale-up manufacturing and radiolabeling
for clinical trial or commercial production or to obtain contract manufacturers,
could negatively affect our financial position and results of operations.
28
THERE ARE SUBSTANTIAL SHARES ELIGIBLE FOR FUTURE SALE; THE SALE OF
SUCH SHARES MAY DEPRESS OUR STOCK PRICE. As of February 28, 1999, we had
70,898,581 shares of Common Stock outstanding. We will issue additional shares
of Common Stock and/or warrants to purchase shares of Common Stock under the
following agreements:
o 5% Adjustable Convertible Class C Preferred Stock ("Class C Stock");
o Regulation D Common Stock Equity Line Subscription Agreement
("Equity Line Agreement") and a related Placement Agent Agreement;
o Biotechnology Development, Ltd. Termination Agreement; and
o other Option and Warrant Agreements.
CLASS C STOCK. Of the 70,898,581 shares of Common Stock outstanding
as of February 28, 1999, from September 26, 1997 (the date the Class C Stock
became convertible into Common Stock) through February 28, 1999, we issued
30,865,164 shares of Common Stock in conjunction with the conversion of the
Class C Stock (including shares of Class C Stock issued as dividends shares and
penalty shares) and the exercise of warrants to purchase shares of Common Stock
(the "Class C Warrants") for gross proceeds of approximately $15,641,000. The
Class C Warrants were issued to holders of Class C Stock in conjunction with the
conversion of the Class C Stock pursuant to the terms of the Company's agreement
with the holders of the Class C Stock. From September 26, 1997, the date on
which the Class C Stock was first convertible, through March 1998, the price of
the Common Stock steadily declined while the average trading volume increased
significantly. As of February 28, 1999, there were 121 shares of Class C Stock
outstanding and Class C Warrants outstanding to purchase up to 35,244 shares of
Common Stock. If the 121 shares of Class C Stock outstanding as of February 28,
1999 were converted, we would be required to issue approximately 203,000 shares
of Common Stock (based on a conversion price of $0.5958 per share of Common
Stock) and Class C Warrants to purchase up to an aggregate of approximately
51,000 shares of Common Stock at an exercise price of $0.6554 per share.
EQUITY LINE AGREEMENT. As of February 28, 1999, we have issued an
aggregate of 5,789,506 shares of Common Stock and warrants to purchase up to an
additional 566,953 shares of Common Stock at an average exercise price of $1.23
per share under the Equity Line Agreement and related Placement Agent Agreement
for gross proceeds of $5.75 million. Pursuant to the Equity Line Agreement, and
assuming a 10-day low closing bid price of $1.00 per share (which allows us to
sell the maximum number of shares of Common Stock), we may, at our option, sell
to the institutional investors up to an additional 17,812,500 shares of Common
Stock and warrants to purchase up to an additional 1,781,250 shares of Common
Stock for gross proceeds of $14,250,000. In addition, we may be obligated to
issue for no additional consideration up to 1,876,704 shares of Common Stock and
warrants to purchase up to 178,125 shares of Common Stock pursuant to the
Placement Agent Agreement. The shares of Common Stock will be issued and sold to
the institutional investors at a discount to the 10-day low closing bid price of
the Common Stock prior to the sale equal to the greater of twenty cents ($0.20)
per share or a 17.5% discount to the 10-day low closing bid price of the Common
Stock. In addition, we may be obligated to issue to the institutional investors
an aggregate of up to 954,545 shares of Common Stock on April 15, 1999 and July
15, 1999 upon adjustment of the purchase price of the shares of Common Stock
sold to the institutional investors. We will not receive any proceeds from the
exercise of warrants under the Equity Line Agreement or the Placement Agent
Agreement to purchase shares of Common Stock, which may only be exercised
pursuant to a cashless exercise.
29
BIOTECHNOLOGY DEVELOPMENT LTD. TERMINATION AGREEMENT. On March 8,
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 LYM products
in Europe and certain other designated foreign countries, in exchange for (i)
the issuance to BTD of a Secured Promissory Note in the principal face amount of
$3,300,000 bearing simple interest at the rate of ten percent (10%) per annum,
with interest payable monthly in advance and the full principal amount due and
payable on March 1, 2001, (ii) the issuance of 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 (iii) the issuance of 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 and (iv) the issuance of
shares of Common Stock equal in value to $1,200,000, based on a value per share
equal to ninety percent (90%) of the market price of the Common Stock.
OTHER OPTION AND WARRANT AGREEMENTS. In addition to the Class C
Warrants, the warrants issued and to be issued under the Equity Line Agreement
and the Placement Agent Agreement and the warrants issued to BTD under the
Termination Agreement, at February 28, 1999, there were outstanding warrants and
options to employees, directors, consultants and other parties to issue
approximately 8,453,000 shares of Common Stock at an average exercise price of
$1.17 per share.
The sale and issuance of shares of Common Stock pursuant to the
Equity Line Agreement and related Placement Agent Agreement and pursuant to the
Termination Agreement may cause the market price of the Common Stock to fall and
might also make it more difficult for us to sell equity or equity-related
securities in the future, whether pursuant to the Equity Line Agreement or
otherwise. The issuance of shares of Common Stock upon conversion of the
remaining Class C Stock and upon exercise of the Class C Warrants, the warrants
issued to BTD and the warrants issued and to be issued under the Equity Line
Agreement, and such other outstanding warrants and options, as well as
subsequent sales of shares of Common Stock in the open market, could also cause
the market price of the Common Stock to fall and impair our ability to raise
additional capital.
OUR STOCK PRICE AND TRADING VOLUME HAVE BEEN HIGHLY VOLATILE. The
market price of the Common Stock, and the market prices of securities of
companies in the biotechnology industry generally, have 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 89,000 shares per
day to as many as 19 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, for example:
o Announcements of technological innovations or new commercial
products by us or our competitors;
o Developments or disputes concerning patent or proprietary rights;
o Publicity regarding actual or potential medical results relating to
products under development by us or our competitors;
o Regulatory developments in both the United States and foreign
countries;
o Public concern as to the safety of biotechnology products;
o Economic and other external factors; and
o Period-to-period fluctuations in financial results.
30
THERE ARE RISKS RELATED TO SECURITIES LISTED ON THE NASDAQ SMALLCAP
MARKET AND LOW-PRICED SECURITIES. The Common Stock is presently traded on The
Nasdaq SmallCap Market. To maintain inclusion on The Nasdaq SmallCap Market, the
Common Stock must continue to be registered under Section 12(g) of the Exchange
Act, and 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 business days), at
least two market makers and at least 300 stockholders, each holding at least 100
shares of Common Stock. For the period of January 29, 1998 through May 4, 1998,
we failed to maintain a $1.00 minimum closing bid price. From May 5, 1998,
through September 2, 1998, we met this requirement. However, at various times
since September 2, 1998, we have failed to maintain a $1.00 minimum closing bid
price and expect the closing bid price of the Common Stock to fall below the
$1.00 minimum bid requirement from time to time in the future. If we fail to
meet the minimum closing bid price of $1.00 for a period of 30 consecutive
business 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 business 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 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 and to obtain accurate quotations as to the
market value 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 business
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.
If the Common Stock ceases to be included on The Nasdaq SmallCap
Market, the Common Stock could become subject to rules adopted by the SEC
regulating broker-dealer practices in connection with transactions in "penny
stocks." Penny stocks generally are equity securities with a price per share of
less than $5.00 (other than securities registered on certain national securities
exchanges or quoted on The Nasdaq Stock Market, provided that current price and
volume information with respect to transactions in these securities is
provided). The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document in a form prepared by the SEC which provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its sales person in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker-dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in writing before or
with the customer's confirmation. In addition, the penny stock rules require
that prior to a transaction in a penny stock not otherwise exempt from these
rules, the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to these penny stock rules. If the
Common Stock becomes subject to the penny stock rules, investors may be unable
to readily sell their shares of Common Stock.
31
OUR INDUSTRY IS HIGHLY COMPETITIVE. 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 and 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 Oncolym(R) product. Idec
Pharmaceuticals Corporation is currently marketing its lymphoma product for low
grade non-Hodgkins 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 FDA 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-Hodgkins lymphomas. There are several companies in preclinical studies with
angiogenesis technologies which may compete with our VTA technology. 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 or that competition will not negatively affect
our financial position or results of operations. In addition, we cannot assure
you that our existing and future competitors will not develop products which
compete with our other product candidates.
THERE ARE MANY RISKS AND UNCERTAINTIES ASSOCIATED WITH CLINICAL
TRIALS. We have limited experience in conducting clinical trials. The rate of
completion of our clinical trials will depend on, among other factors, the rate
of patient enrollment. Patient enrollment is a function of many factors,
including the nature of clinical trial protocols, the existence of competing
protocols, the size of the patient population, the proximity of patients to
clinical sites and the eligibility criteria for the study. Delays in patient
enrollment will result in increased costs and delays, which could negatively
affect our financial position and results of operations. We cannot assure you
that patients enrolled in our clinical trials will respond to our product
candidates. In fact, setbacks are to be expected in conducting human clinical
trials. In addition, our failure to comply with FDA regulations applicable to
this testing could result in substantial delays, suspension or cancellation of
the testing, or refusal by the FDA to accept the results of the testing. The FDA
may suspend clinical trials at any time if it concludes that the subjects or
patients participating in such trials are being exposed to unacceptable health
risks. We also cannot assure you that human clinical testing will show any
current or future product candidates to be safe or effective or that data
derived from the testing will be suitable for submission to the FDA. Any
suspension or delay of any of the clinical trials could negatively affect our
financial position and results of operations.
MARKET ACCEPTANCE OF OUR PRODUCTS IS UNCERTAIN. Even if our products
are approved for marketing by the FDA and other regulatory authorities, we
cannot guarantee that our products will be commercially successful. If our
products currently in clinical trials, Oncolym(R) and TNT, are approved, they
would represent a departure from more commonly used methods for cancer
treatment. Accordingly, Oncolym(R) and TNT may experience under-utilization by
oncologists and hematologists who are unfamiliar with the application of
Oncolym(R) and TNT 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 will 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 also could be affected by the availability of
third party reimbursement. Failure of Oncolym(R) or TNT to achieve market
acceptance would negatively affect our financial position and results of
operations.
32
WE ARE DEPENDENT ON A LIMITED NUMBER OF PROVIDERS OF RADIOLABELING
SERVICES. We currently procure, and intend in the future to procure, our
radiolabeling services pursuant to negotiated contracts with two domestic
entities 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, or that governmental clearances will be provided in a timely
manner, if at all, or that clinical trials will not be delayed or disrupted.
Prior to commercial distribution, we will be required to identify and contract
with a commercial radiolabeling company for commercial services. We are
presently in discussions with a few companies to provide commercial
radiolabeling services. A commercial radiolabeling service agreement will
require us to make a substantial investment of funds. We currently rely on, and
expect in the future to rely on, our current suppliers for all or a significant
portion of our requirements for the Oncolym(R) and TNT antibody products.
Radiolabeled antibody cannot be stockpiled against future shortages due to the
eight-day half-life of the I131 radioisotope. Accordingly, any change in our
existing or future contractual relationships with, or an interruption in supply
from, any third-party supplier could negatively impact our ability to complete
ongoing clinical trials and to market the Oncolym(R) and TNT antibodies, if
approved, which would negatively affect our financial position and results of
operations.
THERE ARE RISKS ASSOCIATED WITH THE MANUFACTURING AND USE OF
HAZARDOUS AND RADIOACTIVE MATERIALS. The manufacturing and use of Oncolym(R) and
TNT 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 radiolabel antibodies with I131 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 radiolabeling companies or a
clinical trial site could significantly delay completion of the trials.
Violations of safety regulations could occur with these manufacturers, so there
is also a risk of accidental contamination or injury. Accordingly, we could be
held liable for any damages that result from an accident, contamination or
injury caused by the handling and disposal of these materials, as well as for
unexpected remedial costs and penalties that may result from any violation of
applicable regulations, which could negatively affect our financial position and
results of operations. In addition, we may incur substantial costs to comply
with environmental regulations. In the event of any noncompliance or accident,
the supply of Oncolym(R) and TNT for use in clinical trials or commercially
could be interrupted, which could negatively impact our financial position and
results of operations.
WE ARE DEPENDENT ON THIRD PARTIES FOR COMMERCIALIZATION. We intend
to sell our products in the United States and internationally in collaboration
with one or more marketing partners. At the present time, we do not have a sales
force to market Oncolym(R) or TNT, or any other product. If and when the FDA
approves Oncolym(R) or TNT, the marketing of Oncolym(R) and TNT 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 Oncolym(R), TNT or any other product candidates.
Other than an agreement with Schering AG, Germany with respect to the
marketing of Oncolym(R), 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 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 our product candidates.
33
OUR SUCCESS IS DEPENDENT ON OBTAINING AND MAINTAINING 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. The patent position worldwide of biotechnology
companies in relation to proprietary products is highly uncertain and involves
complex legal and factual questions. Moreover, any patents we or our licensors
are granted may be infringed by others or may not be enforceable against others.
We cannot assure you that any of our or our licensors' patents would be held
valid or enforceable by a court of competent jurisdiction. 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 will not become involved in litigation
involving patents or other proprietary rights. Patent and proprietary rights
litigation entails substantial legal and other costs, and we do not know if we
will 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 several years to resolve.
A substantial number of patents have already been issued to other
biotechnology and biopharmaceutical companies. Particularly in the monoclonal
antibody and angiogenesis fields, our competitors may have filed applications
for or have been issued patents and may obtain additional patents and
proprietary rights relating to similar or competitive products or processes. To
date, we are not aware of any consistent policy regarding the breadth of claims
allowed in biopharmaceutical patents. We cannot assure you that there are no
existing patents in the United States or in foreign countries or that no future
patents will be issued that would have a negative impact on our ability to
market any of our existing or future products or product candidates. We expect
that commercializing monoclonal antibody-based products may require licensing
and/or cross-licensing of patents with other companies in this field. We cannot
guarantee that any licenses which might be required for our processes or
products, will be available, if at all, on commercially acceptable terms. If we
are required to acquire rights to valid and enforceable patents but cannot do so
at a reasonable cost, our ability to manufacture our products would be
negatively impacted. Moreover, the likelihood of successfully contesting the
scope or validity of such patents is uncertain and the costs associated
therewith may be significant.
We also rely on trade secrets and proprietary know-how, which we
attempt to protect, in part, by confidentiality agreements with our employees
and consultants. We cannot be certain that these agreements will not be
breached, that we will have adequate remedies for any breach, or that our trade
secrets will not otherwise become known or be independently developed by our
competitors.
34
WE ARE EXPOSED TO PRODUCT LIABILITY CLAIMS. The manufacture and sale
of human therapeutic products involve an inherent risk of product liability
claims. We maintain only limited product liability insurance. However, 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.
THERE ARE RISKS ASSOCIATED WITH HEALTH CARE REFORM AND THIRD-PARTY
REIMBURSEMENT. Political, economic and regulatory influences are subjecting the
health care industry in the United States to fundamental change. 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, the creation of large insurance purchasing groups, price controls on
pharmaceuticals and other fundamental changes to the health care delivery
system. Any such changes could negatively impact our ultimate profitability.
Legislative debate is expected to continue in the future, and market forces are
expected to drive reductions of health care costs. We cannot predict what impact
the adoption of any federal or state health care reform measures or future
private sector reforms may have on our business.
Our ability to successfully commercialize our product candidates
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 ("HMOs"). The Health
Care Financing Administration ("HCFA"), the agency responsible for administering
the Medicare program, sets requirements for coverage and reimbursement under the
program, pursuant to the Medicare law. In addition, each state Medicaid program
has individual requirements that affect coverage and reimbursement decisions
under state Medicaid programs for certain health care providers and recipients.
Private insurance companies and state Medicaid programs are influenced, however,
by the HCFA requirements.
There can be no assurance that any of our product candidates, once
available, will be included within the then current Medicare coverage
determination. In the absence of national Medicare coverage determination, local
contractors that administer the Medicare program, within certain guidelines, can
make their own coverage decisions. Favorable coverage determinations are made in
those situations where a procedure falls within allowable Medicare benefits and
a review concludes that the service is safe, effective and not experimental.
Under HCFA coverage requirements, FDA approval for marketing will not
necessarily lead to a favorable coverage decision. A determination will still
need to be made as to whether the product is reasonable and necessary for the
purpose used. In addition, HCFA has proposed adopting regulations that would add
cost-effectiveness as a criterion in determining Medicare coverage. Changes in
HCFA's coverage policy, including adoption of a cost-effective criterion, could
negatively impact our financial position and results of operations.
35
Third-party payers are increasingly challenging the prices charged
for medical products and services. Also, the trend toward managed health care in
the United States and the concurrent growth of organizations such as HMOs, which
could control or significantly influence the purchase of health care services
and products, as well as legislative proposals to reform health care or reduce
government insurance programs, may all result in lower prices for our product
candidates than we currently expect. The cost containment measures that health
care payers and providers are instituting and the effect of any health care
reform could negatively affect our ability to operate profitably.
WE ARE DEPENDENT ON 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, Dr. John
Bonfiglio, our Vice President of Business Development, and Dr. Jamie Oliver, our
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. We do not
know if we will be successful in attracting or retaining skilled personnel.
Further, the loss of certain key employees or our inability to attract and
retain other qualified employees could negatively affect our financial position
and results of operation.
YEAR 2000 ISSUE RISKS MAY RESULT IN A MATERIAL ADVERSE EFFECT ON OUR
BUSINESS. 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. Virtually every computer operation will be affected in
some way by the rollover of the two digit year value to "00". The issue is
whether computer systems will properly recognize date-sensitive information when
the year changes to 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 major hardware and software platforms in use
and are continually modifying and upgrading our software and information
technology and other systems. We have modified our current financial software to
be year 2000 compliant and expect all of our internal computer systems to be
year 2000 compliant by April 30, 1999 through the use of internal and external
resources. Although we do not presently believe that, with upgrades of existing
software and/or conversion to new software, the year 2000 problem will pose
significant operational problems for our internal computer systems or have a
negative affect on our financial position or results of operations, we cannot
assure you that any year 2000 compliance problems of our suppliers will not
negatively affect our financial position or results of operation. 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 we or any third parties upon
which we rely are unable to address the year 2000 issue in a timely manner, it
could have an adverse impact on our financial position and results of
operations. In order to assure that this does not occur, we are in the process
of developing a contingency plan intend to devote all resources required to
attempt to resolve any significant year 2000 issues in a timely manner.
THERE ARE RISKS ASSOCIATED WITH EARTHQUAKES. 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 affecting our
facilities, our operations, financial position and results of operations will be
negatively affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
36
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
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ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
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The following is a summary of transactions by the Company during the quarterly
period commencing on November 1, 1998 and ending on January 31, 1999 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 or about November 25, 1998, in consideration of the cancellation of certain
indebtedness of the Company of approximately $70,000, the Company issued to
Bente K. Hansen and DHR International, Inc. an aggregate of 72,258 shares of the
Company's Common Stock.
On or about December 9, 1998, in connection with the transactions contemplated
by the Company's Regulation D Common Stock Equity Line Subscription Agreement
(the "Equity Line Agreement"), for no additional monetary consideration, the
Company issued 76,844 shares of the Company's Common Stock to The Tail Wind
Fund, Ltd. and 19,211 shares of the Company's Common Stock to Resonance Limited.
In addition, on or about December 24, 1998, in connection with the issuance of
shares to The Tail Wind Fund, Ltd. and Resonance Limited, the Company issued to
Swartz Investments LLC 60,515 shares of the Company's Common Stock and warrants
to purchase up to 5,091 shares of Common Stock at an exercise price of $1.375
per share, which warrants are immediately exercisable and expire on December 31,
2004.
On various dates during the quarter ended January 31, 1999, the Company issued
to six unaffiliated investors an aggregate of 454,747 shares of the Company's
Common Stock upon conversion of an aggregate of 233 outstanding shares of the
Company's 5% Adjustable Convertible Class C Preferred Stock (the "Class C
Stock") and upon the exercise of outstanding warrants for total consideration of
$41,129. Upon conversion of the 233 shares of Class C Stock, the Company issued
additional warrants to such investors to purchase up to an aggregate of 97,997
shares of the Company's Common Stock at an exercise price of $0.6554 per share,
which warrants are immediately exercisable and expire on April 25, 2002.
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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
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ITEM 5. OTHER INFORMATION. None.
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37
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
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(a) Exhibits:
Exhibit Number Description
-------------- -----------
10.47 Real Estate Purchase Agreement By and Between
Techniclone Corporation and 14282 Franklin
Avenue Associates, LLC dated December 24,
1998.
10.48 Lease and Agreement of Lease Between TNCA,
LLC, as Landlord, and Techniclone
Corporation, as Tenant dated as of December
24, 1998.
10.49 Promissory Note dated as of December 24, 1998
between Techniclone Corporation (Payee) and
TNCA Holding, LLC (Maker) for $1,925,000.
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).
27 Financial Data Schedule.
(b) Reports on Form 8-K: Current Report on Form 8-K as filed with
the Commission on January 7, 1999 reporting the sale and
subsequent leaseback of its two corporate facilities.
38
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/ Steven C. Burke
------------------------------------
Chief Financial Officer
(signed both as an officer duly
authorized to sign on behalf of
the Registrant and principal
financial officer and chief
accounting officer)
39