1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q/A
AMENDMENT NO. 1
(Mark One)
[X] AMENDMENT NO. 1 TO THE QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 31, 1997
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) 838-0500
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 ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. YES ___ NO ___.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
27,400,631 shares of Common Stock
as of August 31, 1997
Page 1 of 27 pages
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PART I -- FINANCIAL INFORMATION
ITEM 1 -- FINANCIAL STATEMENTS
The following financial statements required to be provided by this
Item 1 and Rule 10.01 of Regulation S-X are filed herewith, at the respective
pages indicated on this Quarterly Report, Form 10-Q:
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Consolidated Balance Sheets at April 30, 1997 and July 31, 1997; Restated (unaudited)......... 19
Consolidated Statements of Operations for the periods from May 1, 1996 to July 31, 1996
restated (unaudited) and from May 1, 1997 to July 31, 1997; Restated (unaudited) ............. 21
Consolidated Statement of Stockholders' Equity for the period from
April 30, 1997 to July 31, 1997; Restated (unaudited)......................................... 22
Consolidated Statements of Cash Flows for the periods May 1, 1996 to July 31, 1996
(unaudited) and from May 1, 1997 to July 31, 1997; Restated (unaudited)....................... 23
Notes to Consolidated Financial Statements; Restated (unaudited).............................. 25
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q includes certain forward-looking
statements, the realization of which may be impacted by certain important
factors discussed in "Additional Factors that May Affect Future Results".
RESULTS OF OPERATIONS
The Company's net loss of $2,270,913 for the quarter ended July 31,
1997 represents an increase of $1,322,649 in comparison to the net loss of
$948,264 for the prior year quarter ended July 31, 1996. This increase in the
net loss for the quarter ended July 31, 1997 is primarily attributable to a
$1,439,259 increase in total costs and expenses which is partially offset by a
$116,610 increase in total revenues. The increased loss over the comparable
period in the prior year is primarily attributable to increases in activity by
the Company associated with the expansion of its facilities, continuation and
expansion of the clinical trial activities for LYM-1 (Oncolym(TM)) and TNT
antibody technologies and increases in administrative and operational personnel
related to increases in clinical trial activities and in preparation for
scale-up of the manufacturing process for production of the LYM-1 (Oncolym(TM))
antibodies to be used in Phase III clinical trials. The Company expects to
continue to incur losses during the fiscal year ending April 30, 1998 as it
further expands the clinical trials for its LYM-1 (Oncolym(TM)) and TNT
technologies.
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Revenues for the quarter ended July 31, 1997, increased $116,610,
compared to the same period in the prior year. The quarterly increase in
revenues is attributable to a $73,893 increase in interest income, a $38,417
increase in rental income, and a $4,300 increase in sales revenue. Interest
income increased during the current quarter coinciding with an increased level
of cash funds available for investment. Management expects interest income
during the remainder of the current year to exceed amounts earned in the prior
year due to the increase in cash and short-term investments resulting from the
issuance of the 5% Adjustable Convertible Class C Preferred Stock in April 1997.
Rental income increased as a result of the Company's purchase of a second
building in October 1996, that is partially leased to tenants. Product sales
increased in the current quarter compared to the quarter ended July 31, 1996 due
to shipments of LYM-1 (Oncolym(TM)) used in the Phase II/III clinical trials.
Management expects revenues from the sales of antibodies to increase during the
remainder of the fiscal year ending April 30, 1998 as the Company continues to
ship its LYM-1 (Oncolym(TM)) antibody for use in the Phase II/III clinical
trials.
The Company's total costs and expenses increased $1,439,259 during the
quarter ended July 31, 1997, in comparison to the same prior quarter period
ended July 31, 1996. This increase resulted from a $4,300 increase in cost of
sales, a $745,985 increase in research and development expenses, a $664,871
increase in general and administrative expenses, and a $24,103 increase in
interest expense in comparison to the prior year quarter ended July 31, 1996.
The increase in cost of sales was due to the increase in sales of
antibodies associated with the LYM-1 (Oncolym(TM)) Phase II/III clinical trials.
The increase in research and development expenses resulted primarily from
increased payroll costs associated with the hiring additional management and
staff personnel and increased material costs to facilitate the expansion of
clinical trial activities for LYM-1 (Oncolym(TM)) and to continue final
development of the TNT technologies in preparation for the filing of two
Investigational New Drug Applications (IND's) for U.S. Phase I/II clinical
trials. Research and development expenses also increased as a result of expenses
associated with patents and various sponsored research agreements related to
Vascular Targeting Agents (VTA) technologies, which were related to the
acquisition of Peregrine Pharmaceuticals, Inc. in April 1997.
The increase in general and administrative expenses during the quarter
ended July 31, 1997, resulted primarily from increased payroll and related costs
associated with the hiring of new personnel, costs associated with the directors
and officers liability insurance coverage obtained during August 1996, increased
travel costs and an increase in stock-based compensation expense. The increase
in the number of personnel and increased travel costs were required to
facilitate the expansion of the Company's development and clinical trial
activities and to facilitate expansion of European development activities. The
increase in interest expense of $24,103 is due to a higher level of interest
bearing debt outstanding during the current quarter as a result of the purchase
of the Company's second building in October 1996. Original borrowings for the
second facility amounted to $1,020,000.
Management believes that research and development costs as well as
expenses associated with clinical trials may continue to increase as the
Company's continues to expand its clinical trial activities and increases
production of the LYM-1 (Oncolym(TM)) antibodies for the expanded Phase II/III
LYM-1 (Oncolym TM) clinical trials.
The Company began Phase II/III testing in multi-center clinical trials
of the LYM-1 (Oncolym(TM)) antibody in late stage non-Hodgkins lymphoma
patients. The clinical trials are being sponsored by Alpha Therapeutic
Corporation ("Alpha"), a wholly owned subsidiary of Green Cross
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Corporation. The clinical trials are being held at participating medical centers
including M.D. Anderson, The Cleveland Clinic, Cornell University (N.Y.C.),
George Washington University and University of Cincinnati. Alpha completed the
patient imaging portion of the Phase III trial and submitted the final imaging
and dosimetry data reports to the FDA in August 1997. Alpha has scheduled a
meeting with the FDA for October 28, 1997, to discuss expansion of the Phase
II/III trial to include additional trial sites and to discuss certain requested
protocol changes for patient selection and treatment during the remainder of the
expanded Phase II/III trial. Following the completion of the clinical trials,
the Company expects Alpha to file an application with the FDA to market LYM-1
(Oncolym(TM)) in the United States.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company had $10,460,630 in cash and short-term
investments and working capital of $8,629,786 compared to $12,228,660 in cash
and short-term investments and working capital of $10,618,012 at April 30, 1997.
Although management believes that the Company's cash and short term investments
are sufficient to sustain its operations through at least July 31, 1998,
historically the Company has experienced significant losses and negative cash
flows from operations and had an accumulated deficit of $60,784,487 at July 31,
1997. The Company expects that it will continue to experience negative cash
flows as it increases activities associated with the Phase II/III clinical
trials for LYM-1 (Oncolym(TM)) and activities associated with its research,
development and clinical trials for its Tumor Necrosis Therapy ("TNT") and other
technologies. Historically, the Company has relied on third party and investor
funds to fund its operations and clinical trials. The Company must raise
additional capital in the future to sustain its research and development efforts
and to provide for future clinical trials. Although management expects to
receive additional funding in the future, there can be no assurance that funding
will be received. If the Company does not receive additional funding, it will be
forced to scale back operations and it could have a material adverse effect on
the Company. The Company's continuation as a going concern is dependent on its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing as may be required and, ultimately to
attain successful operations.
COMMITMENTS
The Company is currently negotiating with Alpha Therapeutic Corporation
concerning Techniclone's increased participation in the development of LYM-1
(Oncolym(TM)). The negotiations include the possibility of Techniclone acquiring
Alpha's LYM-1 (Oncolym(TM)) marketing rights and clinical data and Alpha's
cooperation in the ongoing clinical trial, in exchange for a series of fixed
dollar payments and royalties on sales through a specified time period.
Techniclone is also negotiating with a large, well-established
biopharmaceutical service company for the manufacture of a significant portion
of additional antibodies required for expanded clinical trials. The terms of the
manufacturing agreement have not been finalized but, the Company believes that
this type of agreement would enable Techniclone to delay the significant
investment required to build the in-house GMP facilities required to support
increased clinical trial activity and to devote the Company's resources to
expanding ongoing clinical trials and additional trials of its other
technologies.
These agreements are in the process of being negotiated and there can
be no assurances that the agreements will be finalized.
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At July 31, 1997, the Company had commitments to acquire additional
assets of approximately $500,000 to expand its office and production facilities
and to purchase furniture and fixtures.
ITEM 3 -- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
FLUCTUATION OF FUTURE OPERATING RESULTS. Future operating results may
be impacted by a number of factors that could cause actual results to differ
materially from those stated herein. These factors include worldwide economic
and political conditions and industry specific factors. If the Company is to
remain competitive and to timely develop and produce commercially viable
products at competitive prices in a timely manner, it must maintain access to
external financing sources until it can generate revenue from licensing
transactions or sales of products. The Company's ability to obtain financing and
to manage its expenses and cash depletion rate (the "burn rate") is the key to
the Company's continued development of product candidates and the completion of
ongoing clinical trials. The Company expects that its burn rate will vary
substantially on a quarter to quarter basis as it funds non-recurring items
associated with clinical trials, product development, executive search firm fees
and various consulting fees. The Company has limited experience with clinical
trials and if the Company encounters unexpected difficulties with its operation
or clinical trials, it may have to expend additional funds which would increase
its burn rate.
EARLY STAGE OF DEVELOPMENT. Since its inception, the Company has been
engaged in the development of drugs and related therapies for the treatment of
people with cancer. The Company's product candidates are generally in early
stages of development, with only one product candidate in a clinical trials.
Revenues from product sales have been insignificant and through-out the
Company's history there has been minimal revenues from product royalties.
Additionally, product candidates resulting from the Company's research and
development efforts, if any, are not expected to be available commercially for
at least the next year. No assurance can be given that the Company's product
development efforts, including clinical trials, will be successful, that
required regulatory approvals for the indications being studied can be obtained,
that its product candidates can be manufactured at acceptable cost and with
appropriate quality or that any approved products can be successfully marketed.
NEED FOR ADDITIONAL CAPITAL. At July 31, 1997, the Company had
approximately $10,461,000 in cash, cash equivalents and short-term investments.
The Company currently has commitments to expend approximately $500,000 for
building improvements, equipment, furniture and fixtures. The Company expects
these expenditures to increase in the future as the Company's scale up for pilot
production continues and its development of other technologies increases. The
Company has experienced negative cash flows from operations since its inception
and expects the negative cash flow from operations to continue for the
foreseeable future. Whether or not the Company becomes more active in managing
the LYM-1 (Oncolym(TM)) clinical trial, the Company expects that the monthly
negative cash flow will increase as a result of increased activities in
connection with the Phase II/III clinical trials for LYM-1 (Oncolym(TM)) and as
a result of significantly increased research, development and clinical trial
costs associated with the Company's other products, including Tumor Necrosis
Therapy ("TNT") and Vascular Targeting Agents ("VTA"). As a result of the
increased expenditure of funds, the Company believes that it will be necessary
for the Company to raise additional capital to sustain research and development
and provide for future clinical trials. The Company must raise additional funds
either through equity or debt placements or through licensing arrangements in
order to continue its operations until it is able to generate sufficient
additional revenue from the sale and/or
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additional licensing of its products. There can be no assurance that the Company
will be successful in raising such funds on terms acceptable to it, or at all,
or that sufficient additional capital will be raised to complete the research
and development of the Company's additional product candidates. The Company is
discussing the possibility of potential licensing arrangements with various
companies and is discussing the possibility of raising additional funds with
various investment banking firms and private investors, but as of September 25,
1997, the Company had not entered into any firm commitments for additional
funds. If the initial results from the Phase II/III clinical trials of LYM-1
(Oncolym(TM)) are poor, then management believes that such results will have a
material adverse effect upon the Company's ability to raise additional capital,
which will affect the Company's ability to continue a full-scale research and
development effort for its antibody technologies. The Company's future success
is highly dependent upon its continued access to sources of financing which it
believes are necessary for the continued growth of the Company. If the Company
is unable to maintain access to its existing financing sources, or obtain other
sources of financing there would be a material adverse effect on the Company's
business, financial position and results of operations.
To conduct clinical trials on a timely basis, obtain regulatory
approval and be commercially successful, the Company must be able to scale up
its manufacturing processes and be in compliance with regulatory requirements
for its product candidates, either directly or through third parties, so that
such product candidates can be manufactured in a pilot product run and
ultimately in commercial quantities. Although the Company has produced its
product candidates in the laboratory and in limited clinical runs, the Company
has not scaled up its production process to manufacture pilot production runs.
As the Company's first product, LYM-1 (Oncolym(TM)) moves closer to finishing
the clinical trial process for FDA approval, the Company must scale its
production process to pilot production levels so that it or a contract
manufacturer can produce the product in commercial quantities. To meet FDA
requirements, the Company's manufacturing process must be scaleable. The Company
anticipates that the scale up of its LYM-1 (Oncolym(TM)) product to pilot
production will cost at least two million dollars and that, if the Company were
to commercially manufacture the product, it will have to expend an additional
six to ten million dollars to build and validate a production facility which
complies with "current good manufacturing practices" ("CGMP"). Accordingly, once
the Company's scale up to pilot production is complete, the Company believes it
can successfully negotiate an agreement with a contract manufacturer to have
LYM-1 (Oncolym(TM)) produced on a "per run basis" thereby deferring or
eliminating the significant expenditure (six to ten million dollars) which it
estimates is required to build and validate a CGMP production facility. The
Company anticipates that production of its products in commercial quantities
will create technical and financial challenges for the Company. The Company has
limited manufacturing experience, and no assurance can be given as to the
ultimate performance of the Company's ability to scale its manufacturing, the
suitability of the Company's present facility for pilot production or commercial
production, the Company's ability to make a successful transition to commercial
production or the Company's ability to reach an acceptable agreement with a
contract manufacturer to produce LYM-1 (Oncolym(TM)) or the Company's other
product candidates in clinical or commercial quantities. The failure of the
Company to scale its manufacturing for pilot or commercial production or to
obtain a contract manufacturer could have a material adverse effect on the
Company's business, financial position and results of operations.
ANTICIPATED FUTURE LOSSES. The Company has experienced significant
losses since inception. As of July 31, 1997, the Company's accumulated deficit
was approximately $60,784,000. The Company expects to incur significant
additional operating losses in the future and expects cumulative losses to
increase substantially due to expanded research and development efforts,
preclinical studies and clinical trials and development of manufacturing,
marketing and sales capabilities. The Company expects that losses will fluctuate
from quarter to quarter and that such fluctuations may be substantial. All of
the Company's products are in development, preclinical studies or clinical
trials, and significant revenues have
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not been generated from product sales. To achieve and sustain profitable
operations, the Company, alone or with others, must successfully develop, obtain
regulatory approval for, manufacture, introduce, market and sell its products.
The time frame necessary to achieve market success is long and uncertain. The
Company does not expect to generate significant product revenues for at least
the next few years. There can be no assurance that the Company will ever
generate significant product revenues which are sufficient to become profitable
or to sustain profitability.
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION; CONTROL. A precipitous
decline in the market price of the Company's Common Stock may lead to very
substantial dilution to current holders of the Common Stock. Both the Class B
Convertible Preferred Stock ("Class B Preferred Stock") and the Class C
Preferred Stock provide that the conversion of such shares of preferred stock
into shares of the Company's Common Stock issued or issuable shall be at the
lower of a conversion cap or a conversion price indexed to the market price of
the Common Stock at the time of conversion. On conversion of the Class B
Preferred Stock and the Class C Preferred Stock, all of such shares of Common
Stock which are issued may be freely tradable. Sales of substantial amounts of
Common Stock in the public market could adversely affect the prevailing market
price of the Common Stock and, depending upon the then current market price of
the Common Stock, increase the risks associated with the possible conversion of
the Preferred Stock.
If all of the outstanding shares of Class B Preferred Stock and the
Class C Preferred Stock are converted on the last day that they may be
converted, and all outstanding warrants are exercised and converted prior to
their expiration then, assuming the Company's Common Stock has a stock price of
$3.9375 on the date of such conversion, approximately 8,411,000 additional
shares of Common Stock could become freely tradable without restriction under
the Securities Act. Of the 8,411,000 shares, 7,212,000 will be issued on the
conversion of the Class C Preferred Stock and Warrants and 1,199,000 shares of
the 8,411,000 shares of Common Stock which are issuable, will be issued on the
conversion of the Class B Preferred Stock and Warrants.
Of the 7,212,000 shares of the Company's Common Stock that would be
issuable to the holders of the Class C Preferred Stock, approximately 5,353,000
are issuable as a result of the conversion of the shares of Class C Preferred
Stock including all shares of Class C Preferred Stock paid as a dividend,
417,000 are issuable as a result of the placement agent exercising its warrants
and 1,442,000 are issuable as a result of the exercise of the Conversion
Warrants. All of the 7,212,000 additional shares of Common Stock could become
freely tradable without restriction under the Securities Act if all of the
shares of Class C Preferred Stock are converted and the conversion Warrants
related thereto are exercised on the last conversion date.
The shares of Class C Preferred Stock will be converted into shares of
Common Stock at a discount from the average of the lowest market trading price
for the five days preceding conversion ("Conversion Price"). The Selling
Stockholders may begin converting the shares of Class C Preferred Stock on
September 25, 1997. If any shares of Class C Preferred Stock are converted on or
after September 25, 1997, but prior to November 25, 1997, the discount from
Market Price is 0.0%, if any shares of Class C Preferred Stock are converted on
or after November 25, 1997 but prior to January 25, 1998, the discount from
Market Price is 13%, if any shares of Class C Preferred Stock are converted on
or after January 25, 1998, but prior to March 25, 1998, the discount from Market
Price is 20%, if any shares of Class C Preferred Stock are converted on or after
March 25, 1998, but prior to May 25, 1998, the discount from Market Price is
22.5%, if any shares of Class C Preferred Stock are converted on or after May
25, 1998 but prior to July 25, 1998, the discount from Market Price is 25%, if
any shares of Class C Preferred Stock are converted on or after July 25, 1998,
the discount from Market Price is 27%.
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At any date prior to March 24, 1998, the Conversion Price for any share
of Class C Preferred Stock shall be the discount from Market Price set forth in
the preceding paragraph. At any date after March 24, 1998, the Conversion Price
shall be the lower of (i) the Conversion Price calculated in accordance with the
paragraph set forth above or (ii) the average of the closing prices of the
Common Stock for the thirty (30) trading days including and immediately
preceding March 24, 1998 (such average being the "Conversion Cap").
If after July 25, 1998, the market price of the Common Stock is below
$3.9375 per share at the time(s) of conversion, the effective conversion
price(s) of the Class C Preferred Stock issued will be lower than $2.88 per
share (the market price less the applicable discount) assumed for purposes of
these calculations, resulting in the issuance of more Common Stock upon
conversion of the Class C Preferred Stock.
Of the 1,199,000 shares reserved for issuance pursuant to the Class B
Preferred Stock, approximately 932,000 shares of Common Stock are issuable upon
conversion of currently outstanding Class B Convertible Preferred Stock ("Class
B Preferred Stock") and approximately 267,000 shares of Common Stock are
issuable upon the exercise of the warrants related thereto.
In the event of a dissolution or liquidation of the Company, the
holders of the Class C Preferred Stock are entitled to a liquidation or
preference of $1,000 plus accrued dividends. Upon the occurrence of certain
specified events, the holders of the Class C Preferred Stock may force a
redemption of the Class C Preferred Stock. The Company may elect in its
redemption notice to redeem the Preferred Stock either in cash or in Common
Stock. For purposes of redemption, the value of the Common Stock will be 73% of
the average of the lowest market trading price for five consecutive days during
the period beginning on the date of the redemption notice and ending on the
redemption date.
The Class B Preferred Stock has a mandatory conversion date of December
29, 1998, and the warrants related thereto have an expiration date as of
December 28, 2000. If the market price of the Common Stock is below $3.61 per
share at the time of conversion of the Class B Preferred Stock, the effective
conversion price of the Class B Preferred Stock issued will be lower than the
conversion cap of $3.06875, resulting in the issuance of more shares of Common
Stock upon the conversion of the Class B Preferred Stock. The conversion price
for the Class B Preferred Stock is the lower of (i) $3.06875, which was the
average closing bid price for the Company's Common Stock for the five (5)
trading days ending on December 8, 1995 and the closing price on December 5,
1995, the date the Company agreed to proceed with the offering of the Class B
Preferred Stock, or (ii) 85% of the closing bid price for the Company's Common
Stock for the five trading days immediately preceding the date of the
conversion. The number of shares of Common Stock issued upon conversion of each
share of Class B Preferred Stock is determined by (i) taking ten percent (10%)
of One Thousand Dollars ($1,000) pro-rated on the basis of a 365 day year, by
the number of days between December 29, 1995 and the date of conversion plus
(ii) One Thousand Dollars ($1,000), (iii) divided by the conversion price.
The Class B Preferred Stock has a liquidation preference over the
Company's Common Stock. This liquidation preference is $1,000 per share of Class
B Preferred Stock plus 10% per annum pro-rated through any liquidation date.
During the years ended April 30, 1996 and 1997, 1,400 and 4,600 shares
respectively, of Class B Preferred Stock were converted at the election of the
holder to common stock. In connection with these conversions, the Company issued
469,144 and 1,587,138 shares, respectively, of common stock. As of
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September 25, 1997, 2,200 shares of Class B Convertible Preferred Stock with
a liquidation preference of approximately $2,583,000 remain outstanding. If
converted on September 25, 1997, these 2,200 shares would have been convertible
into approximately 960,000 shares of Common Stock. If the warrants associated
with the Class B Preferred Stock were also exercised on September 25, 1997,
approximately 267,000 additional shares of Common Stock would have been issued.
If all of the shares of Class B Preferred Stock were converted and the
warrants associated therewith were exercised and if all of the shares of Class C
Preferred Stock were converted and the Conversion Warrants exercised on
September 25, 1997, the Company would have issued approximately 6,522,275 shares
of Common Stock, of which amount approximately 1,227,000 shares of Common Stock
would be attributable to the conversion of the Class B Preferred Stock and the
exercise of the warrants applicable thereto and approximately 5,295,000 shares
of Common Stock would be attributable to the conversion of the Class C Preferred
Stock, the exercise of the placement agent warrants and the Conversion Warrants.
During the past year, the Company's Common Stock has traded as low as
$2.88 per share and as high as $7.19 per share. If all of the shares of the
Class C Preferred Stock were converted and the warrants applicable thereto were
exercised when the Company Stock was at its low and the maximum discount was in
effect then approximately 7,997,000 additional shares of Common Stock would be
issued. If all of the shares of the Class C Preferred Stock were converted and
the placement agent warrants applicable thereto and the Conversion Warrants were
exercised when the Common Stock was at its high and the maximum discount was in
effect then approximately 3,203,000 additional shares would be issued. If all of
the shares of the Class B Preferred Stock were converted and the warrants
applicable thereto were exercised when the Company Stock was at its low then
approximately 1,055,000 additional shares of Common Stock would be issued. It is
assumed that the Warrants would not be exercised at the low since the exercise
price exceeds the market price. If all of the shares of the Class B Preferred
Stock were converted and the warrants applicable thereto exercised when the
Common Stock was at its high then approximately 1,110,000 additional shares
would be issued.
In addition to the warrants set forth above, the Company has
outstanding warrants to issue 130,100 shares of stock at prices ranging from
$3.00 to $5.30. The warrants expire as follows: 30,000 warrants expire on or
before April 30, 1998, 10,000 on December 31, 1999 and 90,100 on December 18,
2000. In connection with its search for a chief executive officer, the Company
has committed to grant warrants for a maximum of 60,000 shares. Such grant is
dependent on the success and the conclusion date of the search. The Company has
granted options to purchase 4,544,750 shares of Common Stock pursuant to its
stock option plans.
STOCK PRICE FLUCTUATIONS AND LIMITED TRADING VOLUME. The Company's
participation in the highly competitive biotechnology industry often results in
significant volatility in the market price of the Company's Common Stock. Also,
at times there is a limited trading volume in the Company's Common Stock.
Announcements of technological innovations or new commercial products by the
Company or its competitors, developments or disputes concerning patent or
proprietary rights, publicity regarding actual or potential medical results
relating to products under development by the Company or its competitors,
regulatory developments in both the United States and foreign countries, public
concern as to the safety of biotechnology products and economic and other
external factors, as well as period-to-period fluctuations in financial results
may have a significant impact on the market price of the Company's Common Stock.
The volatility in the stock price and limited trading volume are significant
risks investors should consider. As noted in the Section entitled SHARES
ELIGIBLE FOR FUTURE SALE; DILUTION; CONTROL, the Company could issue
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in excess of 8,000,000 additional shares of Common Stock if the market price of
the Common Stock is approximately $3.9375 per share and the Preferred Stock and
the Warrants related thereto are converted and exercised on the last day they
may be converted and exercised. If the price of the Common Stock declines and
the holders of the Preferred Stock convert when the price is low, the Company
will be required to issue a substantial amount of additional shares as both the
Class B Convertible Preferred Stock ("Class B Preferred Stock") and the Class C
Preferred Stock provide that the conversion of such shares of preferred stock
into shares of the Company's Common Stock issued or issuable shall be at the
lower of a conversion cap or a conversion price indexed to the market price of
the Common Stock at the time of conversion. If the holders of the Preferred
Stock converted and attempted to sell all or a significant portion of the shares
of Common Stock in the open market, this could cause a severe depression of the
market price for a share of the Company's Common Stock.
MAINTENANCE CRITERIA FOR NASDAQ SECURITIES. The National Association of
Securities Dealers, Inc. ("the NASD"), which administers Nasdaq, recently made
changes in the criteria for continued Nasdaq eligibility on the Nasdaq SmallCap
Market. In order to continue to be included in Nasdaq, the Company must maintain
$2 million in tangible net assets, public float of 500,000 shares with a
$1,000,000 market value of its public float and $1 million in total capital and
surplus. In addition, continued inclusion requires two market-makers, at least
300 holders of the Common Stock and a minimum bid price of $1 per share;
provided, however, that if the Company falls below such minimum bid price, it
will remain eligible for continued inclusion in Nasdaq if the market value of
the public float is at least $1 million and the Company has $2 million in
capital and surplus. The Company's failure to meet these maintenance criteria in
the future may result in the discontinuance of the inclusion of its securities
in Nasdaq. In such event, the Company would become subject to the "penny stock"
rules and trading, if any, in the Company's Common Stock would then continue to
be conducted in the non-Nasdaq over-the-counter market in what are commonly
referred to as the electronic bulletin board and the "pink sheets." As a result,
an investor may find it more difficult to dispose of or to obtain accurate
quotations as to the market value of the securities.
INTENSE COMPETITION. The biotechnology industry is intensely
competitive and changing rapidly. Substantially all of the Company's existing
competitors have greater financial resources, larger technical staff, and larger
research budgets than the Company and greater experience in developing products
and running clinical trials. Two of the Company's competitors, Idec
Pharmaceuticals Corporation ("Idec") and Coutler Pharmaceuticals, Inc.
("Coulter"), each have a lymphoma antibody which, while indicated for a
different stage of the disease, may compete with the Company's LYM-1
(Oncolym(TM)) product. The Company believes that both Idec and Coulter will be
marketing their respective lymphoma products prior to the time the LYM-1
(Oncolym(TM)) product receives marketing approval. There can be no assurance
that the Company will be able to compete successfully or that competition will
not have a material adverse effect on the Company's business, financial position
and results of operations. There can be no assurance that these competitors will
not be able to raise substantial funds and to employ these funds and their other
resources to develop products which compete with the Company's other product
candidates.
TECHNOLOGICAL UNCERTAINTY. The Company's future success will depend
significantly upon its ability to develop and test workable products for which
the Company will seek FDA approval to market to certain defined groups. A
significant risk remains as to the technological performance and commercial
success of the Company's technology and products. The products currently under
development by the Company will require significant additional laboratory and
clinical testing and investment over the foreseeable future. The significant
research, development, and testing activities, together with the resulting
increases in associated expenses, are expected to result in operating losses for
the foreseeable future. Although the Company is optimistic that it will be able
to successfully complete development of one or
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11
more of its products, there can be no assurance that (i) the Company's research
and development activities will be successful; (ii) any proposed products will
prove to be effective in clinical trials; (iii) the Company's product candidates
will not cause harmful side effects during clinical trials; (iv) the Company's
product candidates may take longer to progress through clinical trials than has
been anticipated; (v) the Company's product candidates may prove impracticable
to manufacture in commercial quantities at a reasonable cost and/or with
acceptable quality; (vi) the Company will be able to obtain all necessary
governmental clearances and approvals to market its products; (vii) the
Company's product candidates will prove to be commercially viable or
successfully marketed; or (viii) that the Company will ever achieve significant
revenues or profitable operations. In addition, the Company may encounter
unanticipated problems, including development, manufacturing, distribution and
marketing difficulties. The failure to adequately address such difficulties
could have a material adverse effect on the Company's business, financial
position and results of operations.
The results of initial preclinical and clinical testing of the products
under development by the Company are not necessarily indicative of results that
will be obtained from subsequent or more extensive preclinical studies and
clinical testing. The Company's clinical data gathered to date with respect to
its LYM-1 (Oncolym(TM)) antibody 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 treatment with a radiolabeled antibody. Further,
the data from this Phase II dose escalation trial were compiled from testing
conducted at a single site and with a relatively small number of patients.
Substantial additional development and clinical testing and investment will be
required prior to seeking any regulatory approval for commercialization of this
potential product. There can be no assurance that clinical trials of the LYM-1
(Oncolym(TM)) 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 demonstrate adequately the safety and efficacy of
LYM-1 (Oncolym(TM)) or any other therapeutic product under development could
delay or prevent regulatory approval of the product and would have a material
adverse effect on the Company's business, financial condition and results of
operations.
LIMITED CONTROL OF CLINICAL TRIALS. A Phase II/III clinical trial for
the Company's LYM-1 (Oncolym(TM)) antibody is being conducted by Alpha. As a
result of Alpha being in charge of the clinical trial, the Company has limited
control over the LYM-1 (Oncolym(TM)) clinical trial. In August 1997, the Company
commenced negotiations with Alpha to increase its participation in the LYM-1
(Oncolym(TM)) clinical trial. Discussions and negotiations between the Company
and Alpha are continuing. While the Company is attempting to reach an agreement
with Alpha which would allow the Company to increase its participation in the
LYM-1 (Oncolym(TM)) clinical trial, no assurance can be given that the Company
will be able to negotiate any modification to the existing agreement with Alpha
on acceptable terms, or at all, or that the Company will have any increased
participation or input in the progress of the clinical trial.
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS. The Company has limited
experience in conducting clinical trials, but it believes that the clinical
trials will be costly. The rate of completion of the Company's clinical trials
will be dependent upon, among other factors, the rate of patient enrollment.
Patient enrollment is a function of many factors, including the nature of the
Company's clinical trial protocols, existence of competing protocols, size of
the patient population, proximity of patients to clinical sites and eligibility
criteria for the study. Delays in patient enrollment will result in increased
costs and delays, which could have a material adverse effect on the Company. The
Company cannot assure that
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12
patients enrolled in the Company's clinical trials will respond to the Company's
product candidates. Setbacks are to be expected in conducting human clinical
trials. Failure to comply with the United States Food and Drug Administration
("FDA") regulations applicable to such testing can result in delay, suspension
or cancellation of such testing, and/or refusal by the FDA to accept the results
of such testing. In addition, 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. Further, there can be no assurance
that human clinical testing will show any current or future product candidate to
be safe and effective or that data derived therefrom will be suitable for
submission to the FDA. Any suspension or delay of any of the clinical trials
could have a material adverse effect on the Company's business, financial
condition and results of operations.
LENGTHY REGULATORY PROCESS; NO ASSURANCE OF REGULATORY APPROVALS. The
testing, manufacturing, labeling, advertising, promotion, export and marketing,
among other things, of the Company's 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. At the present time, the Company
believes that its products will be regulated by the FDA as biologics.
Manufacturers of biologics may also be subject to state regulation.
The steps required before a biologic may be approved for marketing in
the United States generally include (i) preclinical laboratory tests and animal
tests, (ii) the submission to the FDA of an Investigational New Drug application
("IND") for human clinical testing, which must become effective before human
clinical trials may commence, (iii) adequate and well-controlled human clinical
trials to establish the safety and efficacy of the product, (iv) the submission
to the FDA of a Product License Application ("PLA") or a Biologics License
Application ("BLA"), (v) the submission to the FDA of an Establishment License
Application ("ELA"), (vi) FDA review of the ELA and the PLA or BLA, and (vii)
satisfactory completion of an FDA inspection of the manufacturing facility or
facilities at which the product is made to assess compliance with CGMP. The
testing and approval process requires substantial time, effort, and financial
resources and there can be no assurance that any approval will be granted on a
timely basis, if at all. There can be no assurance 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 the Company's 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 studies and clinical studies, together with
detailed information on the manufacture and composition of a product candidate,
are submitted to the FDA in the form of 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
postmarketing testing and surveillance to monitor the safety or efficacy of a
product. There can be no assurance that FDA approval of any PLA or BLA submitted
by the Company will be granted 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 approval is obtained, violations of regulatory
requirements, including the preclinical and clinical testing process, the PLA or
BLA review process, or thereafter (including after approval) may result in
various adverse consequences, including the FDA's delay in approving or refusing
-12-
13
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, manufacturer, including withdrawal of the product from the market.
Also, new government requirements may be established that could delay or prevent
regulatory approval of the Company's product candidates.
The Company will also be subject to a variety of foreign regulations
governing clinical trials and sales of its 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, the Company intends, to the extent possible,
to rely on foreign licensees to obtain regulatory approval for marketing its
products in foreign countries.
SINGLE SOURCE OF RADIOLABELING SERVICES. The Company procures its
radiolabeling services from Mills Biopharmaceuticals, Inc. The Company has
negotiated contracts with two other radiolabeling companies and continues to
negotiate with other companies to provide radiolabeling services for its
antibodies and expects to have additional sources for radiolabeling its antibody
in late-1997. There can be no assurance that these additional suppliers will be
able to qualify their facilities, 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, and that clinical trials will not be delayed or disrupted as a
result. While the Company is developing additional suppliers of these services,
it expects to rely on its current supplier for all or a significant portion of
its requirements for the LYM-1 (Oncolym(TM)) antibody for the foreseeable
future. Radiolabeled antibody cannot be stockpiled against future shortages due
to the eight-day half-life of the I131 radioisotope. Accordingly, any change in
the Company's existing or planned contractual relationships with, or
interruption in supply from, its third-party suppliers could adversely affect
the Company's ability to complete its ongoing clinical trials and to market the
LYM-1 (Oncolym(TM)) antibody, if approved. Any such change or interruption would
have a material adverse effect on the Company's business, financial condition
and results of operations.
HAZARDOUS AND RADIOACTIVE MATERIALS. The manufacturing and use of the
Company's LYM-1 (Oncolym(TM)) requires the handling and disposal of I131. The
Company is relying on its current contract manufacturer, Mills
Biopharmaceuticals, Inc ("MBI"), to radiolabel its LYM-1 Antibody with I131 and
to comply with various state and federal regulations regarding the handling and
use of radioactive materials. Violation of these state and federal regulations
by MBI or a clinical trial site could delay significantly completion of such
trials. Violations of safety regulations could occur with this manufacturer,
and, therefore, there is a risk of accidental contamination or injury. The
Company could be held liable for any damages that result from such an accident,
contamination or injury from 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 result in a material adverse
effect on the Company's business, financial condition and results of operations.
In addition, the Company may incur substantial costs to comply with
environmental regulations. In the event of any such noncompliance or accident,
the supply of LYM-1
-13-
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(Oncolym(TM)) for use in clinical trials or commercially could be interrupted,
which could have a material adverse effect on the Company's business, financial
condition and results of operations.
DEPENDENCE ON THIRD PARTIES FOR COMMERCIALIZATION. The Company intends
to sell its products in the United States and internationally in collaboration
with marketing partners. The Company has a development and marketing agreement
with Alpha for LYM-1 (Oncolym(TM)). At the present time, Alpha does not have a
sales force to market LYM-1 (Oncolym(TM)). If and when the FDA approves LYM-1
(Oncolym(TM)), the marketing of LYM-1 (Oncolym(TM)) will be contingent upon
Alpha recruiting, training and deploying a sales force. As noted in the
paragraph entitled LIMITED CONTROL OF CLINICAL TRIALS, the Company has been
negotiating with Alpha to increase its participation in the clinical trials. To
date no agreement has been reached, but the parties continue to discuss the
situation. The Company does not possess the resources and experience necessary
to market either LYM-1 (Oncolym(TM)) or its other product candidates. The
Company has no arrangements for the distribution of its other product
candidates, and there can be no assurance that the Company will be able to enter
into any such arrangements in a timely manner or on commercially favorable
terms, if at all. If the Company is successful in obtaining FDA approval for one
of its other product candidates the Company's ability to market the product will
be contingent upon it either licensing or entering into a marketing agreement
with a large company or upon it recruiting, developing, training and deploying
its own sales force. Development of an effective sales force requires
significant financial resources and time. There can be no assurance that the
Company or Alpha will be able to establish such a sales force in a timely or
cost effective manner, if at all, or that such a sales force will be capable of
generating demand for the Company's product candidates.
UNCERTAINTY OF MARKET ACCEPTANCE. Even if the Company's products are
approved for marketing by the FDA and other regulatory authorities, there can be
no assurance that the Company's products will be commercially successful. If the
Company's most advanced product, LYM-1 (Oncolym(TM)) is approved, it would
represent a significant departure from currently approved methods of treatment
for Non-Hodgkin's lymphoma. Accordingly, LYM-1 (Oncolym(TM)) may experience
under-utilization by oncologists and hematologists who are unfamiliar with the
application of LYM-1 (Oncolym(TM)) in the treatment of Non-Hodgkin's lymphoma.
As with any new drug, doctors may be inclined to continue to treat patients with
conventional therapies, in this case chemotherapy, rather than new alternative
therapies. Market acceptance also could be affected by the availability of third
party reimbursement. Failure of LYM-1 (Oncolym(TM)) to achieve market
acceptance would have a material adverse effect on the Company's business,
financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS. The Company's success will depend, in
large part, on its ability to maintain a proprietary position in its products
through patents, trade secret and orphan drug designation. The Company holds
several United States patent(s), United States patent applications and numerous
corresponding foreign patent applications, and has licenses to patents or patent
applications owned by other entities. No assurance can be given, however, that
the patent applications of the Company or the Company's licensors will be issued
or that any issued patents will provide competitive advantages for the Company's
products or will not be successfully challenged or circumvented by its
competitors. The patent position worldwide of biotechnology companies in
relation to proprietary products is highly uncertain and involves complex legal
and factual questions. Moreover, there can be no assurance that any patents
issued to the Company or the Company's licensors will not be infringed by others
or will be enforceable against others. In addition, there can be no assurance
that the patents, if issued, would not be held invalid or unenforceable by a
court of competent jurisdiction. Enforcement of the Company's patents may
require substantial financial and human resources. Moreover, the Company may
have to participate in interference
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15
proceedings if declared by the United States Patent and Trademark Office to
determine priority of inventions, which typically take several years to resolve
and could result in substantial costs to the Company.
A substantial number of patents have already been issued to other
biotechnology and biopharmaceutical companies. Particularly in the monoclonal
antibody field, competitors may have filed applications for or have been issued
patents and may obtain additional patents and proprietary rights relating to
products or processes competitive with or similar to those of the Company. To
date, no consistent policy has emerged regarding the breadth of claims allowed
in biopharmaceutical patents. There can be no assurance that patents do not
exist in the United States or in foreign countries or that patents will not be
issued that would have an adverse effect on the Company's ability to market any
product which it develops. Accordingly, the Company expects that commercializing
monoclonal antibody-based products may require licensing and/or cross-licensing
of patents with other companies in this field. There can be no assurance that
the licenses, which might be required for the Company's processes or products,
would be available, if at all, on commercially acceptable terms. The ability to
license any such patents and the likelihood of successfully contesting the scope
or validity of such patents are uncertain and the costs associated therewith may
be significant. If the Company is required to acquire rights to valid and
enforceable patents but cannot do so at a reasonable cost, the Company's ability
to manufacture its products would be materially adversely affected.
The Company also relies on trade secrets and proprietary know-how which
it seeks to protect, in part, by confidentiality agreements with its employees
and consultants. There can be no assurance that these agreements will not be
breached, that the Company will have adequate remedies for any breach, or that
the Company's trade secrets will not otherwise become known or be independently
developed by competitors.
PRODUCT LIABILITY. The manufacture and sale of human therapeutic
products involve an inherent risk of product liability claims. The Company has
only limited product liability insurance. There can be no assurance that the
Company will be able to maintain existing insurance or obtain additional product
liability insurance on acceptable terms or with adequate coverage against
potential liabilities. Such insurance is expensive, difficult to obtain and may
not be available in the future on acceptable terms, if at all. An inability to
obtain sufficient insurance coverage on reasonable terms or to otherwise protect
against potential product liability claims brought against the Company in excess
of its insurance coverage, if any, or a product recall could have a material
adverse effect upon the Company's business, financial condition and results of
operations.
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. The
Company anticipates 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 proposed or actual changes could affect
the Company's ultimate profitability. Legislative debate is expected to continue
in the future, and market forces are expected to drive reductions of health care
costs. The Company cannot predict what impact the adoption of any federal or
state health care reform measures or future private sector reforms may have on
its business.
-15-
16
The Company's ability to successfully commercialize its 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 the Company's 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
have a material adverse effect on the Company.
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 the Company's
product candidates than it expects. The cost containment measures that health
care payers and providers are instituting and the effect of any health care
reform could materially adversely affect the Company's ability to operate
profitably.
EARTHQUAKE RISKS. The Company's corporate and research facilities,
where the majority of its research and development activities are conducted, are
located near major earthquake faults which have experienced earthquakes in the
past. The Company does not carry earthquake insurance on its facility due to its
prohibitive cost and limited available coverages. In the event of a major
earthquake or other disaster affecting the Company's facilities, the operations
and operating results of the Company could be adversely affected.
FORWARD-LOOKING STATEMENTS. Based on current expectations, this
prospectus and the Company's Annual Report on Form 10-K or Form 10-K/A Amendment
No. 1 and its quarterly and periodic reports contain 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 above, 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. The Company may encounter competitive, technological, financial and
business challenges making it more difficult than expected to continue to
develop, market and manufacture its products; competitive conditions within the
industry may change adversely; upon development of the Company's products,
demand for the Company's products may weaken; the market may not accept the
Company's products; the Company may be unable to retain existing key management
personnel; the Company's
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17
forecasts may not accurately anticipate market demand; and there may be other
material adverse changes in the Company's operations or business. Certain
important factors affecting the forward looking statements made herein include,
but are not limited to (i) accurately forecasting capital expenditures, and (ii)
obtaining new sources of external financing prior to the expiration of existing
support arrangements or capital. Assumptions relating to budgeting, marketing,
product development and other management decisions are subjective in many
respects and thus susceptible to interpretations and periodic revisions based on
actual experience and business developments, the impact of which may cause the
Company to alter its capital expenditure or other budgets, which may in turn
affect the Company's business, financial position and results of operations.
PART II
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Report on Form 8-K.
(a) Exhibits:
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
(b) Reports on Form 8-K: Report on Form 8-K filed May 12, 1997
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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/ LON H. STONE
---------------------------
Lon H. Stone
By: /s/ WILLIAM V. MODING
---------------------------
William V. Moding
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19
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
APRIL 30, JULY 31,
1997 1997
------------ -------------
Restated Restated
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 12,228,660 $ 8,500,657
Short-term investments 1,959,973
Other receivables 360,448 98,402
Inventories, net 172,162 186,977
Prepaid expenses and other current assets 20,138 65,224
------------ ------------
Total current assets 12,781,408 10,811,233
PROPERTY:
Land 1,050,510 1,050,510
Buildings and improvements 3,350,916 3,350,916
Laboratory equipment 1,579,300 1,766,705
Furniture and fixtures 396,225 533,521
Construction-in-progress 255,880
------------ ------------
6,376,951 6,957,532
Less accumulated depreciation and amortization (1,038,619) (1,170,338)
------------ ------------
Property, net 5,338,332 5,787,194
OTHER ASSETS:
Patents, net 178,815 173,541
Note receivable from officer and shareholder 356,914 363,089
Other 46,001 94,316
------------ ------------
Total other assets 581,730 630,946
------------ ------------
$ 18,701,470 $ 17,229,373
============ ============
See accompanying notes to consolidated
financial statements
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20
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
(continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
APRIL 30, JULY 31,
1997 1997
------------- ------------
Restated Restated
(Unaudited)
CURRENT LIABILITIES:
Accounts payable $ 707,504 $ 590,420
Accrued legal and accounting fees 385,500 269,534
Accrued payroll and related costs 162,487 167,397
Accrued royalties and sponsored research 339,560 465,295
Reserve for contract losses 248,803 216,306
Accrued license termination fee 100,000 100,000
Accrued interest 72,844 72,844
Current portion of long-term debt 76,527 103,886
Other current liabilities 70,171 195,765
------------ ------------
Total current liabilities 2,163,396 2,181,447
LONG-TERM DEBT 1,970,065 2,018,893
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock - $.001 par value; authorized 5,000,000 shares:
Class B convertible preferred stock, shares outstanding --
April 30, 1997 and July 31, 1997, 2,200 shares;
(liquidation preference of $2,552,603 at July 31, 1997) 2 2
Class C convertible preferred stock, shares outstanding --
April 30, 1997 and July 31, 1997, 12,000 shares;
(liquidation preference of $12,159,454 at July 31, 1997) 12 12
Common stock - $.001 par value; authorized 50,000,000 shares;
outstanding -- April 30, 1997, 27,248,652 shares;
July 31, 1997, 27,398,631 shares 27,249 27,399
Additional paid-in capital (Note 8) 72,391,736 74,262,689
Accumulated deficit (Note 8) (57,374,408) (60,784,487)
------------ ------------
15,044,591 13,505,615
Less notes receivable from sale of common stock (476,582) (476,582)
------------ ------------
Total stockholders' equity 14,568,009 13,029,033
------------ ------------
$ 18,701,470 $ 17,229,373
============ ============
See accompanying notes to consolidated
financial statements
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21
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
------------------------------
JULY 31, JULY 31,
1996 1997
------------ ------------
Restated Restated
REVENUES:
Net product sales and royalties $ -- $ 4,300
Interest and other income 86,302 198,612
------------ ------------
Total revenues 86,302 202,912
COSTS AND EXPENSES:
Cost of sales 4,300
Research and development 578,122 1,324,107
General and administrative:
Unrelated entities 376,215 1,064,804
Affiliates 55,255 31,537
Interest 24,974 49,077
------------ ------------
Total costs and expenses 1,034,566 2,473,825
============ ============
Net loss before preferred
stock accretion and dividends $ (948,264) $ (2,270,913)
Preferred stock accretion
and dividends:
Imputed dividends for Class B
Convertible Preferred Stock (211,049) (85,083)
Accretion of Class C
Preferred Stock Discount (832,192)
Imputed dividends for Class C
Convertible Preferred Stock (221,891)
------------ ------------
Net Loss Applicable to
Common Stock (Note 2) $ (1,159,313) $ (3,410,079)
============ ============
Weighted Average Shares
Outstanding (Note 2) 20,686,817 27,360,223
============ ============
Net Loss per Share (Note 2) $ (.06) $ (0.12)
============ ============
See accompanying notes to consolidated
financial statements
-21-
22
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
NOTES
RECEIVABLE
PREFERRED STOCK COMMON STOCK ADDITIONAL FROM
------------------- --------------------- PAID-IN ACCUMULATED SALE OF
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT STOCK TOTAL
------ ------ ---------- ------- ----------- ------------- ---------- -----------
Restated Restated
BALANCE AT APRIL 30, 1997
Restated 14,200 $14 27,248,652 $27,249 $72,391,736 $(57,374,408) $(476,582) $14,568,009
Common stock issued
upon exercise of stock
options 6,000 6 5,994 6,000
Common stock issued
for cash 143,979 144 549,856 550,000
Stock-based compensation
175,937 175,937
Accretion of Class C
preferred stock discount 832,192 (832,192)
Accretion of Class B and
Class C preferred stock
dividends 306,974 (306,974)
Net loss (2,270,913) (2,270,913)
------ --- ---------- ------- ----------- ------------ --------- -----------
BALANCE AT JULY 31, 1997,
Restated (unaudited) 14,200 $14 27,398,631 $27,399 $74,262,689 $(60,784,487) $(476,582) $13,029,033
====== === ========== ======= =========== ============ ========= ===========
See accompanying notes to consolidated
financial statements
-22-
23
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
----------------------------
JULY 31, JULY 31,
1996 1997
------------ -----------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (948,264) $(2,270,913)
Adjustments to reconcile net loss to net cash
used in operating activities:
Stock based compensation 175,937
Depreciation and amortization 69,786 137,445
Changes in operating assets and liabilities:
Other receivables 75,568 262,046
Inventories, net (86,959) (14,815)
Prepaid expenses and other current assets 8,100 (45,086)
Accounts payable and accrued legal and accounting
fees (27,387) (233,050)
Accrued royalties and sponsored research fees 20,000 125,735
Other accrued expenses and current liabilities (9,590) 98,007
----------- -----------
Net cash used in operating activities (898,746) (1,764,694)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale (purchase) of short-term investments 3,898,888 (1,959,973)
Property acquisitions (189,430) (577,491)
Increase in other assets (6,175) (58,032)
----------- -----------
Net cash provided by (used in) investing
activities 3,703,283 (2,595,496)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 8,000 556,000
Principal payments on long-term debt (5,100) (21,894)
Proceeds from issuance of long-term debt 98,081
----------- -----------
Net cash provided by financing activities 2,900 632,187
See accompanying notes to consolidated
financial statements
-23-
24
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
THREE MONTHS ENDED
----------------------------------
JULY 31, JULY 31,
1996 1997
------------ ------------
(Unaudited) (Unaudited)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS $ 2,807,437 $ (3,728,003)
CASH AND CASH EQUIVALENTS,
beginning of period 4,179,313 12,228,660
------------ ------------
CASH AND CASH EQUIVALENTS,
end of period $ 6,986,750 $ 8,500,657
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 16,671 $ 49,077
============ ============
Income taxes paid $ 800 $ 800
============ ============
See accompanying notes to consolidated
financial statements
-24-
25
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RESTATED (UNAUDITED)
(1) 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, 1997,
and the consolidated results of its operations and its consolidated
cash flows for the three month periods ended July 31, 1997 and 1996.
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, 1997, filed with the Securities
and Exchange Commission on July 29, 1997, as amended by a Form 10-K/A
filed on or about October 2, 1997.
(2) The Company will adopt Financial Accounting Standards Board (SFAS) No.
128, "Earnings per Share" beginning in the quarter ending January 31,
1998. Under SFAS No. 128, the Company will be required to disclose
basic earnings (loss) per share and diluted earnings (loss) per share
for all periods for which an income statement is presented. The
Company believes that adoption of this standard will have no effect on
the basic or diluted earnings per share for periods in which the
Company incurs losses and that its adoption will result in an increase
in basic earnings per share in periods with income and will have no
effect on the fully diluted earnings per share in periods with income.
(3) Short-term investments at July 31, 1997, represent a six-month term
treasury bill valued at $986,000 and a six-month term Federal National
Mortgage Association Discount Note valued at $973,973, which expire at
various dates through November 1997. Both short-term investments are
classified as held-to-maturity and are stated at cost, which
approximates fair value.
(4) Net loss per share attributable to common stockholders is calculated
by adding the net loss for the quarter to the dividends and Preferred
Stock issuance discount accretion on the Class B Preferred Stock and
the Class C Preferred Stock during the quarter and dividing the sum of
these amounts by the weighted average number of shares of common stock
outstanding during the quarter. Shares issuable upon the exercise of
common stock warrants and options have been excluded from the quarter
ended July 31, 1997 and 1996 per share calculation because their
effect is antidilutive. Accretion of the Class B and Class C Preferred
Stock dividends and issue discount amounted to $211,049 and $1,139,166
for the quarters ended July 31, 1996 and 1997, respectively.
(5) In August 1997, the Company filed a Registration Statement on Form S-3
to register common shares which may be issued should the Class C
Preferred stockholders exercise their conversion rights under the 5%
Preferred Stock Investment Agreement. Commencing on September 26,
1997, the Class C Stock is convertible at the option of the holder
into a number of shares of common stock of the Company determined by
dividing $1,000 plus all accrued but unpaid dividends by the
Conversion Price. The Conversion Price is the average of the lowest
trading price of the Company's common stock for the five consecutive
trading days ending with the trading day prior to the conversion date
reduced by 13% starting on November 26, 1997, 20% starting on January
26, 1998, 22.5% starting on March 26, 1998, 25% starting on May 26,
1998, and 27% starting on July 26, 1998 and thereafter. After
March 24, 1998, the Conversion Price will be the lower of the
Conversion Price as calculated in the preceding sentence or the
average of the Closing Price of the Company's common stock for the
thirty (30) trading days including and immediately preceding March 24,
1998 (the "Conversion Cap"). In addition to the common stock issued
upon conversion of the Class C Stock, warrants to purchase one-fourth
of the number of shares of common stock issued upon the conversion
will be issued to the converting investor. The Warrants are
exercisable at 110 percent of the Conversion Cap through April 2002.
Subject to certain conditions contained in the Certificate of
Designation, the Class C Stock is subject to mandatory redemption upon
certain events as defined in the Certificate of Designation and
mandatory conversion at any time after April 25, 1998. Some of the
mandatory redemption features are within the control of the Company.
for those mandatory redemption features that are not within the
control of the Company, the Company has the option to redeem the Class
C Stock in cash or in common stock. Should a redemption event occur,
it is the Company's intention to redeem the Class C Stock through the
issuance of the Company's common stock. Except as provided in the
Certificate of Designation or by Delaware law, the Class C Stock does
not have voting rights.
-25-
26
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
RESTATED (UNAUDITED)
(6) 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.
(7) Management believes that the Company's cash and short-term investments
are sufficient to sustain its operations through at least July 31,
1998. Although management believes that the current financial
resources are sufficient to sustain operations through at least July
31, 1998, the Company has historically experienced significant losses
and negative cash flows from operations and had an accumulated deficit
of approximately $60,784,000 at July 31, 1997. The Company expects
that it will continue to experience negative cash flows from
operations as it increases activities associated with the Phase II/III
clinical trials for LYM-1 (Oncolym TM) and with its research,
development and clinical trials for its Tumor Necrosis Therapy ("TNT")
and other technologies. Historically, the Company has relied on third
party and investor funds to fund its operations and clinical trials.
The Company must raise additional capital to sustain its research and
development efforts and to provide for future clinical trials.
Although management expects to receive additional funding in the
future, there can be no assurance that funding will be received. If
the Company does not receive additional funding, it will be forced to
scale back operations and it could have a material adverse effect on
the Company. The Company's continuation as a going concern is
dependent on its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing as may
be required and, ultimately to attain successful operations.
(8) At the March 13, 1997, meeting of the Emerging Issues Task Force, the
staff of the Securities and Exchange Commission ("SEC") issued an
announcement regarding accounting for the issuance of convertible
preferred stock and debt securities. The announcement dealt with,
among other things, the belief by the SEC staff that any discounts on
future conversions of preferred securities are analogous to a dividend
and should be recognized as a return to the preferred shareholders. At
July 31, 1997, the Company had two classes of securities with future
conversion discounts, the Class B Preferred Stock and the Class C
Preferred Stock. Both of these securities include conversion features
which permit the holders of the preferred stock to convert their
holdings to common shares at a discount from the market price of the
common shares when converted.
Subsequent to the issuance of the Company's financial statements for
the quarter ended July 31, 1997, in conjunction with a review of a
Registration Statement on Form S-3 filed by the Company relating to
the registration of common stock underlying the Class C Preferred
Stock, the SEC requested that the Company retroactively apply the
accounting suggested in their announcement to the Company's Class B
Preferred Stock which was issued in December 1995. Accordingly, the
Company's management determined that the financial position presented
in the consolidated financial statements and footnotes as of April 30,
1997 and July 31, 1997 (unaudited) and for each of the three month
periods ended July 31, 1996 and 1997 (unaudited) should be restated to
comply with the SEC's request and to include the accretion of the
discount on the Class C Preferred Stock discount in the quarter ended
July 31, 1997.
Under this accounting treatment, the value of the discount has been
reflected in the restated consolidated financial statements as
additional preferred dividends and has been accreted through the first
possible conversion date (Class B) or through the first date of the
maximum conversion discount (Class C). The restatement also gives
effect to the recognition in the calculation of net loss per share of
additional preferred dividends on the Class B and Class C Preferred
Stock representing the accretion of the issuance discount which had
not been previously recognized in the calculation of net loss per
share. None of these restatements had any effect on the net loss of
the Company or of its cash flows.
A summary of the significant effects of the restatement is as follows:
As Previously
Reported Restated
------------- ------------
Quarter ended July 31, 1997
Additional paid-in-capital $ 66,850,534 $ 74,262,689
Accumulated deficit $(53,372,332) $(60,784,487)
Net loss per share $ (.08) $ (.12)
Quarter ended July 31, 1996
Net loss per share $ (.05) $ (.06)
-26-
27
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule
5
0000704562
TECHNICLONE CORPORATION
1,000
U.S. DOLLARS
3-MOS
APR-30-1998
MAY-01-1997
JUL-31-1997
1,000
8,501
1,960
98
0
187
10,811
6,958
1,170
17,229
2,181
0
0
0
27
13,002
17,229
4
203
4
2,474
0
0
49
(2,271)
0
(2,271)
0
0
0
(2,271)
(.12)
(.12)
