SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED
JULY 31, 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.)
78,355,183 shares of Common Stock
as of August 31, 1999
TECHNICLONE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 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 July 31, 1999 and April 30, 1999 ............ 4
Consolidated Statements of Operations for the three months ended July 31,
1999 and 1998............................................................... 6
Consolidated Statement of Stockholders' Equity for the three months ended
July 31, 1999............................................................... 7
Consolidated Statements of Cash Flows for the three months ended July 31,
1999 and 1998............................................................... 8
Notes to Consolidated Financial Statements ................................. 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ...................................................... 15
Company Overview ........................................................... 15
Other Risk Factors of Our Company .......................................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk ................. 28
PART II OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 28
Item 2. Changes in Securities and Use of Proceeds .................................. 28
Item 3. Defaults Upon Senior Securities ............................................ 30
Item 4. Submission of Matters to a Vote of Security Holders ........................ 30
Item 5. Other Information .......................................................... 30
Item 6. Exhibits and Reports on Form 8-K............................................ 30
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. FINANCIAL STATEMENTS
- ------- --------------------
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1999 AND APRIL 30, 1999
- ---------------------------------------------------------------------------------------------------------------
JULY 31, ARRIL 30,
1999 1999
------------- -------------
UNAUDITED
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,632,000 $ 2,385,000
Other receivables, net of allowance for doubtful accounts of
$221,000 (July) and $201,000 (April) 303,000 279,000
Inventories 48,000 57,000
Prepaid expenses and other current assets 260,000 280,000
Covenant not-to-compete with former officer 155,000 213,000
------------- -------------
Total current assets 2,398,000 3,214,000
PROPERTY:
Laboratory equipment 2,170,000 2,098,000
Leasehold improvements 73,000 71,000
Furniture, fixtures and computer equipment 840,000 838,000
------------- -------------
3,083,000 3,007,000
Less accumulated depreciation and amortization (1,193,000) (1,067,000)
------------- -------------
Property, net 1,890,000 1,940,000
OTHER ASSETS:
Note receivable 1,851,000 1,863,000
Other, net 348,000 353,000
------------- -------------
Total other assets 2,199,000 2,216,000
------------- -------------
TOTAL ASSETS $ 6,487,000 $ 7,370,000
============= =============
4
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF JULY 31, 1999 AND APRIL 30, 1999 (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------
JULY 31, APRIL 30,
1999 1999
------------- -------------
UNAUDITED
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 969,000 $ 898,000
Deferred license revenue 3,000,000 3,000,000
Accrued clinical trial site fees 628,000 691,000
Notes payable 103,000 106,000
Accrued legal and accounting fees 177,000 314,000
Accrued royalties and license fees 301,000 310,000
Due to former officers under severance agreements 397,000 329,000
Other current liabilities 210,000 357,000
------------- -------------
Total current liabilities 5,785,000 6,005,000
NOTES PAYABLE 3,472,000 3,498,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock- $.001 par value; authorized 5,000,000 shares:
Class C convertible preferred stock, shares outstanding -
91 shares (July 31, 1999); 121 shares (April 30, 1999);
liquidation preference of $91,000 at July 31, 1999 - -
Common stock-$.001 par value; authorized 120,000,000 shares;
outstanding - 76,369,778 shares (July 31, 1999); 73,372,205
shares (April 30, 1999) 76,000 73,000
Additional paid-in capital 93,129,000 90,779,000
Accumulated deficit (95,668,000) (92,678,000)
------------- -------------
(2,463,000) (1,826,000)
Less notes receivable from sale of common stock (307,000) (307,000)
------------- -------------
Total stockholders' deficit (2,770,000) (2,133,000)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 6,487,000 $ 7,370,000
============= =============
See accompanying notes to consolidated financial statements
5
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 1999 AND 1998 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31,
1999 1998
------------- -------------
COSTS AND EXPENSES:
Research and development $ 1,984,000 $ 1,851,000
General and administrative 980,000 1,292,000
Interest 88,000 240,000
------------- -------------
Total costs and expenses 3,052,000 3,383,000
Interest and other income 63,000 77,000
------------- -------------
NET LOSS $ (2,989,000) $ (3,306,000)
============= =============
Net loss before preferred stock accretion
and dividends $ (2,989,000) $ (3,306,000)
Preferred stock accretion and dividends:
Imputed dividends on
Class C Preferred Stock (1,000) (11,000)
Accretion of Class C Preferred
Stock discount - (531,000)
------------- -------------
Net loss applicable to common stock $ (2,990,000) $ (3,848,000)
============= =============
Weighted average shares outstanding 75,002,199 59,746,636
============= =============
BASIC AND DILUTED LOSS PER SHARE $ (0.04) $ (0.06)
============= =============
See accompanying notes to consolidated financial statements
6
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED JULY 31, 1999 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
------------- ------------- ------------- -------------
BALANCES - April 30, 1999 121 $ - 73,372,205 $ 73,000
Accretion of Class C preferred stock
dividends
Common stock issued upon conversion of
Class C preferred stock (30) 50,873
Common stock issued upon exercise of
Class C warrants and Equity Line
warrants 54,373
Common stock issued for cash upon
exercise of stock options 203,334
Common stock issued under the
Equity Line for cash 2,688,993 3,000
Stock-based compensation
Net loss
------------- ------------- ------------- -------------
BALANCES - July 31, 1999 91 $ - 76,369,778 $ 76,000
============= ============= ============= =============
(CONTINUED)
NOTES
ADDITIONAL RECEIVABLE NET
PAID-IN ACCUMULATED FROM SALE OF STOCKHOLDERS'
CAPITAL DEFICIT COMMON STOCK DEFICIT
------------- ------------- ------------- -------------
BALANCES - April 30, 1999 $ 90,779,000 $(92,678,000) $ (307,000) $ (2,133,000)
Accretion of Class C preferred stock
dividends (1,000) (1,000)
Common stock issued upon conversion of
Class C preferred stock -
Common stock issued upon exercise of
Class C warrants and Equity Line
warrants 31,000 31,000
Common stock issued for cash upon
exercise of stock options 122,000 122,000
Common stock issued under the
Equity Line for cash 2,040,000 2,043,000
Stock-based compensation 157,000 157,000
Net loss (2,989,000) (2,989,000)
------------- ------------- ------------- -------------
BALANCES - July 31, 1999 $ 93,129,000 $(95,668,000) $ (307,000) $ (2,770,000)
============= ============= ============= =============
See accompanying notes to consolidated financial statements
7
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 1999 AND 1998 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31,
1999 1998
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,989,000) $ (3,306,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 126,000 244,000
Stock-based compensation and common stock issued for interest,
services and under severance agreements 157,000 334,000
Severance expense 126,000 234,000
Changes in operating assets and liabilities:
Other receivables (23,000) 6,000
Inventories, net 9,000 (19,000)
Prepaid expenses and other current assets 20,000 4,000
Other assets (6,000)
Accounts payable and accrued legal and accounting fees (66,000) 212,000
Accrued clinical trial site fees (63,000)
Accrued royalties and license termination fees (9,000) (12,000)
Other accrued expenses and current liabilities (147,000) 350,000
------------- -------------
Net cash used in operating activities (2,859,000) (1,959,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (76,000) (166,000)
Decrease in other assets 16,000 5,000
------------- -------------
Net cash used in investing activities (60,000) (161,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,196,000 5,244,000
Proceeds from issuance of Class C Preferred Stock - 530,000
Principal payments on notes payable (29,000) (529,000)
Payment of Class C preferred stock dividends (1,000) (4,000)
------------- -------------
Net cash provided by financing activities 2,166,000 5,241,000
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8
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 1999 AND 1998 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31,
1999 1998
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (753,000) $ 3,121,000
CASH AND CASH EQUIVALENTS,
beginning of period 2,385,000 1,736,000
------------- -------------
CASH AND CASH EQUIVALENTS,
end of period $ 1,632,000 $ 4,857,000
============= =============
SUPPLEMENTAL INFORMATION:
Interest paid $ 88,000 $ 51,000
============= =============
See accompanying notes to consolidated financial statements
9
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 1999 (UNAUDITED)
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1. SUMMARY OF 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 1999 and during
the first three months of fiscal 2000 and has an accumulated deficit of
$95,668,000 at July 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 assurances that the Company will be successful in
raising such funds on terms acceptable to it, or at all, or that
sufficient additional capital will be raised to complete the research,
development, and clinical testing of the Company's product candidates.
The Company's 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 July 31, 1999, the Company had cash and cash equivalents
of $1,632,000. During August 1999, the Company exercised its Put option
and received gross proceeds of $1,250,000 in exchange for 1,718,750
shares of common stock, including commission shares, pursuant to a
Regulation D Common Stock Equity Line Subscription Agreement the (the
"Equity Line Agreement") (Note 2). The Company believes it has
sufficient cash on hand at August 31, 1999 and available pursuant to
the Equity Line Agreement (assuming only one future quarterly draw of
$2,250,000) to meet its obligations on a timely basis through November
1999. Management believes that additional capital must be raised to
support the Company's continued operations and other short-term cash
needs.
The Company's ability to access funds under the Equity Line
Agreement is subject to the satisfaction of certain conditions and the
failure to satisfy these conditions may limit or preclude the Company's
ability to access such funds, which could adversely affect the
Company's business, immediate liquidity, financial position and results
of operations unless additional financing sources are available (Note
2).
10
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 1999 (UNAUDITED) (CONTINUED)
-------------------------------------------------------------------------
The accompanying unaudited consolidated financial statements
contain all adjustments (consisting of only normal recurring
adjustments) which, in the opinion of management, are necessary to
present fairly the consolidated financial position of the Company at
July 31, 1999, and the consolidated results of its operations and its
consolidated cash flows for the three month periods ended July 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, 1999, filed with the Securities
and Exchange Commission on July 28, 1999.
Results of operations for the interim periods covered by this
Report may not necessarily be indicative of results of operations for
the full fiscal year.
INVENTORIES. Inventories consist of raw materials and
supplies and are stated at the lower of first-in, first-out cost or
market.
RECLASSIFICATION. Certain reclassifications were made to the
prior period balances to conform them to the current period
presentation.
NET LOSS PER SHARE. Net loss per share is calculated by
adding the net loss for the three month period to the Preferred Stock
dividends and Preferred Stock issuance discount accretion on the Class
C Preferred Stock during the three month period divided by the weighted
average number of shares of common stock outstanding during the three
month period. Shares issuable upon the exercise of common stock
warrants and options have been excluded from the per share calculation
for the three month period ended July 31, 1999 and 1998 because their
effect is antidilutive. Accretion of the Class C Preferred Stock
dividends and issue discount amounted to $1,000 and $542,000 for the
quarter ended July 31, 1999 and 1998, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS. Effective May 1, 1998, the
Company adopted SFAS No. 130, Reporting Comprehensive Income, which
establishes standards for reporting and displaying comprehensive income
and its components in the consolidated financial statements. For the
three months ended July 31, 1999 and 1998, the Company did not have any
components of comprehensive income as defined in SFAS No. 130.
The Company adopted SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information" on May 1, 1998. SFAS No. 131
established standards of reporting by publicly held businesses and
disclosures of information about operating segments in annual financial
11
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 1999 (UNAUDITED) (CONTINUED)
-------------------------------------------------------------------------
statements, and to a lesser extent, in interim financial reports issued
to stockholders. The adoption of SFAS No. 131 had no impact on the
Company's consolidated financial statements as the Company operates in
one industry segment engaged in the research, development and
commercialization of targeted cancer therapeutics.
During June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" which will be effective for the Company beginning May 1,
2001. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
imbedded in other contracts, and for hedging activities. It requires an
entity to recognize all derivatives as either assets or liabilities in
the statements of financial position and measure those instruments at
fair value. The Company has not determined the impact on the
consolidated financial statements, if any, upon adopting SFAS No. 133.
2. STOCKHOLDERS' EQUITY
During June 1998, the Company secured access to $20,000,000
under a Common Stock Equity Line ("Equity Line") with two institutional
investors, expiring in June 2001. Under the terms of the Equity Line,
the Company may, in its sole discretion, and subject to certain
restrictions, periodically sell ("Put") shares of the Company's common
stock for up to $20,000,000 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 the share resale limitations
set forth in Rule 144(e). In addition, if the Company's closing bid
price falls below $1.00 on any day during the ten trading days prior to
the Put, the Company's ability to access funds under the Equity Line in
the Put is limited to 15% of what would otherwise be available. If the
closing bid price of the Company's common stock falls below $0.50 or if
the Company is delisted from The Nasdaq SmallCap Market, the Company
would have no access to funds under the Equity Line.
The Equity Line provided for immediate funding of $3,500,000
in exchange for 2,749,090 shares of common stock, including commission
shares. One-half of this amount, or $1,750,000, is subject to
adjustment at three months after the effective date of the registration
statement registering these shares with the second half subject to
adjustment six months after such effective date of the registration of
these shares. At each adjustment date, if the market price at the three
or six month period ("Adjustment Price") is less than the initial price
paid for the common stock, the Company will be required to issue
additional shares of its common stock equal to the difference between
the amount of shares actually issued and the amount of shares which
would have been issued if the purchase price had been the Adjustment
Price. On July 15, 1999, the Company issued 179,485 shares of common
stock covering the final six-month adjustment date.
12
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 1999 (UNAUDITED) (CONTINUED)
-------------------------------------------------------------------------
Future Puts under the Equity Line are priced at a discount
equal to the greater of $0.20 or 17.5% off the lowest closing per share
bid price during the ten trading days immediately preceding the date on
which such shares are sold to the institutional investors.
At the time of each Put, the investors will be issued
warrants, exercisable only on a cashless basis and expiring on December
31, 2004, to purchase up to 10% of the amount of common stock issued to
the investor at the same price as the purchase of the shares sold in
the Put. During the quarter ended July 31, 1999, the Company issued
250,948 warrants under the Equity Line at an exercise price ranging
from $0.61 to $1.24. Also during the quarter ended July 31, 1999, the
Company issued 6,411 shares of common stock upon the cashless exercise
of 20,172 Equity Line warrants.
In addition, during the quarter ended July 31, 1999, the
Company received gross proceeds of $2,250,000 in exchange for 2,509,508
shares of common stock, including commission shares, under the Equity
Line 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. 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. On June 24, 1999, the first
anniversary date of the agreement, the Company issued Commitment
Warrants to purchase up to 17,721 shares of the Company's common stock
at $1.50 per share, exercisable on a cashless basis only.
13
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 1999 (UNAUDITED) (CONTINUED)
-------------------------------------------------------------------------
3. CONTINGENCY
On March 18, 1999, the Company was served with notice of a
lawsuit filed in Orange County Superior Court for the State of
California by a former employee alleging a single cause of action for
wrongful termination. The Company believes this lawsuit is barred by a
severance agreement and release signed by the former employee following
his termination and the Company is vigorously defending the action. The
Company's motion for summary judgement is currently pending argument.
Management does not believe that the outcome of this action will have a
material adverse effect upon the financial position or results of
operations of the Company.
4. SUBSEQUENT EVENTS
On August 4, 1999, the Company entered into a revised license
agreement with Northwestern University for the licensing of Oncolym(R).
Under the revised terms, the Company's royalty rate payable to
Northwestern University was reduced from 6% of net sales to 3% of net
sales generated in the United States including Guam and Puerto Rico.
The royalty rate was further reduced to 1.5% of net sales if there is a
generic form of the licensed product sold in such territory. In
addition, in all other territories, the royalty rate was reduced to
1.5% of net sales and further reduced to 1% of net sales if there is a
generic form of the licensed product sold in such territory. The term
of the revised license agreement had been reduced from 20 years from
the first commercial sale to a fixed date ending in February 2009.
14
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 1999
and during the first three months of fiscal 2000 and we have an accumulated
deficit at July 31, 1999 of $95,668,000. 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 our products. We plan to obtain required financing through one
or more methods including, obtaining additional equity or debt financing and
negotiating additional licensing or collaboration agreements with another
company. 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) to meet its
obligations on a timely basis through November 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. Techniclone Corporation is a biopharmaceutical
company engaged in the research, development and commercialization of
targeted cancer therapeutics. We develop product candidates based primarily
on our proprietary collateral (indirect) tumor targeting technologies for
the treatment of solid tumors and a direct tumor targeting agent for the
treatment of refractory malignant lymphoma. We have four potential product
candidates: two products are in Phase II clinical trials and two products
are in preclinical studies.
Collateral (indirect) tumor targeting is the therapeutic strategy
of targeting peripheral structures and cell types, other than the viable
cancer cells directly, as a means to treat solid tumors. We are currently
developing three collateral (indirect) targeting agents for the treatment of
solid tumors: Tumor Necrosis Therapy, which is potentially capable of
carrying a variety of therapeutic agents to the interior of solid tumors and
irradiating the tumor from the inside out; Vasopermeation Enhancement
Agents, which potentially increases the permeability of the tumor site and
consequently can increase the concentration of killing agents at the core of
the tumor; and Vascular Targeting Agents, which potentially creates a
blockage within the capillaries and blood vessels that supply solid tumors
with nutrients, thus potentially destroying the tumor.
15
A Phase II clinical trial of our Tumor Necrosis Therapy agent
(called Cotara(TM)) for the treatment of malignant glioma (brain cancer) is
currently being conducted at The Medical University of South Carolina,
University of California at Los Angeles, Temple University, University of
Utah-Salt Lake City and Carolina Neurosurgery & Spine Association, with
three additional clinical trial sites at various stages of contract
negotiation. In addition, our Tumor Necrosis Therapy agent is being used in
an equivalent Phase I clinical trial for the treatment of pancreatic,
prostrate and liver cancers at a clinical trial site in Mexico City. We are
collaborating with outside scientists for preclinical studies on
Vasopermeation Enhancement Agents and on Vascular Targeting Agents.
On March 8, 1999, we entered into a license agreement with Schering
A.G., Germany, a major multinational pharmaceutical company, with respect to
the development, manufacture and marketing of our direct tumor targeting
agent candidate, Oncolym(R). At the time we entered into the license
agreement with Schering A.G., Germany, Oncolym(R) was in a Phase II/III
clinical trial for the treatment of non-Hodgkin's B-cell Lymphoma. Under the
agreement, Schering A.G., Germany controls the clinical development program
and funds 80% of the clinical trial costs. Recently, Schering A.G., Germany
has advised us that they believe the potential success of the Oncolym(R)
product may be enhanced via a revision of the current Phase II protocol. In
this context, Schering A.G., Germany is analyzing the results of the current
Phase II clinical trial and, based on that analysis, may revise the current
protocol. As such, the current clinical trial sites will remain open for
treating existing patients, however, no new enrollment of patients will be
made under the current trial. If a revised protocol is developed by Schering
A.G., Germany, it will be submitted to the United States Food and Drug
Administration ("FDA") for additional clinical studies. As part of this
Oncolym(R) agreement, Schering A.G., Germany and Techniclone are proceeding
with negotiations concerning the terms of a possible licensing transaction
on the Vascular Targeting Agents technology. We cannot be certain whether we
will be successful in entering into a licensing transaction on the Vascular
Targeting Agents technology on terms satisfactory to us, if at all.
RESULTS OF OPERATIONS. The Company's net loss of $2,989,000, before
preferred stock discount accretion and dividends, for the quarter ended July
31, 1999 represents a decrease in net loss of $317,000 in comparison to the
net loss of $3,306,000 for the prior year quarter ended July 31, 1998. This
decrease in the net loss for the quarter ended July 31, 1999 is due to a
decrease in total costs and expenses of $331,000 offset by a decrease in
interest and other income of $14,000.
The Company's total costs and expenses decreased $331,000 during
the three months ended July 31, 1999 compared to the three months ended July
31, 1998 due to a decrease in general and administrative expenses of
$312,000 and a decrease in interest expense of $152,000 offset by an
increase in research and development expenses of $133,000, in comparison to
the three months ended July 31, 1998.
The increase in research and development expenses of $133,000
during the three months ended July 31, 1999 compared to the same period in
the prior year is primarily due to increased research fees from MDS Nordion
associated with the development of a commercial radiolabeling facility. In
addition, during the quarter ended July 31, 1999, the Company incurred
increased building lease expense related to the sale and subsequent
leaseback of the Company's facilities in December 1998 partially offset by a
corresponding decrease in depreciation expense on the related building. Also
during the current quarter, the Company incurred increased costs associated
with the equivalent Phase I study in Mexico City for the treatment of
pancreatic, liver, and prostate cancers using Cotara(TM). This was offset by
a decrease in the Oncolym(R) clinical trial fees as Schering A.G., Germany
16
is paying for 80% of the clinical trial expenses as defined in the
agreement. In addition, Schering A.G., Germany is analyzing the results of
the current Phase II trial and during such time, no new enrollment of
patients is being made under the current trial, further lowering the
clinical trial costs for the current quarter.
The decrease in general and administrative expenses of $312,000
during the quarter ended July 31, 1999 compared to the quarter ended July
31, 1998 resulted primarily from a decrease in severance expenses associated
with the Company's former Chief Executive Officer combined with a decrease
in consulting fees.
The decrease in interest expense of $152,000 for the three months
ended July 31, 1999 compared to the same period in the prior year is
primarily due to a decrease in interest charges related to construction
costs incurred in the prior year quarter related to manufacturing facility
enhancements combined with a decrease in mortgage interest in the current
quarter as the mortgages were paid in full as part of sale of the facilities
in December 1998. Such decrease was partially offset by an increase in
interest charges on a $3,300,000 note payable to Biotechnology Development
Ltd. related to the buyback of the Oncolym(R) rights in March 1999.
The decrease in interest and other income of $14,000 during the
three months ended July 31, 1999 compared to the same period in the prior
year is primarily due to a decrease in rental income as one of the Company's
sub-tenants had completed their lease term in March 1999. 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 TNT and
Oncolym(R) antibodies.
LIQUIDITY AND CAPITAL RESOURCES. At July 31, 1999, we had
$1,632,000 in cash and cash equivalents and a working capital deficit of
$3,387,000. We experienced losses in fiscal 1999 and during the first three
months of fiscal 2000 and had an accumulated deficit of approximately
$95,668,000 at July 31, 1999. During August 1999, the Company exercised its
Put option and received gross proceeds of $1,250,000 in exchange for
1,718,750 shares of common stock, including commission shares, pursuant to a
Regulation D Common Stock Equity Line Subscription Agreement the (the
"Equity Line Agreement"). The Company believes it has sufficient cash on
hand at August 31, 1999 and available pursuant to the Equity Line Agreement
(assuming only one future quarterly draw of $2,250,000) to meet its
obligations on a timely basis through November 1999. Management believes
that additional capital must be raised to support the Company's continued
operations and other short-term cash needs.
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
preclinical development, clinical trials, 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
17
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 clinical trials of Cotara(TM) and the
equivalent Phase I clinical trials of Cotara(TM) in Mexico and the
development costs associated with Vasopermeation Enhancement Agents ("VEAs")
and Vascular Targeting Agents ("VTAs"). 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.
COMMITMENTS. At July 31, 1999, we had no material capital
commitments, although we have significant obligations, most of which are
contingent, for payments to licensors for its technologies and in connection
with the acquisition of the Oncolym(R) rights previously owned by Alpha
Therapeutic Corporation ("Alpha").
OTHER RISK FACTORS OF OUR COMPANY
IF WE CANNOT OBTAIN ADDITIONAL FUNDING, OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION EFFORTS MAY BE REDUCED OR DISCONTINUED.
At July 31, 1999, we had $1,632,000 in cash and cash equivalents.
We have expended, and will continue to expend, substantial funds on the
development of our product candidates and for clinical trials. As a result,
we have had negative cash flows from operations since inception and expect
the negative cash flows from operations to continue for the foreseeable
future. We currently have commitments to expend additional funds for
antibody and radioactive isotope combination services, clinical trials,
product development contracts, license contracts, severance arrangements,
employment agreements, consulting agreements, and for the repurchase of
marketing rights to certain product technology. We expect operating
expenditures related to clinical trials to increase in the future as
clinical trial activity increases and expansion for clinical trial
production continues. We also expect that the monthly negative cash flows
will continue. We will require additional funding to sustain our research
and development efforts, provide for future clinical trials, expand our
manufacturing and product commercialization capabilities, and continue our
operations until we are able to generate sufficient revenue from the sale
and/or licensing of our products.
During June 1998, we secured access to $20,000,000 under a Common
Stock Equity Line (Equity Line) with two institutional investors. The Equity
Line expires in June 2001. Under the terms of the Equity Line, we may, in
our sole discretion, and subject to certain restrictions, periodically sell
("Put") shares of our common stock for up to $20,000,000 upon the effective
registration of the Put shares. Up to $2,250,000 of Puts, unless an increase
is otherwise agreed to, can be made every quarter, subject to the
satisfaction of certain conditions, including share issuance volume
limitations identical to the share resale limitations set forth in Rule
144(e). In addition, if the closing bid price of our common stock falls
below $1.00 during the ten trading days prior to the call date, then the
amount of Puts will be limited to 15% of what would otherwise be available.
If the closing bid price of the Company's common stock falls below $0.50 or
if the Company is delisted from The Nasdaq SmallCap Market, the Company
would have no access to funds under the Equity Line. As of August 31, 1999,
we had $10,750,000 available for future Puts under the Equity Line.
18
We cannot be certain whether we can obtain required additional
funding on terms satisfactory to us, if at all. If we do raise additional
funds through the issuance of equity or convertible debt securities, these
new securities may have rights, preferences or privileges senior to the
presently outstanding securities of the Company. If we are unable to raise
additional funds when necessary, we may have to reduce or discontinue
development, commercialization or clinical testing of some or all of our
product candidates or enter into financing arrangements on terms which we
would not otherwise accept. Our future success is dependent upon raising
additional money to provide for the necessary operations of the Company. If
we are unable to obtain additional financing, there would be a material
adverse effect on the Company's business, financial position and results of
operations.
Without obtaining additional financing or completing a licensing
transaction, we believe that we have sufficient cash on hand as of August
31, 1999 and available pursuant to the Equity Line mentioned above, assuming
we make one additional quarterly draw of $2,250,000, to meet our obligations
on a timely basis through November, 1999.
WE HAVE HAD SIGNIFICANT LOSSES AND ANTICIPATE FUTURE LOSSES.
We have experienced significant losses since inception. As of July
31, 1999, our accumulated deficit was approximately $95,668,000. We expect
to incur significant additional operating losses in the future and expect
cumulative losses to increase substantially due to expanded research and
development efforts, preclinical studies and clinical trials, and expansion
of manufacturing and product commercialization capabilities. We also expect
losses to fluctuate substantially from quarter to quarter. All of our
products are currently in development, preclinical studies or clinical
trials, and no revenues have been generated from commercial product sales.
To achieve and sustain profitable operations, we must successfully develop
and obtain regulatory approval for our products, either alone or with
others, and must also manufacture, introduce, market and sell our products.
The time frame necessary to achieve market success for our products is long
and uncertain. We do not expect to generate significant product revenues for
at least the next year. There can be no guarantee that we will ever generate
product revenues sufficient to become profitable or to sustain
profitability.
PROBLEMS IN PRODUCT DEVELOPMENT MAY CAUSE OUR CASH DEPLETION RATE
TO INCREASE.
Our ability to obtain financing and to manage expenses and our cash
depletion rate is key to the continued development of product candidates and
the completion of ongoing clinical trials. Our cash depletion rate will vary
substantially from quarter to quarter as we fund non-recurring items
associated with clinical trials, product development, antibody manufacturing
and facility expansion and scale-up, patent legal fees and various
consulting fees. We have limited experience with clinical trials and if we
encounter unexpected difficulties with our operations or clinical trials, we
may have to expend additional funds, which would increase our cash depletion
rate.
19
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY NOT BE SUCCESSFUL.
Since inception, we have been engaged in the development of drugs
and related therapies for the treatment of people with cancer. Our product
candidates, which have not received regulatory approval, are generally in
the early stages of development. If the initial results from any of the
clinical trials are poor, those results will adversely effect our ability to
raise additional capital, which will affect our ability to continue
full-scale research and development for our antibody technologies. In
addition, product candidates resulting from our research and development
efforts, if any, are not expected to be available commercially for at least
the next year. Our products currently in clinical trials represent a
departure from more commonly used methods for cancer treatment. These
products, if approved, may experience under-utilization by doctors who are
unfamiliar with their application in the treatment of cancer. As with any
new drug, doctors may be inclined to continue to treat patients with
conventional therapies, in most cases chemotherapy, rather than new
alternative therapies. We or our marketing partner may be required to
implement an aggressive education and promotion plan with doctors in order
to gain market recognition, understanding and acceptance of our products.
Market acceptance could also be affected by the availability of third-party
reimbursement. Accordingly, we cannot guarantee that our product development
efforts, including clinical trials, or commercialization efforts will be
successful or that any of our products, if approved, can be successfully
marketed.
WE MAY NOT BE ABLE TO EXPAND OUR FACILITIES TO IMPLEMENT COMMERCIAL
PRODUCTION OF OUR PRODUCTS.
In order to conduct clinical trials on a timely basis, obtain
regulatory approval and be commercially successful, we must expand our
manufacturing and product commercialization processes so that our product
candidates, if approved, can be manufactured and produced in commercial
quantities. To date, we have expended significant funds for the expansion of
our antibody manufacturing capabilities for clinical trial requirements for
two of our product candidates and for refinement of the production
processes. We intend to use existing antibody manufacturing capacity to meet
the clinical trial requirements for these two product candidates and to
support the initial commercialization of these product candidates, if
approved. In order to provide additional capacity, we must successfully
negotiate agreements with contract antibody manufacturers to have these
products produced, the cost of which is estimated to be several million
dollars in start-up costs and additional production costs on a "per run
basis". Such contracts would also require an additional investment estimated
at five to nine million dollars over the next two years for antibody
radiolabeling services and related equipment and related production area
enhancements, and for vendor services associated with technology transfer
assistance, expansion and production start-up and for regulatory assistance.
We have limited manufacturing experience, and cannot make any guarantee as
to our ability to expand our manufacturing operations, the suitability of
our present facility for clinical trial production or commercial production,
our ability to make a successful transition to commercial production or our
ability to reach an acceptable agreement with one or more contract
manufacturers to produce any of our other product candidates, if approved,
in clinical or commercial quantities.
OUR TECHNOLOGY AND PRODUCTS MAY PROVE INEFFECTIVE OR BE TOO EXPENSIVE TO
MARKET SUCCESSFULLY.
Our future success is significantly dependent on our ability to
develop and test workable products for which we will seek approval from the
United States Food and Drug Administration to market to certain defined
patient groups. There is a significant risk as to the performance and
commercial success of our technology and products. The products we are
currently developing will require significant additional laboratory and
20
clinical testing and investment over the foreseeable future. Our proposed
products may not prove to be effective in clinical trials or they may cause
harmful side effects during clinical trials. In addition, our product
candidates, if approved, may prove impracticable to manufacture in
commercial quantities at a reasonable cost and/or with acceptable quality.
Any of these factors could negatively affect our financial position and
results of operations.
OUR DEPENDENCY ON A LIMITED NUMBER OF SUPPLIERS MAY NEGATIVELY IMPACT OUR
ABILITY TO COMPLETE CLINICAL TRIALS AND MARKET OUR PRODUCTS.
We currently procure, and intend in the future to procure, our
antibody radioactive isotope combination services ("radiolabeling") under
negotiated contracts with two domestic entities, one Canadian entity and one
European entity. We cannot guarantee that these suppliers will be able to
qualify their facilities or label and supply antibody in a timely manner, if
at all. Prior to commercial distribution of any of our products, if
approved, we will be required to identify and contract with a commercial
company for commercial antibody manufacturing and radioactive isotope
combination services. We are presently in discussions with a few companies
to provide commercial antibody manufacturing and radioactive isotope
combination services. We also currently rely on, and expect in the future to
rely on, our current suppliers for all or a significant portion of the raw
material requirements for our antibody products. Antibody that has been
combined with a radioactive isotope cannot be stockpiled against future
shortages. Accordingly, any change in our existing or future contractual
relationships with, or an interruption in supply from, any such third-party
service provider or antibody supplier could negatively impact our ability to
complete ongoing clinical trials and to market our products, if approved.
TERMINATION OF OUR RELATIONSHIP WITH SCHERING A.G., GERMANY COULD ADVERSELY
AFFECT OUR BUSINESS.
In March 1999, we entered into a license agreement with Schering
A.G., Germany for the worldwide development, marketing and distribution of
our direct tumor targeting agent product candidate, Oncolym(R). Under the
agreement, Schering A.G., Germany has assumed control of the clinical
development program, regulatory approvals in the United States and all
foreign countries and handling sales and marketing of this product
candidate. Schering A.G., Germany may terminate the agreement under a number
of circumstances as defined in the agreement, including thirty days' written
notice given at any time prior to receiving regulatory approval. We are
relying on Schering A.G., Germany to apply its expertise and know-how
through the development, launch and sale of this product candidate. If
Schering A.G., Germany decides to discontinue the development of this
product candidate and terminates our license agreement, we may have to
discontinue development, commercialization and clinical testing of this
product candidate, which could negatively affect our operations and
financial performance. In connection with our agreement with Schering A.G.,
Germany for Oncolym(R), Schering A.G., Germany has also agreed to discuss
the development and commercialization of our Vascular Targeting Agent
technology. If we enter into an agreement with Schering A.G., Germany with
respect to our Vascular Targeting Agent technology, we will also rely on
Schering A.G., Germany to apply its expertise and know-how through the
development, launch and sale of our Vascular Targeting Agent product
candidates. We cannot guarantee that Schering A.G., Germany will devote the
resources necessary to successfully develop and/or market any product
candidate.
21
WE DO NOT HAVE A SALES FORCE TO MARKET OUR PRODUCTS.
At the present time, we do not have a sales force to market any of
our products, if and when they are approved. We intend to sell our products
in the United States and internationally in collaboration with one or more
marketing partners. If and when we receive approval from the United States
Food and Drug Administration for our initial product candidates, the
marketing of these products will be contingent upon our ability to either
license or enter into a marketing agreement with a large company or our
ability to recruit, develop, train and deploy our own sales force. We do not
presently possess the resources or experience necessary to market any of our
product candidates. Other than an agreement with Schering A.G., Germany with
respect to the marketing of our direct tumor targeting agent product
candidate, we presently have no agreements for the licensing or marketing of
our product candidates, and we cannot assure you that we will be able to
enter into any such agreements in a timely manner or on commercially
favorable terms, if at all. Development of an effective sales force requires
significant financial resources, time and expertise. We cannot assure you
that we will be able to obtain the financing necessary to establish such a
sales force in a timely or cost effective manner, if at all, or that such a
sales force will be capable of generating demand for our product candidates,
if and when they are approved.
WE MAINTAIN ONLY LIMITED PRODUCT LIABILITY INSURANCE AND MAY BE EXPOSED TO
CLAIMS IF OUR INSURANCE COVERAGE IS INSUFFICIENT.
The manufacture and sale of human therapeutic products involves an
inherent risk of product liability claims. We maintain only limited product
liability insurance. We cannot assure you that we will be able to maintain
existing insurance or obtain additional product liability insurance on
acceptable terms or with adequate coverage against potential liabilities.
Product liability insurance is expensive, difficult to obtain and may not be
available in the future on acceptable terms, if at all. Our inability to
obtain sufficient insurance coverage on reasonable terms or to otherwise
protect against potential product liability claims in excess of our
insurance coverage, if any, or a product recall could negatively impact our
financial position and results of operations.
EARTHQUAKES MAY DAMAGE OUR FACILITIES.
Our corporate and research facilities, where the majority of our
research and development activities are conducted, are located near major
earthquake faults, which have experienced earthquakes in the past. Although
we carry limited earthquake insurance, in the event of a major earthquake or
other disaster in or near the greater Southern California area, our
facilities may sustain significant damage and our operations could be
negatively affected.
THE LIQUIDITY OF OUR COMMON STOCK WILL BE ADVERSELY AFFECTED IF OUR COMMON
STOCK IS DELISTED FROM THE NASDAQ SMALLCAP MARKET.
The Common Stock is presently traded on The Nasdaq SmallCap Market.
To maintain inclusion on The Nasdaq SmallCap Market, we must continue to
have either net tangible assets of at least $2,000,000, market
capitalization of at least $35,000,000, or net income (in either our latest
fiscal year or in two of our last three fiscal years) of at least $500,000.
In addition, we must meet other requirements, including, but not limited to,
having a public float of at least 500,000 shares and $1,000,000, a minimum
closing bid price of $1.00 per share of Common Stock (without falling below
this minimum bid price for a period of 30 consecutive trading days), at
least two market makers and at least 300 stockholders, each holding at least
22
100 shares of Common Stock. At various times, we have failed to maintain a
$1.00 minimum closing bid price for extended periods of time and our stock
may periodically fall below the minimum $1.00 closing bid price for extended
periods of time in the future. If we fail to meet the minimum closing bid
price of $1.00 for a period of 30 consecutive trading days, we will be
notified by The Nasdaq Stock Market and will then have a period of 90
calendar days from such notification to achieve compliance with the
applicable standard by meeting the minimum closing bid price requirement for
at least 10 consecutive trading days during such 90 day period. We cannot
guarantee that we will be able to maintain these requirements in the future.
If we fail to meet any of The Nasdaq SmallCap Market listing requirements,
the market value of the Common Stock could fall and holders of Common Stock
would likely find it more difficult to dispose of the Common Stock. In
addition, if the minimum closing bid price of the Common Stock is not at
least $1.00 per share for 10 consecutive trading days before we make a call
for proceeds under our Regulation D Common Stock Equity Line Subscription
Agreement with two institutional investors or if the Common Stock ceases to
be included on The Nasdaq SmallCap Market, we would have limited or no
access to funds under the Regulation D Common Stock Equity Line Subscription
Agreement. Moreover, should the market price of the Common Stock fall
significantly, we would be required to issue to the two institutional
investors a much greater number of shares than we would otherwise if the
market price were stable or rising, which could cause the market price of
the Common Stock to fall further and faster. In addition, we and
broker-dealers effecting transactions in the Common Stock may become subject
to additional disclosure and reporting requirements applicable to low-priced
securities, which may reduce the level of trading activity in the secondary
market for the Common Stock and limit or prevent investors from readily
selling their shares of Common Stock.
THE SALE OF SUBSTANTIAL SHARES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK
PRICE.
As of August 31, 1999, we had approximately 78,355,000 shares of
Common Stock outstanding. We are also obligated to issue up to an additional
approximately 191,000 shares of Common Stock upon conversion of 91
outstanding shares of our 5% Adjustable Convertible Class C Preferred Stock
and exercise of related warrants. Under our Regulation D Common Stock Equity
Line Subscription Agreement with two institutional investors, we may issue
up to an additional approximately 16,259,000 shares of Common Stock
(assuming a market price of our common stock of $1.00 per share), at our
sole option, from time to time, in exchange for an aggregate purchase price
of $10,750,000, which includes warrants equal to 10% of the shares of Common
Stock issued under such agreement, which must be exercised on a cashless
basis only. In addition, an additional approximately 16,050,000 shares of
Common Stock are issuable upon exercise of outstanding stock options and
other warrants at an average exercise price of $1.79. The conversion rate
applicable to our Class C Preferred Stock and the purchase price for the
shares of Common Stock and warrants to be issued under the Regulation D
Common Stock Equity Line Subscription Agreement are at a significant
discount to the market price of the Common Stock. The sale and issuance of
these shares of Common Stock, as well as subsequent sales of shares of
Common Stock in the open market, may cause the market price of the Common
Stock to fall and might impair our ability to raise additional capital
through sales of equity or equity-related securities, whether under the
Regulation D Common Stock Equity Line Subscription Agreement or otherwise.
23
OUR HIGHLY VOLATILE STOCK PRICE AND TRADING VOLUME MAY ADVERSELY AFFECT THE
LIQUIDITY OF THE COMMON STOCK.
The market price of the Common Stock, and the market prices of
securities of companies in the biotechnology industry generally, 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 44,000 shares per day to as many as 19 million shares per day over
the past eighteen months, and is likely to continue to be highly volatile.
The market price of the Common Stock may be significantly impacted by many
factors, including announcements of technological innovations or new
commercial products by us or our competitors, disputes concerning patent or
proprietary rights, publicity regarding actual or potential medical results
relating to products under development by us or our competitors and
regulatory developments and product safety concerns in both the United
States and foreign countries. These and other external factors have caused
and may continue to cause the market price and demand for the Common Stock
to fluctuate substantially, which may limit or prevent investors from
readily selling their shares of Common Stock and may otherwise negatively
affect the liquidity of the Common Stock.
WE MAY NOT BE ABLE TO COMPETE WITH OUR COMPETITORS IN THE BIOTECHNOLOGY
INDUSTRY.
The biotechnology industry is intensely competitive. It is also
subject to rapid change and sensitive to new product introductions or
enhancements. We expect to continue to experience significant and increasing
levels of competition in the future. Virtually all of our existing
competitors have greater financial resources, larger technical staffs, and
larger research budgets than we have, as well as greater experience in
developing products and running clinical trials. Two of our competitors,
IDEC Pharmaceuticals Corporation and Coulter Pharmaceuticals, Inc., each has
a lymphoma antibody that may compete with our direct tumor targeting agent
product, Oncolym(R). IDEC Pharmaceuticals Corporation is currently marketing
its lymphoma product for low grade non-Hodgkin's lymphoma and we believe
that Coulter Pharmaceuticals, Inc. will be marketing its respective lymphoma
product prior to the time our Oncolym(R) product will be submitted to the
United States Food and Drug Administration for marketing approval. Coulter
Pharmaceuticals, Inc. has also announced that it intends to conduct clinical
trials of its antibody treatment for intermediate and/or high-grade
non-Hodgkin's lymphomas. In addition, there may be other companies which are
currently developing competitive technologies and products or which may in
the future develop technologies and products which are comparable or
superior to our technologies and products. Some or all of these companies
may also have greater financial and technical resources than we have.
Accordingly, we cannot assure you that we will be able to compete
successfully with our existing and future competitors or that competition
will not negatively affect our financial position or results of operations
in the future.
WE MAY NOT BE SUCCESSFUL IF WE ARE UNABLE TO OBTAIN AND MAINTAIN PATENTS AND
LICENSES TO PATENTS.
Our success depends, in large part, on our ability to obtain or
maintain a proprietary position in our products through patents, trade
secrets and orphan drug designations. We have been granted several United
States patents and have submitted several United States patent applications
and numerous corresponding foreign patent applications, and have also
obtained licenses to patents or patent applications owned by other entities.
However, we cannot assure you that any of these patent applications will be
granted or that our patent licensors will not terminate any of our patent
licenses. We also cannot guarantee that any issued patents will provide
competitive advantages for our products or that any issued patents will not
be successfully challenged or circumvented by our competitors. Although we
believe that our patents and our licensors' patents do not infringe on any
24
third party's patents, we cannot be certain that we can avoid litigation
involving such patents or other proprietary rights. Patent and proprietary
rights litigation entails substantial legal and other costs, and we may not
have the necessary financial resources to defend or prosecute our rights in
connection with any litigation. Responding to, defending or bringing claims
related to patents and other intellectual property rights may require our
management to redirect our human and monetary resources to address these
claims and may take years to resolve.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY BE REDUCED OR
DISCONTINUED DUE TO DIFFICULTIES OR DELAYS IN CLINICAL TRIALS.
We may encounter unanticipated problems, including development,
manufacturing, distribution, financing and marketing difficulties, during
the product development, approval and commercialization process. Our product
candidates may take longer than anticipated to progress through clinical
trials or patient enrollment in the clinical trials may be delayed or
prolonged significantly, thus delaying the clinical trials. Delays in
patient enrollment will result in increased costs and further delays. If we
experience any such difficulties or delays, we may have to reduce or
discontinue development, commercialization or clinical testing of some or
all of our product candidates. Schering A.G., Germany has recently advised
us that it is analyzing the results of the current Phase II clinical
development program for our direct tumor targeting agent product candidate
and based on that analysis, Schering A.G., Germany may revise the current
protocol. As such, the current clinical trial sites will remain open for
treating existing patients, however, no new enrollment of patients will be
made under the current trial. Schering A.G., Germany has further informed us
that if a revised protocol is developed, it will be submitted to the United
States Food and Drug Administration for additional clinical trials. If
Schering A.G., Germany decides to discontinue the development of this
product candidate and terminates our license agreement for the worldwide
development, distribution and marketing of this product candidate, we may
have to discontinue development, commercialization and clinical testing of
this product candidate.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY BE REDUCED OR
DISCONTINUED DUE TO DELAYS OR FAILURE IN OBTAINING REGULATORY APPROVALS.
We will need to do substantial additional development and clinical
testing prior to seeking any regulatory approval for commercialization of
our product candidates. Testing, manufacturing, commercialization,
advertising, promotion, export and marketing, among other things, of our
proposed products are subject to extensive regulation by governmental
authorities in the United States and other countries. The testing and
approval process requires substantial time, effort and financial resources
and we cannot guarantee that any approval will be granted on a timely basis,
if at all. Companies in the pharmaceutical and biotechnology industries have
suffered significant setbacks in conducting advanced human clinical trials,
even after obtaining promising results in earlier trials. Furthermore, the
United States Food and Drug Administration may suspend clinical trials at
any time on various grounds, including a finding that the subjects or
patients are being exposed to an unacceptable health risk. Even if
regulatory approval of a product is granted, such approval may entail
limitations on the indicated uses for which it may be marketed. Accordingly,
we may experience difficulties and delays in obtaining necessary
governmental clearances and approvals to market our products, and we may not
be able to obtain all necessary governmental clearances and approvals to
market our products. At least initially, we intend, to the extent possible,
to rely on licensees to obtain regulatory approval for marketing our
products. The failure by us or our licensees to adequately demonstrate the
safety and efficacy of any of our product candidates under development could
delay, limit or prevent regulatory approval of the product, which may
require us to reduce or discontinue development, commercialization or
clinical testing of some or all of our product candidates.
25
OUR PRODUCTS, IF APPROVED, MAY NOT BE COMMERCIALLY VIABLE DUE TO HEALTH CARE
REFORM AND THIRD-PARTY REIMBURSEMENT LIMITATIONS.
Recent initiatives to reduce the federal deficit and to reform
health care delivery are increasing cost-containment efforts. We anticipate
that Congress, state legislatures and the private sector will continue to
review and assess alternative benefits, controls on health care spending
through limitations on the growth of private health insurance premiums and
Medicare and Medicaid spending, price controls on pharmaceuticals and other
fundamental changes to the health care delivery system. Legislative debate
is expected to continue in the future, and market forces are expected to
drive reductions of health care costs. Any such changes could negatively
impact the commercial viability of our products, if approved. Our ability to
successfully commercialize our product candidates, if and when they are
approved, will depend in part on the extent to which appropriate
reimbursement codes and authorized cost reimbursement levels of such
products and related treatment are obtained from governmental authorities,
private health insurers and other organizations, such as health maintenance
organizations. In the absence of national Medicare coverage determination,
local contractors that administer the Medicare program, within certain
guidelines, can make their own coverage decisions. Accordingly, there can be
no assurance that any of our product candidates, if approved and when
commercially available, will be included within the then, current Medicare
coverage determination or the coverage determination of state Medicaid
programs, private insurance companies and other health care providers. In
addition, third-party payors are increasingly challenging the prices charged
for medical products and services. The trend toward managed health care and
the growth of health maintenance organizations in the United States may all
result in lower prices for our products, if approved and when commercially
available, than we currently expect. The cost containment measures that
health care payors and providers are instituting and the effect of any
health care reform could negatively affect our financial performance, if and
when one or more of our products are approved and available for commercial
use.
OUR MANUFACTURING AND USE OF HAZARDOUS AND RADIOACTIVE MATERIALS MAY RESULT
IN OUR LIABILITY FOR DAMAGES, INCREASED COSTS AND INTERRUPTION OF ANTIBODY
SUPPLIES.
The manufacturing and use of our products require the handling and
disposal of the radioactive isotope I131. We currently rely on, and intend
in the future to rely on, our current contract manufacturers to combine
antibodies with radioactive I131 isotope in our products and to comply with
various local, state, national or international regulations regarding the
handling and use of radioactive materials. Violation of these regulations by
these companies or a clinical trial site could significantly delay
completion of the trials. Violations of safety regulations could occur with
these manufacturers, so there is also a risk of accidental contamination or
injury. Accordingly, we could be held liable for any damages that result
from an accident, contamination or injury caused by the handling and
disposal of these materials, as well as for unexpected remedial costs and
penalties that may result from any violation of applicable regulations. In
addition, we may incur substantial costs to comply with environmental
regulations. In the event of any noncompliance or accident, the supply of
antibodies for use in clinical trials or commercial products could also be
interrupted.
26
OUR OPERATIONS AND FINANCIAL PERFORMANCE COULD BE NEGATIVELY AFFECTED IF WE
CANNOT ATTRACT AND RETAIN KEY PERSONNEL.
Our success is dependent, in part, upon a limited number of key
executive officers and technical personnel remaining employed with us,
including Larry O. Bymaster, our President and Chief Executive Officer,
Steven C. Burke, our Chief Financial Officer, and Dr. John N. Bonfiglio, our
Vice President of Technology and Business Development and interim Vice
President of Clinical and Regulatory Affairs. We also believe that our
future success will depend largely upon our ability to attract and retain
highly-skilled research and development and technical personnel. We face
intense competition in our recruiting activities, including larger companies
with greater resources. We do not know if we will be successful in
attracting or retaining skilled personnel. The loss of certain key employees
or our inability to attract and retain other qualified employees could
negatively affect our operations and financial performance.
OUR BUSINESS MAY BE ADVERSELY EFFECTED IF OUR COMPUTER SYSTEMS AND THE
COMPUTER SYSTEMS OF OUR SUPPLIERS ARE NOT YEAR 2000 COMPLIANT.
We are aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The year 2000 problem
is pervasive and complex. The issue is whether computer systems will
properly recognize date-sensitive information in the year 2000 due to the
fact that the programming in most computer systems use a two digit year
value, which value will rollover to "00" as of January 1, 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail. We have identified substantially all of our
information technology ("IT") and non-IT systems, including major hardware
and software platforms in use and we have modified and upgraded our
hardware, software of IT and non-IT systems to be year 2000 compliant. We do
not presently believe that the year 2000 problem will pose significant
operational problems for our internal computer systems or have a negative
effect on our operations. However, we cannot assure you that any year 2000
compliance problems of our suppliers will not negatively affect our
operations. Because uncertainty exists concerning the potential costs and
effects associated with any year 2000 compliance, we intend to continue to
make efforts to ensure that third parties with whom we have relationships
are year 2000 compliant. We have not incurred significant costs to date
associated with year 2000 compliance and presently believe estimated future
costs will not be material. However, actual results could differ materially
from our expectations due to unanticipated technological difficulties or
project delays. If any third parties upon which we rely are unable to
address the year 2000 issue in a timely manner, although we are uncertain as
to our worst case consequences, it could have an adverse impact on our
operations, including delaying our clinical trial programs. In order to
minimize this risk, we have developed a contingency plan, the implementation
of which should be completed by November 1999, and we intend to devote all
resources required to attempt to resolve any significant year 2000 problems
in a timely manner.
27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------- ----------------------------------------------------------
A significant change in interest rates would not have a material
adverse effect on the Company's financial position or results of operations
due to the amount of cash on hand at July 31, 1999, which consists of
highly liquid investments, and as the Company's debt instruments have fixed
interest rates and terms.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
------- ------------------
On March 18, 1999, the Company was served with notice of a lawsuit
filed in Orange County Superior Court for the State of California by a
former employee alleging a single cause of action for wrongful termination.
The Company believes this lawsuit is barred by a severance agreement and
release signed by the former employee following his termination and the
Company is vigorously defending the action. The Company's motion for summary
judgement is currently pending argument. Management does not believe that
the outcome of this action will have a material adverse effect upon the
financial position or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
------- ------------------------------------------
The following is a summary of transactions by the Company during
the quarterly period commencing on May 1, 1999 and ending on July 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 June 16, 1999, the Company issued to one unaffiliated
investor an aggregate of 98,835 shares of the Company's Common Stock upon
conversion of 30 outstanding shares of the Company's 5% Adjustable
Convertible Class C Preferred Stock (the "Class C Stock") and upon the
exercise of outstanding warrants to purchase 47,962 shares of Common Stock
for total consideration of $31,435. Upon conversion of the 30 shares of
Class C Stock, the Company issued warrants to such investor to purchase up
to an aggregate of 12,718 shares of the Company's Common Stock at an
exercise price of $0.6554 per share, which warrants were exercised and
included in the total 47,962 warrants.
On various dates during the quarter ended July 31, 1999, the
Company issued an aggregate of 2,509,508 shares of the Company's common
Stock to the two institutional investors and the placement agent under the
Equity Line, for an aggregate purchase price of $2,250,000, pursuant to an
Equity Line draw and also issued warrants to the two institutional investors
and placement agent to purchase up to 250,948 shares of Common Stock, which
warrants are immediately exercisable on a cashless basis only and expire on
December 31, 2004.
28
The following table provides specific information with respect to
securities of Techniclone sold (Put) to the two institutional investors and
the placement agent under the Equity Line during the quarter ended July 31,
1999:
Shares of common Shares subject to Shares of Shares subject
stock issued to the warrants issued common stock to warrants
Institutional to the issued to the issued to the
Amount Investors Institutional Placement Agent Placement
Date Funded Investors Agent
- --------------------- --------------------- --------------------- --------------------- --------------------- ---------------------
May 10, 1999 $ 337,500 551,020 (1) 55,101 (2) 55,102 5,510 (2)
June 2, 1999 $ 337,500 457,626 (3) 45,762 (4) 45,762 4,576 (4)
June 24, 1999 $ 1,575,000 1,272,726 (5) 127,272 (6) 127,272 12,727 (6)
----------------------
(1) Purchase price of $0.6125 per share. (4) Exercise price of $0.7375 per share.
(2) Exercise price of $0.6125 per share. (5) Purchase price of $1.2375 per share.
(3) Purchase price of $0.7375 per share. (6) Exercise price of $1.2375 per share.
On July 15, 1999, the Company issued an aggregate of 179,485 shares
of the Company's Common Stock to the two institutional investors and
placement agent under the Equity Line, for no monetary consideration, as an
adjustment to the purchase price of one-half of the initial shares sold to
the two institutional investors in June 1998, pursuant to the terms of the
Equity Line.
On various dates during the quarter ended July 31, 1999, the
Company issued an aggregate of 6,411 shares of the Company's Common Stock to
one institutional investor upon the cashless exercise of 20,172 warrants
issued under the Equity Line.
Under the Equity Line, if the Company does not exercise the full
amount of its Put rights, then the Company will issue Commitment Warrants on
the first, second, and third anniversary of the Equity Line. The number of
Commitment Warrants to be issued on each anniversary date will be equal to
ten percent (10%) of the quotient of the difference of $6,666,666,
$13,333,333 and $20,000,000 (Commitment Amounts), respectively, less the
actual cumulative total dollar amount of Puts which have been exercised by
the Company prior to such anniversary date divided by the market price of
the Company's common stock. On June 24, 1999, the first anniversary date of
the agreement, the Company issued Commitment Warrants to purchase up to
17,721 shares of the Company's common stock at $1.50 per share, exercisable
on a cashless basis only.
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.
29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
------- ----------------------------------------------------
ITEM 5. OTHER INFORMATION. None.
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ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
------- --------------------------------
(a) Exhibits:
Exhibit Number Description
-------------- -----------
10.57 Patent License Agreement dated October 8,
1998 between Registrant and the Board of
Regents of the University of Texas System
for patents related to Targeting the
Vasculature of Solid Tumors (Vascular
Targeting Agent patents).
10.58 Patent License Agreement dated October 8,
1998 between Registrant and the Board of
Regents of the University of Texas System
for patents related to the Coagulation of
the Tumor Vasculature (Vascular Targeting
Agent patents).
10.59 License Agreement between Northwestern
University and Registrant dated August 4,
1999 covering the LYM-1 and LYM-2 antibodies
(Oncolym(R)).
27 Financial Data Schedule.
(b) Reports on Form 8-K: None.
30
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)
31