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 OCTOBER 31, 1998
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.
66,840,971 shares of Common Stock
as of November 30, 1998
PART I -- FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
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The following unaudited 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 on Form 10-Q:
Page
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Consolidated Balance Sheets at April 30, 1998 and October 31,1998 22
Consolidated Statements of Operations for the periods from August
1, 1997 to October 31, 1997 and from August 1, 1998 to October 31,
1998; from May 1, 1997 to October 31, 1997 and from May 1, 1998 to
October 31, 1998 24
Consolidated Statement of Stockholders' Equity for the period from
May 1, 1998 to October 31, 1998 25
Consolidated Statements of Cash Flows for the periods from May
1,1997 to October 31, 1997 and from May 1, 1998 to October 31, 1998 26
Notes to Consolidated Financial Statements 28
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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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. 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 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, the risks and uncertainties associated with completing pre-clinical
and clinical trials for the Company's technologies; obtaining additional
financing to support the Company's operations; obtaining regulatory approval for
such technologies; complying with other governmental regulations applicable to
the Company's business; obtaining the raw materials necessary in the development
of such compounds; consummating collaborative arrangements with corporate
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partners for product development; achieving milestones under collaborative
arrangements with corporate partners; developing the capacity to manufacture,
market and sell the Company's 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. 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.
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, the Company experienced losses in fiscal 1998 and during
the first six months of fiscal 1999 and has an accumulated deficit at October
31, 1998 of $79,991,000. 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, a sale and subsequent leaseback of its
facilities, obtaining additional equity or debt financing and negotiating a
licensing or collaboration agreements with another company. There can be no
assurance that the Company will be successful in raising such funds on terms
acceptable to it, or at all, or that sufficient additional capital will be
raised to complete the research, development, and clinical testing of the
Company's product candidates. The Company's future success is dependent upon
raising additional money to provide for the necessary operations of the Company.
If the Company is unable to obtain additional financing, there would be a
material adverse effect on the Company's business, financial position and
results of operations. The Company's continuation as a going concern is
dependent on its ability to generate sufficient cash flow to meet its
obligations on a timely basis, to obtain additional financing as may be required
and, ultimately, to attain successful operations.
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 to meet its obligations on a timely
basis through December 31, 1998. Should the Company complete the sale and
subsequent leaseback of its facilities by December 31, 1998, the Company
believes it would have sufficient cash on hand and available pursuant to the
financing commitments under the Equity Line of Credit to meet its obligations on
a timely basis through April 1999.
RESULTS OF OPERATIONS. The Company's net loss of $3,504,000, before
preferred stock discount accretion and dividends, for the quarter ended October
31, 1998 represents an increase in net loss of $75,000 in comparison to the net
loss of $3,429,000 for the prior year quarter ended October 31, 1997. This
increase in the net loss for the quarter ended October 31, 1998 is due to a
decrease in total revenues of $77,000 offset by a decrease in total costs and
expenses of $2,000. The Company's net loss of $6,810,000 for the six months
ended October 31, 1998 represents an increase in losses of $1,110,000 over the
six months ended October 31, 1997. The increased loss for the six months ended
October 31, 1998 is due to a $203,000 decrease in total revenues and a $907,000
increase in total costs and expenses.
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The decrease in total revenues for the quarter and six month period
ended October 31, 1998 of $77,000 and $203,000, respectively, compared to the
same periods in the prior year, is primarily attributable to a decrease in
interest income of $74,000 and $190,000 for the same respective periods.
Interest income decreased during the quarter and six month period ended October
31, 1998 due to a lower level of cash funds available for investment. Interest
income is not expected to be significant during the remainder of the fiscal year
due to the expected level of future cash balances. The Company does not expect
to generate product sales during the fiscal year ending April 30, 1999.
The Company's total costs and expenses decreased approximately $2,000
during the quarter ended October 31, 1998, in comparison to the same prior
quarterly period ended October 31, 1997. This decrease in total costs and
expenses resulted from a $365,000 decrease in general and administrative
expenses offset by a $321,000 increase in research and development expenses and
a $42,000 increase in interest expense, in comparison to the prior year quarter
ended October 31, 1997. The Company's total costs and expenses increased
$907,000 for the six months ended October 31, 1998 compared to the same period
in the prior year. This six month increase resulted from a $765,000 increase in
research and development expenses and a $233,000 increase in interest expense
offset by a $4,000 decrease in cost of sales and a $87,000 decrease in general
and administrative expenses.
The increase in research and development expenses of approximately
$321,000 and $765,000 during the quarter and six months ended October 31, 1998,
respectively, primarily relates to increased clinical trial costs associated
with the Phase II/III clinical trials of Oncolym(R) and the Phase I and
anticipated Phase II clinical trials of Tumor Necrosis Therapy ("TNT"). The
increase in clinical trial costs resulted from increased patient fees,
manufacturing and radiolabeling costs, and travel and consulting fees. In
addition, internal research and development activities increased, including
activities related to manufacturing and radiopharmaceutical scale-up and
increased efforts to validate the manufacturing facility which caused a
corresponding increase in related costs.
The decrease in general and administrative expenses of $365,000 during
the quarter ended October 31, 1998 compared to the quarter ended October 31,
1997 resulted primarily from a non-recurring expense of $276,000 incurred in the
quarter ended October 31, 1997 with respect to a penalty related to the Class C
Preferred Stock combined with a decrease in consulting fees associated with
Peregrine Pharmaceuticals, Inc. of approximately $122,000 and an approximate
$75,000 decrease in general corporate administrative expenses. Such decreases
were partially offset by an increase in stock related severance expenses of
approximately $108,000 for the quarter ended October 31, 1998 to the Company's
former Chief Executive Officer and former Vice President of Operations and
Administration. General and administrative expenses decreased approximately
$87,000 for the six months ended October 31, 1998 compared to the same period in
the prior year. Such decrease was primarily due to the aforementioned
non-recurring expense of $276,000 combined with a decrease in consulting fees
associated with Peregrine Pharmaceuticals, Inc. of approximately $122,000 and an
approximate $40,000 decrease in general corporate administrative expenses. Such
decreases were partially offset by an increase in non-cash related severance
expenses of approximately $351,000 for the six months ended October 31, 1998 to
the Company's former Chief Executive Officer and former Vice President of
Operations and Administration.
4
The increase in interest expense of approximately $42,000 and $233,000
for the quarter and six month periods ended October 31, 1998 compared to the
same respective periods in the prior year is primarily due to a higher level of
interest bearing debt outstanding during the quarter and six month periods ended
October 31, 1998 for construction loans owed to one of the Company's contractors
related to enhancements to the Company's manufacturing facility. For the quarter
and six months ended October 31, 1998, approximately $83,000 and $115,000,
respectively, was included in interest expense, which amount represents the
estimated fair value of 335,000 warrants granted to the above contractor for an
extension of time to pay the outstanding construction loans. The construction
loans were paid in full in August 1998.
Management believes that research and development costs as well as
general and administrative expenses will increase as the Company continues to
expand its clinical trial activities and increases production and radiolabeling
capabilities for its Oncolym(R) and TNT antibodies.
LIQUIDITY AND CAPITAL RESOURCES. At October 31, 1998, the Company had
$1,599,000 in cash and cash equivalents and a working capital deficit of
$1,104,000. The Company experienced losses in fiscal 1998 and during the first
six months of fiscal 1999 and had an accumulated deficit of approximately
$79,991,000 at October 31, 1998. The Company has significant commitments to
expend additional funds for radiolabeling contracts, license contracts,
severance arrangements and consulting. The Company expects operating
expenditures related to clinical trials to increase in the future as the
Company's clinical trial activity increases and scale-up for clinical trial
production continues. The Company has experienced negative cash flows from
operations since its inception and expects the negative cash flow from
operations to continue for the foreseeable future. The Company expects that the
monthly negative cash flow will continue for at least the next year as a result
of increased activities in connection with the Phase II/III clinical trials for
Oncolym(R) and the Phase I and Phase II clinical trials of TNT and the
development costs associated with Vasopermeation Enhancement Agents ("VEAs") and
Vascular Targeting Agents ("VTAs"). The Company believes that it will be
necessary for it to raise additional capital to sustain research and development
and provide for future clinical trials. Additional funds must be raised to
continue its operations until the Company is able to generate sufficient
additional revenue from the sale and/or 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 capital will be raised to
complete the research and development of the Company's product candidates.
The increased clinical trial activities and the manufacturing and
radiolabeling scale-up efforts have impacted the Company's losses and cash
consumption rate ("burn rate"). The Company believes it can only reduce the burn
rate significantly if it reduces programs substantially or delays clinical
trials and continued development of its scale-up efforts. The Company believes
that it will continue to experience losses and negative cash flow from
operations for the foreseeable future as it increases activities associated with
the Phase II/III clinical trials for Oncolym(R) and Phase I and Phase II
clinical trials for TNT and activities associated with the Company's research
and development of its other technologies.
COMMITMENTS. At October 31, 1998, the Company had fixed commitments of
approximately $2,199,000 related to radiolabeling contracts, license contracts,
severance arrangements, employment agreements and consulting agreements. In
addition, the Company has additional significant obligations, most of which are
5
contingent, for payments to licensors for its technologies and in connection
with the acquisition of the Oncolym(R) rights previously owned by Alpha
Therapeutic Corporation ("Alpha") and Biotechnology Development Ltd. ("BTD").
While most of the obligation to Alpha is contingent upon the Company attaining
certain milestones relating to the development of Oncolym(R), the Company
presently believes the milestones are achievable and that it will incur these
milestone obligations. The Company is actively pursuing a partner to assist with
the marketing and development costs of Oncolym(R).
ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS
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FLUCTUATION OF FUTURE OPERATING RESULTS. A number of factors could
cause actual results to differ materially from anticipated future operating
results. These factors include worldwide economic and political conditions and
industry specific factors. If the Company is to remain competitive and is 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 ("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 from quarter to quarter as it
funds non-recurring items associated with clinical trials, product development,
antibody manufacturing and radiolabeling expansion and scale-up, patent legal
fees and various consulting fees. The Company has limited experience with
clinical trials and if the Company encounters unexpected difficulties with its
operations 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 the early
stages of development, with two product candidates currently in clinical trials.
Revenues from product sales have been insignificant and throughout the Company's
history there have been minimal revenues from product royalties. If the initial
results from any of the clinical trials are poor, then management believes that
those results will adversely effect the Company's ability to raise additional
capital, which will affect the Company's ability to continue full-scale research
and development for its antibody technologies. 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 and radiolabeled at an acceptable cost and with appropriate quality
or that any approved products can be successfully marketed.
NEED FOR ADDITIONAL CAPITAL. The Company has experienced negative cash
flows from operations since its inception and expects the negative cash flow
from operations to continue for the foreseeable future. The Company currently
has commitments to expend additional funds for clinical trials, radiolabeling
contracts, license contracts, severance arrangements, employment agreements,
consulting agreements and for the repurchase of Oncolym(R) marketing rights from
Alpha and BTD. The Company expects operating expenditures related to clinical
trials to increase in the future as the Company's clinical trial activity
increases and scale-up for clinical trial production continues. As a result of
increased activities in connection with the Phase II/III clinical trials for
Oncolym(R) and Phase I and Phase II clinical trials for TNT and the development
costs associated with VEAs and VTAs, the Company expects that the monthly
negative cash flow will continue.
6
The Company has entered into an agreement for the sale and subsequent
leaseback of its facilities, which consists of two buildings located in Tustin,
California. The sale/leaseback transaction is with an unrelated entity and
provides for the leaseback of the Company's facilities for a twelve-year period
with two five-year options to renew. While the sale/leaseback agreement is in
escrow, it is subject to completion of normal due diligence procedures by the
buyer and there is no assurance that the transaction will be completed on a
timely basis or at all.
Without obtaining additional financing or completing the aforementioned
sale/leaseback transaction, the Company believes that it has sufficient cash on
hand to meet its obligations on a timely basis through December 31, 1998. Should
the Company complete the sale and subsequent leaseback of its facilities by
December 31, 1998, the Company believes it would have sufficient cash on hand
and available pursuant to such equity line financing facility to meet its
obligations on a timely basis through April, 1999. The Company's ability to
access funds under such equity line financing facility is subject to the
satisfaction of certain conditions precedent and the failure to satisfy these
conditions may limit or preclude the Company's ability to access such funds,
which could adversely affect the Company's business, immediate liquidity,
financial position and results of operations unless additional financing sources
are available.
The Company must raise additional funds to sustain its research and
development efforts, provide for future clinical trials, expand its
manufacturing and radiolabeling capabilities, and continue its operations until
it is able to generate sufficient additional revenue from the sale and/or
licensing of its products. The Company will be required to obtain financing
through one or more methods, including the aforementioned sale and subsequent
leaseback of its facilities, obtaining additional equity or debt financing
and/or negotiating a licensing or collaboration agreement with another company.
There can be no assurance that the Company will be successful in raising these
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, the
Company's business, financial position and results of operations would be
adversely affected.
ANTICIPATED FUTURE LOSSES. The Company has experienced significant
losses since inception. As of October 31, 1998, the Company's accumulated
deficit was approximately $79,991,000. 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 scale-up of manufacturing and
radiolabeling capabilities. The Company expects losses to fluctuate
substantially from quarter to quarter. All of the Company's products are in
development, preclinical studies or clinical trials, and no significant revenues
have 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 year. There can be no assurance that the Company will ever generate
product revenues sufficient to become profitable or to sustain profitability.
TECHNOLOGICAL UNCERTAINTY. The Company's future success depends
significantly upon its ability to develop and test workable products for which
the Company will seek approval by the United States Food and Drug Administration
("FDA") 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
7
require significant additional laboratory and clinical testing and investment
over the foreseeable future. The 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 complete development of one or more of its
products, (i) the Company's research and development activities may not be
successful; (ii) proposed products may not prove to be effective in clinical
trials; (iii) patient enrollment in the clinical trials may be delayed or
prolonged significantly, thus delaying the trials (iv) the Company's product
candidates may cause harmful side effects during clinical trials; (v) the
Company's product candidates may take longer to progress through clinical trials
than has been anticipated; (vi) the Company's product candidates may prove
impracticable to manufacture in commercial quantities at a reasonable cost
and/or with acceptable quality; (vii) the Company may not be able to obtain all
necessary governmental clearances and approvals to market its products; (viii)
the Company's product candidates may not prove to be commercially viable or
successfully marketed; or (ix) the Company may not ever achieve significant
revenues or profitable operations. In addition, the Company may encounter
unanticipated problems, including development, manufacturing, distribution,
financing and marketing difficulties. The failure to adequately address these
difficulties could adversely affect 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 Oncolym(R) antibody are primarily from a series of Phase I and Phase II
trials which were 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 Oncolym(R),
TNT or other product candidates under development will demonstrate the safety
and efficacy of such products to the extent necessary to obtain regulatory
approvals for the indications being studied, or at all. Companies in the
pharmaceutical and biotechnology industries have suffered significant setbacks
in advanced clinical trials, even after obtaining promising results in earlier
trials. The failure to adequately demonstrate the safety and efficacy of
Oncolym(R), TNT or any other therapeutic product under development could delay
or prevent regulatory approval of the product and would adversely affect the
Company's business, financial condition and results of operations.
LENGTHY REGULATORY PROCESS; NO ASSURANCE OF REGULATORY APPROVALS.
Testing, manufacturing, radiolabeling, 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 ("IND")
application for human clinical testing, which must become effective before human
8
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 Current Good
Manufacturing Practices ("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 and clinical studies, together with detailed
information on the manufacture and composition of a product candidate, are
submitted to the FDA as a PLA or BLA requesting approval to market the product
candidate. Before approving a PLA or BLA, the FDA will inspect the facilities at
which the product is manufactured, and will not approve the marketing of the
product candidate unless CGMP compliance is satisfactory. The FDA may deny a PLA
or BLA if applicable regulatory criteria are not satisfied, require additional
testing or information, and/or require post-marketing testing and surveillance
to monitor the safety or efficacy of a product. There can be no assurance that
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, or the PLA
or BLA review process may result in various adverse consequences, including the
FDA's delay in approving or refusing to approve a product, withdrawal of an
approved product from the market, and/or the imposition of criminal penalties
against the manufacturer and/or license holder. For example, license holders are
required to report certain adverse reactions to the FDA, and to comply with
certain requirements concerning advertising and promotional labeling for their
products. Also, quality control and manufacturing procedures must continue to
conform to CGMP regulations after approval, and the FDA periodically inspects
manufacturing facilities to assess compliance with CGMP. Accordingly,
manufacturers must continue to expend time, monies and effort in the area of
production and quality control to maintain CGMP compliance. In addition,
discovery of problems may result in restrictions on a product, 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 licensees to obtain regulatory approval for marketing its products in
foreign countries.
COMMERCIAL PRODUCTION. To conduct clinical trials on a timely basis,
obtain regulatory approval and be commercially successful, the Company must
scale-up its manufacturing and radiolabeling processes and ensure compliance
with regulatory requirements of its product candidates so that those product
9
candidates can be manufactured and radiolabeled in increased quantities. As the
Company's products currently in clinical trials, Oncolym(R) and TNT, move
towards FDA approval, the Company or contract manufacturers must scale-up the
production processes to enable production and radiolabeling in commercial
quantities. The Company has expended significant funds for the scale-up of its
antibody manufacturing capabilities for clinical trial requirements for its
Oncolym(R) and TNT products and for refinement of its radiolabeling processes.
If the Company were to commercially self-manufacture either of these products,
it will have to expend an estimated additional six to ten million dollars for
production facility expansion. However, the Company believes it can successfully
negotiate an agreement with contract antibody manufacturers to have these
products produced with approximately one to three million in start-up costs and
additional production costs on a "per run basis", thereby deferring or reducing
the significant expenditure (six to ten million dollars) estimated to scale-up
manufacturing. The Company believes that it can successfully negotiate an
agreement with contract radiolabeling companies to provide radiolabeling
services to meet commercial demands. Such a contract would, however, require a
substantial investment by the Company (estimated at five to nine million dollars
over the next two years) for equipment and related production area enhancements
required by these vendors, and for vendor services associated with technology
transfer assistance, scale-up and production start-up, and for regulatory
assistance. 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 Company's ability to scale-up its manufacturing operations,
the suitability of the Company's present facility for clinical trial production
or commercial production, the Company's ability to make a successful transition
to commercial production and radiolabeling or the Company's ability to reach an
acceptable agreement with contract manufacturers to produce and radiolabel
Oncolym(R), TNT, or the Company's other product candidates, in clinical or
commercial quantities. The failure of the Company to scale-up its manufacturing
and radiolabeling for clinical trial or commercial production or to obtain
contract manufacturers, could adversely affect the Company's business, financial
position and results of operations.
SHARES ELIGIBLE FOR FUTURE SALE; DILUTION. The decline in the market
price of the Company's Common Stock has lead to substantial dilution to holders
of Common Stock. Under the terms of the Company's agreement with the holders of
the Class C Stock, the shares of the Class C Stock are convertible into shares
of the Company's Common Stock at the lower of a conversion cap of $0.5958 (the
"Conversion Cap") or a conversion price equal to the average of the lowest
trading price of the Company's Common Stock for the five consecutive trading
days ending with the trading date prior to the date of conversion reduced by 27
percent. The Company's agreement with the holders of the Class C Stock also
provides that upon conversion, the holders of the Class C Stock will also
receive warrants to purchase one-fourth of the number of shares of Common Stock
issued upon conversion of the Class C Stock at an exercise price of $0.6554 per
share (or 110% of the Conversion Cap), which warrants will expire in April 2002
(the "Class C Warrants"). Dividends on the Class C Stock are payable quarterly
in shares of Class C Stock or cash, at the option of the Company, at the rate of
$50.00 per share per annum.
From September 26, 1997 (the date the Class C Stock became convertible
into Common Stock) through November 30, 1998, 13,703 shares of Class C Stock,
including Class C dividend shares and additional shares of Class C Stock issued
during fiscal year 1998 (as described below), were converted into 24,719,415
shares of Common Stock, resulting in substantial dilution to the common
stockholders. In addition, in conjunction with the conversion of the Class C
Stock, the holders were granted warrants to purchase shares of Common Stock of
the Company. Class C Warrants to purchase 6,144,537 shares of common stock have
been exercised on a combined cash and cashless basis through November 30, 1998,
at an exercise price of $.6554 per share, in exchange for 5,831,980 shares of
10
common stock and proceeds to the Company of $3,599,901. As of November 30, 1998,
Warrants to purchase 35,244 shares of common stock were outstanding. During
fiscal year 1998, the registration statement required to be filed by the Company
pursuant to the Company's agreement with the holders of the Class C Stock was
not declared effective by the 180th day following the closing date of such
offering, and therefore, the Company was required to issue an additional 325
shares of Class C Stock, calculated in accordance with the terms of such
agreement. At November 30, 1998, 270 shares of Class C Stock remained
outstanding and may be converted into shares of Common Stock at the lower of a
27% discount from the average of the lowest market trading price for the five
consecutive trading days preceding the date of conversion or $.5958 per share.
Assuming the conversion of all of such remaining shares of Class C Stock at the
Conversion Cap, the Company is required to issue to the holders of the Class C
Stock upon conversion thereof an aggregate of approximately 453,000 shares of
Common Stock and Class C Warrants to purchase an aggregate of up to
approximately 113,000 shares of Common Stock at a purchase price of $.6554 per
share.
Sales, particularly short selling, of substantial amounts of shares of
Common Stock in the public market have adversely affected and may continue to
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 Class C Stock and the Class C
Warrants. From September 26, 1997, the date on which the Class C Stock was first
convertible through March 1998, the price of the Company's Common Stock steadily
declined while the average trading volume increased significantly.
Pursuant to the terms of a Regulation D Common Stock Equity Line
Subscription Agreement dated as of June 16, 1998 (the "Equity Line Agreement"),
between the Company and two institutional investors (the "Equity Line
Investors") (and assuming, solely for purposes of this Form 10-Q, a 10-day low
closing bid price per share of not less than $1.00, which allows the Company to
sell the maximum number of shares of Common Stock to the Equity Line Investors
for maximum proceeds of $16,500,000), the Company may, at its option, sell to
the Equity Line Investors up to 20,625,000 shares of Common Stock (the "Equity
Line Investor Shares") and issue warrants to the Equity Line Investors to
purchase up to an additional 2,062,500 shares of Common Stock (the "Equity Line
Investor Warrants"). The price at which the Equity Line Investor Shares will be
issued and sold by the Company to the Equity Line Investors will be equal to (i)
82.5% of the lowest closing bid price during the ten trading days (the "10 day
low closing bid price") immediately preceding the date on which such shares are
sold to the Equity Line Investors, or (ii) if 82.5% of such 10 day low closing
bid price results in a discount of less than twenty cents ($0.20) per share from
such 10 day low closing bid price, such 10 day low closing bid price minus
twenty cents ($0.20). In addition, the Company may be obligated to issue to the
Equity Line Investors an additional 954,545 shares of Common Stock upon
adjustment of the purchase price of shares of Common Stock already issued to the
Equity Line Investors on the three-month and six-month anniversary of the date
on which the registration statement with respect to such shares is declared
effective by the Commission (the "Adjustment Shares"). In addition, pursuant to
the terms of a Placement Agent Agreement dated as of June 16, 1998 entered into
by the Company in connection with the execution and delivery of the Equity Line
Agreement (the "Placement Agent Agreement"), the Company may also be obligated
to issue to the placement agent up to 1,726,364 shares of Common Stock (the
"Equity Line Placement Agent Shares") and warrants to purchase up to an
additional 165,000 shares of Common Stock (the "Equity Line Placement Agent
Warrants"). The Company will not receive any proceeds from the exercise of the
Equity Line Investor Warrants or the Equity Line Placement Agent Warrants, which
may only be exercised pursuant to a cashless exercise in accordance with the
express terms thereof.
11
In addition to the Class C Warrants, Equity Line Investor Warrants and
Equity Line Placement Agent Warrants, at November 30, 1998, the Company had
outstanding warrants and options to employees, directors, consultants and other
parties to issue approximately 8,591,000 shares of Common Stock at an average
price of $1.12 per share.
The sale and issuance of the Equity Line Investor Shares may result in
substantial dilution to the existing holders of Common Stock. The issuance of
the Equity Line Investor Shares, the Adjustments Shares and the Equity Line
Placement Agent Shares, and the issuance of shares of Common Stock issuable upon
conversion of the remaining Class C Stock and upon exercise of the remaining
Class C Warrants, the Equity Line Investor Warrants, the Equity Line Placement
Agent Warrants and such other outstanding warrants and options, as well as
subsequent sales of the Equity Line Investor Shares, the Adjustment Shares, the
Equity Line Placement Agent Shares and such shares of Common Stock in the open
market, could adversely affect the market price of the Company's Common Stock
and impair the Company's ability to raise additional capital.
STOCK PRICE FLUCTUATIONS AND LIMITED TRADING VOLUME. The market price
of the Company's Common Stock, and the market prices of securities of companies
in the biotechnology industry generally, have been highly volatile. 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 the potential additional new shares of
common stock that may be issued on the exercise of warrants and options and the
historical limited trading volume are significant risks investors should
consider.
MAINTENANCE CRITERIA FOR NASDAQ SMALLCAP MARKET, RISKS OF LOW-PRICED
SECURITIES. The Company's Common Stock is presently traded on the Nasdaq
SmallCap Market. To maintain inclusion on the Nasdaq SmallCap Market, the
Company's Common Stock must continue to be registered under Section 12(g) of the
Exchange Act, and the Company 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 its latest fiscal year or in two of its last three fiscal
years) of at least $500,000. In addition, the Company must meet other
requirements, including, but not limited to, having a public float of at least
500,000 shares and $1,000,000, a minimum closing bid price of $1.00 per share of
Common Stock (without falling below this minimum bid price for a period of 30
consecutive business days), at least two market makers and at least 300
stockholders, each holding at least 100 shares of Common Stock. For the period
of January 29, 1998 through May 4, 1998, the Company failed to maintain a $1.00
minimum closing bid price. From May 5, 1998, through September 2, 1998, the
Company met this requirement. However, at various times since September 2, 1998,
the Company has failed to maintain a $1.00 minimum closing bid price and
currently expects the closing bid price of the Common Stock to fall below the
$1.00 minimum bid requirement from time to time in the future. If the Company
fails to meet the minimum closing bid price of $1.00 for a period of 30
consecutive business days, it will be notified by the Nasdaq and will then have
a period of 90 calendar days from such notification to achieve compliance with
the applicable standard by meeting the minimum closing bid price requirement for
at least 10 consecutive business days during such 90 day period. There can be no
assurance that the Company will be able to maintain these requirements in the
future. If the Company fails to meet the Nasdaq SmallCap Market listing
requirements, the market value of the Common Stock could decline and holders of
12
the Company's Common Stock would likely find it more difficult to dispose of and
to obtain accurate quotations as to the market value of the Common Stock. In
addition, if the Company's Common Stock closing minimum bid price is not at
least $1.00 per share for ten consecutive days before a call by the Company
under the Equity Line Agreement or if the Company's Common Stock ceases to be
included on the Nasdaq SmallCap Market, the Company would have limited or no
access to funds under the Equity Line Agreement.
If the Company's Common Stock ceases to be included on the Nasdaq
SmallCap Market, the Company's Common Stock could become subject to rules
adopted by the Commission regulating broker-dealer practices in connection with
transactions in "penny stocks." Penny stocks generally are equity securities
with a price per share of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on Nasdaq, provided that current
price and volume information with respect to transactions in these securities is
provided). The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized
risk disclosure document in a form prepared by the Commission which provides
information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid
and offer quotations for the penny stock, the compensation of the broker-dealer
and its sales person in the transaction and monthly account statements showing
the market value of each penny stock held in the customer's account. The bid and
offer quotations, and the broker-dealer and salesperson compensation
information, must be given to the customer orally or in writing prior to
effecting the transaction and must be given to the customer in writing before or
with the customer's confirmation. In addition, the penny stock rules require
that prior to a transaction in a penny stock not otherwise exempt from these
rules, the broker-dealer must make a special written determination that the
penny stock is a suitable investment for the purchaser and receive the
purchaser's written agreement to the transaction. These disclosure requirements
may have the effect of reducing the level of trading activity in the secondary
market for a stock that becomes subject to these penny stock rules. If the
Company's Common Stock becomes subject to the penny stock rules, investors may
be unable to readily sell their shares of Common Stock.
INTENSE COMPETITION. The biotechnology industry is intensely
competitive and changing rapidly. Virtually all of the Company's existing
competitors have greater financial resources, larger technical staffs, 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 Coulter Pharmaceuticals, Inc.
("Coulter"), each has a lymphoma antibody that may compete with the Company's
Oncolym(R) product. Idec is currently marketing its lymphoma product for low
grade non-Hodgkins Lymphoma and the Company believes that Coulter will be
marketing its respective lymphoma product prior to the time the Oncolym(R)
product will be submitted to the FDA for marketing approval. Coulter has also
announced that it intends to seek to conduct clinical trials of its antibody
treatment for intermediate and/or high grade non-Hodgkins lymphomas. There are
several companies in preclinical studies with angiogenesis technologies which
may compete with the Company's VTA technology. In addition, there may be other
companies which are currently developing competitive technologies and products
or which may in the future develop technologies and products which are
comparable or superior to the Company's technologies and products. Some or all
of these companies may also have greater financial and technical resources than
the Company. Accordingly, there can be no assurance that the Company will be
able to compete successfully or that competition will not adversely affect the
Company's business, financial position and results of operations. There can be
no assurance that the Company's existing and future 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.
13
UNCERTAINTIES ASSOCIATED WITH CLINICAL TRIALS. The Company has limited
experience in conducting clinical trials. The rate of completion of the
Company's clinical trials will depend on, among other factors, the rate of
patient enrollment. Patient enrollment is a function of many factors, including
the nature of 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 adversely effect the Company.
There is no assurance that 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 FDA regulations
applicable to this testing can result in delay, suspension or cancellation of
the testing, or refusal by the FDA to accept the results of the 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 from the testing will be suitable for
submission to the FDA. Any suspension or delay of any of the clinical trials
could adversely effect the Company's business, financial condition and results
of operations.
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 two products in clinical trials, Oncolym(R) and TNT, are approved,
they would represent a departure from more commonly used methods for cancer
treatment. Accordingly, Oncolym(R) and TNT may experience under-utilization by
oncologists and hematologists who are unfamiliar with the application of
Oncolym(R) and TNT in the treatment of cancer. As with any new drug, doctors may
be inclined to continue to treat patients with conventional therapies, in most
cases chemotherapy, rather than new alternative therapies. The Company or its
marketing partner will be required to implement an aggressive education and
promotion plan with doctors in order to gain market recognition, understanding
and acceptance of the Company's products. Market acceptance also could be
affected by the availability of third party reimbursement. Failure of Oncolym(R)
and TNT to achieve market acceptance would adversely affect the Company's
business, financial condition and results of operations.
SOURCE OF RADIOLABELING SERVICES. The Company currently procures its
radiolabeling services pursuant to negotiated contracts with one domestic entity
and one European entity. There can be no assurance that these 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. Prior to
commercial distribution, the Company will be required to identify and contract
with a commercial radiolabeling company for commercial services. The Company is
presently in discussions with a few companies to provide commercial
radiolabeling services. A commercial radiolabeling service agreement will
require the investment of substantial funds by the Company. See "Commercial
Production." The Company expects to rely on its current suppliers for all or a
significant portion of its requirements for the Oncolym(R) and TNT antibody
products to be used in clinical trials for the immediate 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 future contractual relationships with, or an 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 Oncolym(R) and TNT
antibodies, if approved. Any such change or interruption would adversely affect
the Company's business, financial condition and results of operations.
14
HAZARDOUS AND RADIOACTIVE MATERIALS. The manufacturing and use of the
Company's Oncolym(R) and TNT require the handling and disposal of the
radioactive isotope I131. The Company is relying on its current contract
manufacturers to radiolabel its antibodies with I131 and to comply with various
local, state and or national and international regulations regarding the
handling and use of radioactive materials. Violation of these local, state,
national or international regulations by these radiolabeling companies or a
clinical trial site could significantly delay completion of the trials.
Violations of safety regulations could occur with these manufacturers, so there
is a risk of accidental contamination or injury. The Company could be held
liable for any damages that result from an accident, contamination or injury
caused by the handling and disposal of these materials, as well as for
unexpected remedial costs and penalties that may result from any violation of
applicable regulations, which could adversely effect 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 noncompliance or accident, the supply of Oncolym(R) and TNT for use in
clinical trials or commercially could be interrupted, which could adversely
affect 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. At the present time, the Company does not have a sales
force to market Oncolym(R) or TNT. If and when the FDA approves Oncolym(R) or
TNT, the marketing of Oncolym(R) and TNT will be contingent upon the Company
either licensing or entering into a marketing agreement with a large company or
rely upon it recruiting, developing, training and deploying its own sales force.
The Company does not presently possess the resources or experience necessary to
market Oncolym(R), TNT or its other product candidates. Other than the agreement
with BTD, the Company presently has no agreements for the licensing or marketing
of its product candidates, and there can be no assurance that the Company 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. There can be no assurance
that the Company will be able to obtain the financing necessary or to establish
such a sales force in a timely or cost effective manner, if at all, or that such
a sales force will be capable of generating demand for the Company's product
candidates.
PATENTS AND PROPRIETARY RIGHTS. The Company's success depends, in large
part, on its ability to obtain or maintain a proprietary position in its
products through patents, trade secrets and orphan drug designations. The
Company has several United States patents or 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, any patents issued to the Company
or the Company's licensors may be infringed by others or may not be enforceable
against others. In addition, there can be no assurance that the patents, if
issued, would be held valid or enforceable by a court of competent jurisdiction.
Enforcement of the Company's patents may require substantial financial and human
resources. The Company may have to participate in interference 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.
15
A substantial number of patents have already been issued to other
biotechnology and biopharmaceutical companies. Particularly in the monoclonal
antibody and angiogenesis fields, 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 is 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 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. Product liability 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
adversely affect 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 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.
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
16
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
adversely affect the Company's business, financial condition and results of
operations.
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 adversely affect the Company's ability to operate profitably.
DEPENDENCE ON MANAGEMENT AND OTHER KEY PERSONNEL. The Company is
dependent upon a limited number of key management and technical personnel. The
loss of the services of one or more of these key employees could adversely
affect the Company's business, financial condition and results of operations. In
addition, the Company's success is dependent upon its ability to attract and
retain additional highly qualified management and technical personnel. The
Company faces intense competition in its recruiting activities, and there can be
no assurance that the Company will be able to attract and/or retain qualified
personnel.
IMPACT OF THE YEAR 2000. The Company has identified substantially all
of its major hardware and software platforms in use and is continually modifying
and upgrading its software and information technology ("IT") and non-IT systems.
The Company has modified its current financial software to be Year 2000 ("Y2K")
compliant. The Company does not believe that, with upgrades of existing software
and/or conversion to new software, the Y2K issue will pose significant
operational problems for its internal computer systems. The Company expects all
systems to be Y2K compliant by April 30, 1999 through the use of internal and
external resources. The Company has incurred insignificant costs to date
associated with Y2K compliance and the Company presently believes estimated
future costs will not be material. However, the systems of other companies on
which the Company may rely also may not be timely converted, and failure to
convert by another company could have an adverse effect on the Company's
systems. The Company presently believes the Y2K problem will not pose
significant operational problems and is not anticipated to have a material
effect on its financial position or results of operations in any given year.
However, actual results could differ materially from the Company's expectations
17
due to unanticipated technological difficulties or project delays by the Company
or its suppliers. If the Company and third parties upon which it relies are
unable to address the issue in a timely manner, it could result in a material
financial risk to the Company. In order to assure that this does not occur, the
Company is in the process of developing a contingency plan and plans to devote
all resources required to attempt to resolve any significant Y2K issues in a
timely manner.
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. 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Not applicable.
18
PART II
Item 1. Legal Proceedings. None.
------------------
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 August 1, 1998 and ending on October 31, 1998
involving issuances and sales of the Company's securities that were not
registered under the Securities Act of 1933, as amended (the Securities Act")
On or about October 23, 1998, in consideration of the extension by
Biotechnology Development Ltd. ("BTD") of the Company's option to repurchase the
marketing rights to LYM antibodies, which repurchase option was granted to the
Company in conjunction with a distribution agreement entered into by the Company
and BTD in 1996, the Company issued to BTD an option to purchase up to 125,000
shares of the Company's Common Stock at an exercise price of $3.00 per share,
which options are immediately exercisable and expire on October 22, 2001.
The issuance of the securities of the Company in the above transaction
was deemed to be exempt from registration under the Securities Act by virtue of
Section 4(2) thereof or Regulation D promulgated thereunder, as a transaction by
an issuer not involving a public offering. The recipient of such securities
either received adequate information about the Company or had access, through
employment or other relationships with the Company, to such information.
Item 3. Defaults Upon Senior Securities. None.
--------------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Company held an annual meeting of stockholders' on October 13,
1998. The directors elected at the meeting were Larry O. Bymaster, Rockell N.
Hankin, William C. Shepherd, Carmelo J. Santoro, Ph.D., Clive R. Taylor, M.D.
Ph.D., and Thomas R. Testman. The following represent matters voted upon and the
results of the voting:
FOR AGAINST OR
WITHHELD
1) Election of Directors:
Larry O. Bymaster 40,805,311 1,426,308
Rockell N. Hankin 40,521,105 1,710,514
William C. Shepherd 40,773,407 1,458,212
Carmelo J. Santoro, Ph.D. 38,369,588 3,862,031
Clive R. Taylor, M.D. Ph.D. 40,258,961 1,972,658
Thomas R. Testman 40,535,811 1,695,808
19
FOR AGAINST OR
WITHHELD
2) To approve the issuance of Common 23,951,281 3,646,509
Stock pursuant to a $20,000,000
equity-based line of credit to the
extent that such issuance could result
in the Company issuing more than twenty
percent (20%) of the issued and outstanding
Common Stock of the Company as of September
2, 1998
3) To ratify the appointment of Deloitte 40,208,058 2,023,561
& Touche LLP as independent auditors
of the Company for the fiscal year
ending April 30, 1999
Item 5. Other Information. None.
------------------
Item 6. Exhibits and Report on Form 8-K.
--------------------------------
(a) Exhibits:
Exhibit Number Description
-------------- -----------
10.44 Severance Agreement between Lon H.
Stone and Techniclone Corporation
dated July 28, 1998.
10.45 Severance Agreement between William
(Bix) V. Moding and Techniclone
Corporation dated September 25, 1998.
10.46 Option Agreement dated October 23,
1998 between Biotechnology Development
Ltd. and Techniclone Corporation.
27 Financial Data Schedule.
(b) Reports on Form 8-K: None
20
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)
21
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1998 AND OCTOBER 31, 1998 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------
APRIL 30, OCTOBER 31,
1998 1998
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,736,000 $ 1,599,000
Other receivables, net 71,000 51,000
Inventories, net 46,000 87,000
Prepaid expenses and other current assets 304,000 254,000
--------------- ---------------
Total current assets 2,157,000 1,991,000
PROPERTY:
Land 1,051,000 1,051,000
Buildings and improvements 6,227,000 6,666,000
Laboratory equipment 2,174,000 2,623,000
Furniture, fixtures and computer equipment 921,000 927,000
Construction-in-progress 524,000 11,000
--------------- ---------------
10,897,000 11,278,000
Less accumulated depreciation and amortization (1,625,000) (2,113,000)
--------------- ---------------
Property, net 9,272,000 9,165,000
OTHER ASSETS:
Patents, net 211,000 189,000
Note receivable from shareholder and former director (Note 5) 381,000 330,000
Other 18,000 12,000
--------------- ---------------
Total other assets 610,000 531,000
--------------- ---------------
$ 12,039,000 $ 11,687,000
=============== ===============
See accompanying notes to consolidated financial statements
22
TECHNICLONE CORPORATION
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 1998 AND OCTOBER 31, 1998 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------
APRIL 30, OCTOBER 31,
1998 1998
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 729,000 $ 1,367,000
Notes payable, current 2,503,000 115,000
Accrued legal and accounting fees 584,000 380,000
Accrued license termination fees 350,000 100,000
Accrued royalties and sponsored research 190,000 261,000
Accrued payroll and related costs 141,000 105,000
Accrued interest 15,000 15,000
Other current liabilities 153,000 752,000
--------------- ---------------
Total current liabilities 4,665,000 3,095,000
NOTES PAYABLE 1,926,000 1,872,000
OTHER LONG TERM LIABILITIES 133,000
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY (Note 4):
Preferred stock- $.001 par value; authorized 5,000,000 shares:
Class C convertible preferred stock, shares outstanding -
April 1998, 4,807 shares; October 1998, 354 shares
(liquidation preference of $355,503 at October 31, 1998)
Common stock-$.001 par value; authorized 120,000,000 shares;
outstanding April 1998 - 48,547,351 shares;
October 1998 - 66,699,993 shares 49,000 67,000
Additional paid-in capital 78,423,000 86,869,000
Accumulated deficit (72,639,000) (79,991,000)
--------------- ---------------
5,833,000 6,945,000
Less notes receivable from sale of common stock (385,000) (358,000)
--------------- ---------------
Total stockholders' equity 5,448,000 6,587,000
--------------- ---------------
$ 12,039,000 $ 11,687,000
=============== ===============
See accompanying notes to consolidated financial statements
23
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED OCTOBER 31, 1997 AND 1998 (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
OCTOBER 31, OCTOBER 31, OCTOBER 31, OCTOBER 31,
1997 1998 1997 1998
------------- ------------- ------------- -------------
REVENUES:
Net product sales and royalties $ $ $ 4,000 $
Interest and other income 161,000 84,000 360,000 161,000
------------- ------------- ------------- -------------
Total revenues 161,000 84,000 364,000 161,000
COSTS AND EXPENSES:
Cost of sales 4,000
Research and development 1,985,000 2,306,000 3,392,000 4,157,000
General and administrative 1,551,000 1,186,000 2,565,000 2,478,000
Interest 54,000 96,000 103,000 336,000
------------- ------------- ------------- -------------
Total costs and expenses 3,590,000 3,588,000 6,064,000 6,971,000
NET LOSS $ (3,429,000) $ (3,504,000) $ (5,700,000) $ (6,810,000)
============= ============= ============= =============
Net loss before preferred stock accretion
and dividends $ (3,429,000) $ (3,504,000) $ (5,700,000) $ (6,810,000)
Preferred stock accretion and dividends:
Imputed dividends on Class B and
Class C Preferred Stock (275,000) (582,000) (11,000)
Accretion of Class C Preferred
Stock Discount (745,000) (1,577,000) (531,000)
------------- ------------- ------------- -------------
Net Loss Applicable to Common Stock $ (4,449,000) $ (3,504,000) $ (7,859,000) $ (7,352,000)
============= ============= ============= =============
Weighted Average Shares Outstanding 27,447,152 66,440,756 27,403,688 63,093,696
============= ============= ============= =============
BASIC AND DILUTED LOSS PER
SHARE (Notes 2) $ (0.16) $ (0.05) $ (0.29) $ (0.12)
============= ============= ============= =============
See accompanying notes to consolidated financial statements
24
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
Notes
Preferred Additional Receivable Net
Stock Common Stock Paid-In Accumulated from Sale of Stockholders'
Shares Amount Shares Amount Capital Deficit Common Stock Equity
--------- --------- ------------- ---------- ------------- ------------- ------------- ------------
BALANCES, May 1, 1998 4,807 $ - 48,547,351 $ 49,000 $ 78,423,000 $(72,639,000) $ (385,000) $ 5,448,000
Accretion of Class C preferred
stock dividends and discount 531,000 (542,000) (11,000)
Preferred stock issued upon
exercise of Class C
Placement Agent Warrant 530 530,000 530,000
Common stock issued upon
conversion of Class C
preferred stock (4,983) 9,036,137 9,000 (9,000)
Common stock issued upon
exercise of Class C warrants 5,831,980 6,000 3,594,000 3,600,000
Common stock issued for cash
and upon exercise of options 428,200 257,000 257,000
Common stock issued under the
Equity Line for cash (Note 4) 2,749,090 3,000 3,092,000 3,095,000
Common stock issued for
services and interest 107,235 156,000 156,000
Stock-based compensation 295,000 295,000
Payment on notes receivable 27,000 27,000
Net loss (6,810,000) (6,810,000)
--------- --------- ------------- ---------- ------------- ------------- ------------- ------------
BALANCES, October 31, 1998 354 $ - 66,699,993 $ 67,000 $ 86,869,000 $(79,991,000) $ (358,000) $ 6,587,000
========= ========= ============= ========== ============= ============= ============= ============
See accompanying notes to consolidated financial statements
25
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1997 AND 1998 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
-----------------------------------
OCTOBER 31, OCTOBER 31,
1997 1998
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,700,000) $ (6,810,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock-based compensation and common stock issued for
interest and services 312,000 451,000
Depreciation and amortization 296,000 511,000
Loss on disposal of assets 6,000
Inventory write-off, net of reserve for contract losses (53,000)
Severance expense 351,000
Changes in operating assets and liabilities:
Other receivables 163,000 20,000
Inventories, net (86,000) (41,000)
Prepaid expenses and other current assets (119,000) 50,000
Other assets 6,000
Accounts payable and accrued legal and accounting fees 1,149,000 434,000
Accrued license termination fees (250,000)
Accrued royalties and sponsored research fees (155,000) 71,000
Other accrued expenses and current liabilities 417,000 396,000
--------------- ---------------
Net cash used in operating activities (3,776,000) (4,805,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments (2,947,000)
Property acquisitions (2,062,000) (388,000)
Increase in other assets (74,000)
--------------- ---------------
Net cash used in investing activities (5,083,000) (388,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 572,000 6,952,000
Proceed from issuance of Class C Preferred Stock 530,000
Proceeds from notes receivable payment 27,000
Proceeds from issuance of long-term debt 98,000
Principal payments on notes payable (46,000) (2,442,000)
Payment of Class C dividends and offering costs (120,000) (11,000)
--------------- ---------------
Net cash provided by financing activities 504,000 5,056,000
See accompanying notes to consolidated financial statements
26
TECHNICLONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1997 AND 1998 (UNAUDITED) (CONTINUED)
- -------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
-----------------------------------
OCTOBER 31, OCTOBER 31,
1997 1998
--------------- ---------------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (8,355,000) $ (137,000)
CASH AND CASH EQUIVALENTS,
beginning of period 12,229,000 1,736,000
--------------- ---------------
CASH AND CASH EQUIVALENTS,
end of period $ 3,874,000 $ 1,599,000
=============== ===============
SUPPLEMENTAL INFORMATION:
Interest paid $ 103,000 $ 100,000
=============== ===============
Income taxes paid $ 1,000 $ 2,000
=============== ===============
See accompanying notes to consolidated financial statements
27
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED)
- --------------------------------------------------------------------------------
1) BASIS OF PRESENTATION. The accompanying unaudited financial statements
have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal
course of business. As shown in the financial statements, the Company
experienced losses in fiscal 1998 and during the first six months of
fiscal 1999 and has an accumulated deficit of $79,991,000 at October
31, 1998. 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, a sale
and subsequent leaseback of its facilities, obtaining additional equity
or debt financing and negotiating a licensing or collaboration
agreements with another company. There can be no assurance that the
Company will be successful in raising such funds on terms acceptable to
it, or at all, or that sufficient additional capital will be raised to
complete the research, development, and clinical testing of the
Company's product candidates. The Company's future success is dependent
upon raising additional money to provide for the necessary operations
of the Company. If the Company is unable to obtain additional
financing, there would be a material adverse effect on the Company's
business, financial position and results of operations. The Company's
continuation as a going concern is dependent on its ability to generate
sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required and, ultimately, to
attain successful operations.
During the six month period ended October 31, 1998, the Company
received total funding of approximately $7,482,000 from (i) the sale of
common stock pursuant to a Regulation D Common Stock Equity Line
Subscription Agreement dated as of June 16, 1998 between the Company
and two institutional investors (the "Equity Line Agreement")
($3,095,000, net of commissions, legal, accounting and other offering
costs of $405,000), (ii) the exercise of options and warrants,
including the Class C preferred stock warrants ($3,857,000) and (iii)
the exercise of a Class C Placement Agent Warrant ($530,000), which has
resulted in cash and cash equivalents balance of $1,599,000 as of
October 31, 1998. 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 to meet its obligations on a timely basis through December 31,
1998. Should the Company complete the sale and subsequent leaseback of
its facilities by December 31, 1998, the Company believes it would have
sufficient cash on hand and available pursuant to the Equity Line
Agreement to meet its obligations on a timely basis through April 1999.
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 October 31, 1998,
and the consolidated results of its operations and its consolidated
cash flows for the six months ended October 31, 1998 and 1997. Although
the Company believes that the disclosures in the financial statements
28
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
are adequate to make the information presented not misleading, certain
information and footnote disclosures normally included in the
consolidated financial statements have been condensed or omitted
pursuant to rules and regulations of the Securities and Exchange
Commission. The consolidated financial statements included herein
should be read in conjunction with the consolidated financial
statements of the Company, included in the Company's Annual Report on
Form 10-K for the year ended April 30, 1998, filed with the Securities
and Exchange Commission on July 29, 1998.
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.
2) NET LOSS PER SHARE. Net loss per share is calculated by adding the net
loss for the quarter and six month period to the Preferred Stock
dividends and Preferred Stock issuance discount accretion on the Class
B Preferred Stock and the Class C Preferred Stock during the quarter
and six month period divided by the weighted average number of shares
of common stock outstanding during the quarter and six month period.
Shares issuable upon the exercise of common stock warrants and options
have been excluded from the quarter and six month period ended October
31, 1998 and 1997 per share calculation because their effect is
antidilutive. Accretion of the Class B and Class C Preferred Stock
dividends and issue discount amounted to $1,020,000 for the quarter
ended October 31, 1997 and $2,159,000 and $542,000 for the six month
periods ended October 31, 1997 and 1998, respectively.
3) NEW ACCOUNTING STANDARDS. During the quarter ended July 31, 1998, the
Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income". SFAS No. 130 established
standards for the reporting and displaying of comprehensive income.
Comprehensive income is defined as all changes in a Company's net
assets except changes resulting from transactions with shareholders. It
differs from net income in that certain items currently recorded to
equity would be a part of comprehensive income. The adoption of this
standard had no effect on the Company's consolidated financial
statements.
The Company adopted Financial Accounting Standards Board (SFAS) No.
131, "Disclosure about Segments of an Enterprise and Related
Information" on May 1, 1998. SFAS No. 131 established standards of
reporting by publicly held businesses and disclosures of information
about operating segments in annual financial statements, and to a
lesser extent, in interim financial reports issued to shareholders. The
adoption of SFAS No. 131 had no impact on the Company's consolidated
unaudited financial statements or related disclosures for the three and
six month periods ended October 31, 1997 and 1998.
During June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities"
which will be effective for the Company beginning April 1, 2000. SFAS
No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments imbedded in other
contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the
29
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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.
4) STOCKHOLDERS' EQUITY. During June 1998, the Company secured access of
up to $20,000,000 under a Common Stock Equity Line (Equity Line) with
two institutional investors ("Equity Line 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. After effective
registration for the Put shares, unless an increase is otherwise agreed
to, $2,250,000 of Puts can be made every quarter, subject to share
issuance volume limitations identical to those set forth in Rule
144(e). At the time of each Put, the investors will be issued a
warrant, expiring on December 31, 2004, to purchase up to 10% of the
amount of common stock issued to the investor at the same price at the
time of the Put.
During the quarter ended July 31, 1998, the Company sold 2,749,090
shares of the Company's common stock under the Equity Line, including
commission shares, for gross proceeds to the Company of $3,500,000.
One-half of this amount 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 (the "Reset
Provision"). At each adjustment date, if the market price at the three
or six month period ("Adjustment Price") is less than the initial price
paid for the common stock, the Company will be required to issue
additional shares of its common stock equal to the difference between
the amount of shares which would have been issued if the price had been
the Adjustment Price for $1,750,000. The Company will also be required
to issue additional warrants at each three month and six month period
for 10% of any additional shares issued. Future Puts under the Equity
Line will be priced at (i) 82.5% of the lowest closing bid price during
the ten trading days (the "10 day low closing bid price") immediately
preceding the date on which such shares are sold to the Institutional
Investors, or (ii) if 82.5% of such 10 day low closing bid price
results in a discount of less than twenty cents ($0.20) per share from
such 10 day low closing bid price, such 10 day low closing bid price
minus twenty cents ($0.20). If the Company does not exercise the full
amount of its Put rights, then the Company will issue Commitment
Warrants on the first, second, and third anniversary of the Equity Line
Agreement. The amount of Commitment Warrants to be issued will be equal
to 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 to such
anniversary date. On each anniversary date, the Company will issue that
number of shares equal to ten percent (10%) of the shares of common
stock which would be issued by subtracting the actual cumulative dollar
amount of Puts for such anniversary date from the Commitment Amounts on
such anniversary date and dividing the result by the market price of
the Company's common stock.
In accordance with the Emerging Issues Task Force Issue No. 96-13,
"Accounting for Derivative Financial Instruments", contracts that
require a company to deliver shares as part of a physical settlement
should be measured at the estimated fair value on the date of the
30
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
initial Put. As such, the Company had an independent appraisal
performed to determine the estimated fair market value of the various
financial instruments included in the Equity Line Agreement and
recorded the related financial instruments as reclassifications between
equity categories. Reclassifications were made for the estimated fair
market value of the warrants issued and estimated Commitment Warrants
to be issued under the Equity Line of $1,140,000 and the estimated fair
market value of the Reset Provision of $400,000 as additional
consideration and have been included in the accompanying unaudited
financial statements. The above recorded amounts were offset by
$700,000 related to the restrictive nature of the common stock issued
under the initial tranche in June 1998 and the estimated fair market
value of the Equity Line Put Option of $840,000.
5) COMMITMENTS. During the quarter ended July 31, 1998, the Company
entered into an agreement for the sale and subsequent leaseback of its
facilities, which consists of two buildings located in Tustin,
California. The sale/leaseback transaction is with an unrelated entity
and provides for the leaseback of the Company's facilities for a
twelve-year period with two five-year options to renew. Net proceeds
from the sale of the Company's facilities will be used for general
working capital purposes. As the sale/leaseback agreement is in escrow
and subject to completion of normal due diligence procedures by the
buyer, there is no assurance that the transaction will be completed on
a timely basis or at all.
On February 29, 1996, the Company entered into a Distribution Agreement
with Biotechnology Development Limited ("BTD"). Under the terms of the
agreement, BTD was granted the right to market and distribute LYM
products in Europe and other designated foreign countries in exchange
for a nonrefundable fee of $3,000,000 and the performance of certain
duties by BTD as outlined in the agreement. The agreement also provides
that the Company will retain all manufacturing rights to the LYM
antibodies and will supply the LYM antibodies to BTD at preset prices.
In conjunction with the agreement, the Company was granted an option to
repurchase the marketing rights to the LYM antibodies through August
29, 1998, at its sole discretion. Although the Company did not exercise
its rights under the repurchase option as of such date, BTD
subsequently agreed to extend the repurchase option through August 30,
1999 in consideration of cash payments to BTD aggregating $431,250
(with $93,750 payable immediately and $112,500 payable each quarter
thereafter, beginning December 1, 1998) and the issuance by the Company
to BTD of options to purchase 125,000 shares of Common Stock at an
exercise price of $3.00 per share with a three-year term. The
repurchase option may be canceled by the Company upon 90 days' notice
to BTD. The repurchase price under the repurchase option, if exercised
by the Company, would include a cash payment of $4,500,000, the
issuance of an option to purchase 1,000,000 shares of Common Stock at
an exercise price of $5.00 per share with a five-year term and
royalties equal to 5% of gross sales of LYM products in designated
geographic areas. Alternatively, if the repurchase option is not
exercised by the Company and BTD elects to market LYM products itself
and requests clinical data from the Company, BTD will make a cash
payment of $1,000,000 to the Company and will pay royalties to the
Company equal to 5% of gross sales on LYM products in designated
geographic areas.
31
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
During the quarter ended July 31, 1998, the Company renegotiated a
severance agreement with its former Chief Executive Officer (CEO). The
Company's former CEO's employment agreement provided that the Company
make immediate and substantial cash expenditure upon his termination.
The Company did not have sufficient cash resources to fulfill its
obligations under the former CEO's employment agreement. Accordingly,
at the direction of the Board of Directors, the Company negotiated a
new Severance Agreement with its former CEO to conserve cash. The new
Severance Agreement provides for its former CEO to be paid $300,000 a
year for the period beginning March 1, 1998 through March 1, 2000.
Unexercised and unvested outstanding stock options on March 1, 1998,
will vest and be paid as follows: one-third of the unexercised,
unvested options outstanding on March 1, 1998 will vest immediately and
be paid to the former CEO on December 31, 1998; one-third of the
unexercised, unvested and outstanding options on March 1, 1998, will
vest on March 1, 1999 and be paid on December 31, 1999; and one-third
of the unexercised, unvested and outstanding options on March 1, 1998,
will vest and be paid on March 1, 2000. In addition, the Company will
make appropriate payments, at the bonus rate, to the appropriate taxing
authorities. During the employment period, beginning on March 1, 1998
and ending on March 1, 2000, the former CEO will, with certain
exceptions, be eligible for Company benefits. Pursuant to the Severance
Agreement, the former CEO will be available to work for the Company for
a minimum of 25 hours per week. In addition, as part of the former
CEO's agreement to modify his existing severance package, the Company
agreed that if the former CEO did not compete during the period
beginning March 1, 1998 and ending February 29, 2000, the Company will,
on March 1, 2000, pay the former CEO an amount equal to his note of
$350,000, plus all accrued interest thereon, which will be used to
retire the respective note. During the six months ended October 31,
1998, the Company expensed approximately $564,000 for related severance
pay which has been included in general and administrative expenses in
the accompanying consolidated financial statements.
On October 4, 1998, Mr. William Moding resigned from his position as
Vice President, Operations and Administration to pursue other personal
and business interests. In connection with Mr. Moding's resignation,
the Company entered into a revised severance agreement with Mr. Moding
pursuant to which Mr. Moding will provide consulting services to the
Company as an independent consultant for a fixed and non-cancelable
period of sixteen months continuing until January 31, 2000, in
consideration of the payment to Mr. Moding of a monthly consulting fee
of $12,500 and the issuance of an aggregate of 320,000 shares of Common
Stock during such period for the exercise of outstanding stock options,
without the requirement of any payment by Mr. Moding of the exercise
price ($.60 per share) therefor. In addition, the Company has agreed to
make tax payments totaling $65,280 to federal and state taxing
authorities on behalf of Mr. Moding to offset the income to Mr. Moding
resulting from the non-payment of the exercise price for such options
and to pay Mr. Moding all accrued and unused vacation pay and accrued
back pay relating to salary deferral for the period from March 21, 1998
through October 3, 1998. Pursuant to the revised agreement, Mr. Moding
will be required to repay the Company the entire outstanding principal
balance and accrued interest thereon under two stock option exercise
notes by no later than January 31, 2000 and to execute a standard form
security agreement relating to the stock option exercise notes to
pledge Mr. Moding's interest in the stock options and his personal
assets as backup collateral to secure his obligations under the two
stock option exercise notes. During the quarter ended October 31, 1998,
32
TECHNICLONE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 1998 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
the Company expensed approximately $65,000 for related severance pay,
which has been included in general and administrative expenses in the
accompanying consolidated financial statements.
On November 2, 1998, Elizabeth Gorbett-Frost resigned from her position
as Chief Financial Officer of the Company to pursue other personal and
business interests. However, Ms. Gorbett-Frost agreed to remain in her
position as Corporate Secretary of the Company until November 30, 1998.
In connection with Ms. Gorbett-Frost's resignation, the Company entered
into a severance agreement with Ms. Gorbett-Frost pursuant to which she
will remain as a non-officer employee of the Company through April 30,
1999 in consideration of the payment to Ms. Gorbett-Frost of a
bi-weekly salary in the amount of $6,731, with the first such payment
to be made on December 11, 1998 and a final payment of $5,609 to be
made on April 30, 1999. Ms. Gorbett-Frost will also be entitled to
exercise the outstanding options she presently holds to acquire up to
113,334 shares of Common Stock pursuant to the Company's 1996 Stock
Incentive Plan until 90 days after April 30, 1999, at the stated
exercise price of $.60 per share. In addition, Ms. Gorbett-Frost will
be eligible to receive up to an aggregate of 50,000 unrestricted shares
of Common Stock upon the accomplishment of certain specified tasks to
be substantially completed by November 30, 1998.
On November 2, 1998, Steven C. Burke was appointed to the position of
Chief Financial Officer by the Board of Directors of the Company.
33
EXHIBIT NO. 10.44
July 28, 1998
Lon H. Stone
Re: Severance Agreement
Dear Lon:
This letter will serve to document our agreement on the terms and conditions of
your resignation as an executive officer of Techniclone Corporation
("Techniclone" or the "Company") and your continued employment as a
non-executive employee. Once this letter is signed by you it will constitute a
legally binding contract on the following terms:
1. In consideration of this Severance Agreement ("Severance
Agreement"), you confirm that you voluntarily resigned as an executive officer
and as Chief Executive Officer and President of Techniclone on March 2, 1998 and
as Chairman of the Board on June 3, 1998.
2. Techniclone will employ you as a non-executive employee until March
1, 2000. You agree (i) to be available for a minimum of twenty-five (25) hours
per week, (ii) to use your most reasonable business efforts to provide an
orderly transition of your duties and responsibilities and to make yourself
reasonably available for that purpose, and (iii) to perform all tasks assigned
to you for up to twenty-five (25) hours per week as a non-executive employee,
provided such tasks are commensurate with your status as the former Chief
Executive Officer. For the 4 weeks per year that you are not available, you
shall notify the Company of your unavailability.
3. During the period beginning March 1, 1998 until March 1, 2000 you
shall not, without the express prior written permission of Techniclone, directly
or indirectly participate in the ownership, management, operation, control or
financing of, or be connected as an investor, partner, officer, director,
principal, agent, representative, consultant or otherwise, nor use or permit
your name to be used in connection with any business or other enterprise which
uses monoclonal antibodies to diagnose or treat cancer nor shall you participate
in the production, sale or distribution of Competitive Products anywhere in the
world (including, without limitation, any and all of the counties of the State
of California, all of which are listed on Schedule A hereto). As used in this
Severance Agreement, the Phase "directly or indirectly participate in" includes
any direct or indirect ownership, profit participation or other interest by you,
whether as an owner, stockholder, partner, joint venturer, beneficiary or
otherwise, in any company, firm, trust or entity. The term "Competitive
Products" means any product similar in description to, or competitive with the
Company's products, or which is likely to adversely affect the sale of the
Company's products. Notwithstanding the provisions of this paragraph you may (i)
invest in investment funds or investment partnerships which in turn invest in
companies or entities which may be engaged in the production, sale or
distribution of Competitive Products so long as you do not exercise control of
such investment decisions; and (ii) acquire up to 5% of the outstanding voting
securities of any corporation or other entity regularly producing, marketing,
selling or distributing Competitive Products and which is listed on a national
securities exchange or whose securities are regularly traded in the
over-the-counter market.
4. In accordance with its usual pay practices, Techniclone will pay you
$300,000 per year commencing on March 1, 1998 and continuing through March 1,
2000.
34
5. Unexercised and unvested outstanding stock options on March 1, 1998,
will vest and be paid as follows: one-third of the unexercised, unvested options
outstanding on March 1, 1998 will vest immediately and be paid to you on
December 31, 1998; one-third of the unexercised, unvested and outstanding
options on March 1, 1998, will vest on March 1, 1999 and be paid to you on
December 31, 1999; and one-third of the unexercised, unvested and outstanding
options on March 1, 1998, will vest and be paid to you on March 1, 2000. All
vested opinions will be paid in accordance with the schedule for the payment of
the unvested options, i.e., one-third in December of 1998, one-third in December
of 1999 and one-third on March 1, 2000. In addition to the Company vesting and
issuing the unvested stock options and issuing the vested stock options on the
dates set forth above, the Company will make the appropriate tax payments to the
proper taxing authorities at the bonus rate based on the options paid to you.
6. Your car lease will continue through March 1, 2000.
7. You are entitled to attend two (2) antibody and one (1) nuclear
medicine conferences each year at the Company's expense. When traveling to a
conference or on Company business you will travel in the same style as the Chief
Executive Officer.
8. Except for the reimbursement of actual expenses incurred for any
Company assigned travel, and for traveling and attending the two (2) antibody
and one (1) nuclear medicine conference each year (which expenses shall be
reimbursed in accordance with the Company's standard reimbursement policy), you
will not be paid any expenses other than a monthly $200.00 nonaccountable
expense allowance.
9. Provided that you abide by the terms contained in paragraph 3 of
this Agreement and the other terms contained in this Severance Agreement, the
$350,000 promissory note which you owe the Corporation together with all accrued
interest thereon will, on March 1, 2000, be cancelled and treated by the
Corporation for all purposes, as income to you and will be recorded on a Form
1099.
10. You will be entitled to the Five Thousand Dollar Executive health
benefit plan until the earlier of March 1, 2000 or your death or disability. You
are eligible, at your expense, to participate in the Corporation sponsored group
medical insurance plans as well as the 401(k) and dental plans through the
earlier of March 1, 2001 or your death or disability. Effective immediately, you
will no longer have Life Insurance, Accidental Death and Dismemberment, or Long
Term Disability Benefits paid for by Techniclone. Currently, COBRA benefits will
be available to you for your discontinued medical and dental coverage (only) for
a period of 18 months beginning on the earlier of March 1, 2000 or your death or
disability. A letter explaining these benefits will be sent to you from the
Company as soon as possible after your become eligible for the benefits.
11. All compensation due to you shall be immediately due and payable in
the event there has been a Change in Control of the Company while this Severance
Agreement is in effect. For purposes of this Agreement, a "Change in Control" of
the Company shall be deemed to have occurred if (i) there shall be consummated
(x) any consolidation or merger of the Company in which the Company is not the
continuing or surviving corporation or pursuant to which shares of the Company's
Common Stock would be converted into cash, securities or other property, other
than a merger of the Company in which the holders of the Company's Common Stock
immediately prior to the merger have substantially the same proportionate
ownership of at least 65% of common stock of the surviving corporation
immediately after the merger, or (y) any sale, lease, exchange or other transfer
(in one transaction or a series of related transactions) of all, or
substantially all, of the assets of the Company other than to a corporation in
which the holders of the Company's Common Stock immediately prior to such
transaction have substantially the same proportionate ownership of at least 65%
of the common stock of such corporation, or (ii) the stockholders of the Company
approve any plan or proposal for the liquidation or dissolution of the Company,
or (iii) any person (as such term is used in Sections 13(d) and 14(d)(2) of the
35
Securities Exchange Act of 1934, as amended (the "Exchange Act")), shall become
the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act)
of 40% or more of the Company's outstanding shares of Common Stock (other than
any such person who had record or beneficial ownership of at least 10% of the
Company's outstanding shares of Common Stock on the date hereof), or (iv) during
any period of two consecutive years during the term of this Severance Agreement,
individuals who at the beginning of the two year period constituted the entire
Board of Directors do not for any reason constitute a majority thereof unless
the election, or the nomination for election by the Company's stockholders, of
each new director was approved by a vote of at least two-thirds of the directors
then still in office who were directors at the beginning of the period.
12. If your availability is terminated by reason of death or disability
and you have performed your duties under this Severance Agreement, the remaining
balances excluding the five thousand dollar executive health insurance plan
payment) due you under this Severance Agreement shall be paid to your estate.
Such amount shall be paid for the duration of this Severance Agreement and in
accordance with this Severance Agreement the Company's normal pay practices.
This amount shall be in lieu of any pension, employee benefit plan or life
insurance policy presently maintained by the Company on death or disability.
13. You understand and agree that the terms of this Severance Agreement
are required to be disclosed by law and that the Severance Agreement will be
filed as an Exhibit with the Company's SEC filings.
14. Each of the parties hereto shall "speak well" of the other. Neither
you nor any or your representatives shall make any statements that are critical
of the Company or its personnel or give any reason for your separation of you
from the Company other than those statements contained in the public
announcement of your resignation; provided however, that the prohibition
contained in this sentence shall not apply to privileged communications between
you and your attorneys. No officer or director of the Company shall state to any
person, whether an employee of the Company or not, anything critical of you or
give any reason for your separation of you from the Company other than those
statements contained in the public announcement of your resignation; provided
however, that the prohibition contained in this sentence shall not apply to
privileged communications with the Company's attorneys or to private meetings
attended only by officers and directors of the Company. The Company shall use
its best efforts to ensure that no management employee of the Company does
anything or states anything which reflects unfavorably upon you or your
separation from the Company.
15. This Severance Agreement embodies a mutual compromise that we have
made in order to achieve peace, and is not to be construed as an admission of
liability or wrongdoing by either party. In consideration of this Severance
Agreement and for other valuable consideration, you, on the one hand, and the
Company, on the other hand, fully and forever releases and discharges the other,
its representatives, agents, successors and assigns, from any and all claims,
charges, causes of actions, rights or liabilities that each party now holds or
has held, or may hereafter hold, whether known or unknown, relating to your
employment by the Company or arising under any laws, statutes or regulations
relating to your employment, including, but not limited to, any claims for age
discrimination under the Age Discrimination in Employment Act of 1967, as
amended, and you agree to not bring any legal or administrative action based on
any such claim. The Company and you specifically intend that the above releases
shall bar all claims relating to your employment, including those which are
currently unknown by either party. Pursuant thereto each party hereby waives the
protection of Civil Code ss. 1542 which reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE
TIME OF EXECUTING THE RELEASE, IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
36
16. The Company and you acknowledge that each party is entering into
this Severance Agreement freely and voluntarily, with a full understanding of
its terms including the release of claims. We suggest that you confer with your
attorney before signing this Severance Agreement. You also agree that all of
your employment agreements with Techniclone are terminated and that this
Severance Agreement sets forth all the terms of your agreement with the Company
regarding your resignation, severance and related benefits and supersedes your
Employment Agreement and amendments thereto, and any prior negotiations or
dealings in this regard, but that the terms in your Employment Agreement or in
any other agreement that you have signed with the Company concerning
confidential information or assignment of inventions shall remain in affect in
accordance with the terms thereof.
This Severance Agreement may be executed in counterparts, each of which
shall be deemed an original and all of which together shall constitute a single
agreement.
Please contact me if you have any questions or comments. I wish you the
very best in your future endeavors.
To confirm that you agree to these terms, please sign and date the
enclosed copy of this letter and return it to me from the date you received it.
In the event you decline to sign this letter, it may not be used as evidence
against the Company for any purpose.
Very truly yours,
/s/ Larry O. Bymaster
---------------------------------------
Larry O. Bymaster
President and Chief Executive Officer
I agree to the terms stated in this letter.
/s/ Lon H. Stone
- ---------------------------------------
Lon H. Stone
Dated: July 28, 1998
37
EXHIBIT NO. 10.45
October 28, 1998
William V. (Bix) Moding
14282 Franklin Avenue
Tustin, CA 92780
Re: Severance Agreement
Dear Bix:
This letter will serve to document our agreement on the terms and
conditions of your resignation as an executive officer and employee of
Techniclone Corporation ("Techniclone" or the "Company") and your
continued compensation as a consultant to the Company. Once this letter is
signed by you it will constitute a legally binding contract on the
following terms:
1. In consideration of this Severance Agreement ("Severance Agreement"), you
confirm that you will voluntarily resign as an executive officer (Vice
President, Operations and Administration) and employee of Techniclone
effective on October 4, 1998.
2. Techniclone will engage you as an independent consultant for a fixed and
non-cancelable period of sixteen (16) months commencing on October 4, 1998
and continuing until January 31, 2000. You will be paid a fixed and
non-cancelable monthly consulting fee of Twelve Thousand and Five Hundred
Dollars ($12,500), payable on the last business day of each month (first
payment to be made on October 30, 1998) during the sixteen month
consulting period. Upon your death or disability during the term of this
consultancy, all remaining payments will be made, when due, to your
estate. You agree that you will be available for up to ten (10) hours per
month by phone or in person to consult with the Company or its employees
with the advance approval of the Company's C.E.O. The Company agrees to
provide you with at least three days notice of any requirement to render
consulting services in person.
3. Pursuant to the Company's 1996 Stock Incentive Plan, you have unexercised
and vested stock options amounting to 240,000 shares as of this date; and
an additional 80,000 stock options that vest in January 2000, which will
now all become immediately vested. The resulting total of 320,000 vested
option shares will be distributed to you free of any restrictive legend
and free of payment of any exercise price as follows: 240,000 option
shares to be exercised and delivered to you as of January 1, 1999, and the
remaining 80,000 option shares to be exercised and delivered to you on
January 31, 2000. The non-payment by you of the $.60 per share exercise
price for these options will result in income to you at the rate of $.60
per share as each group of shares is delivered to you. Upon your death or
disability, the stock option shares will be distributed, when due, to your
estate.
38
William V. (Bix) Moding
September 25, 1998
Page 2
4. In addition to the Company vesting and issuing the stock option shares to
you on the dates set forth above, the Company will make the appropriate
tax payments to the proper federal and state taxing authorities at the
bonus tax rates (federal- 28%, Calif. State - 6%), applied to the income
amount of $.60 per share, as each group of options is delivered to you.
Specifically, we will deliver to you as of January 1, 1999, a check in the
amount of $40,320 (28%) made payable to the Internal Revenue Service on
your behalf, and a check in the amount of $8,640 (6%) made payable to the
Franchise Tax Board on your behalf. Additionally, on January 31, 2000, we
will deliver to you a check in the amount of $13,440 (28%) made payable to
the Internal Revenue Service on your behalf, and a check in the amount of
$2,880 (6%) made payable to the Franchise Tax Board on your behalf.
5. Effective on October 4, 1998, your inclusion in Techniclone's employee
benefit plans will be terminated. Effective on such date, you will no
longer be included in the health and dental insurance, $5,000 executive
health benefit program, life insurance, accidental death and dismemberment
insurance, or long-term disability insurance benefits paid for by
Techniclone. You will be eligible at your expense to participate under the
COBRA benefit rules for your discontinued medical and dental insurance
coverages for a period of up to 18 months beginning on October 4, 1998, as
provided by law. A letter explaining these COBRA benefits will be provided
to you separately by the Company.
6. All monthly consulting payments, delivery of stock option shares and
related payment of withholding taxes shall be immediately due and payable
in the event there has been a Change in Control of the Company while this
Severance Agreement is in effect. For purposes of this Agreement, a
"Change in Control" of the Company shall be deemed to have occurred if:
(i) there shall be consummated: (a) any consolidation or merger of the
Company in which the Company is not the continuing or surviving
corporation or pursuant to which the shares of the Company's Common Stock
would be converted into cash, securities or other property, other than a
merger of the Company in which the holders of the Company's Common Stock
immediately prior to the merger have substantially the same proportionate
ownership of at least 50% of common stock of the surviving corporation
immediately after the merger, or (b) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all,
or substantially all, of the assets of the Company other than to a
corporation in which the holders of the Company's Common Stock immediately
prior to such transaction have substantially the same proportionate
ownership of at least 50% of the common stock of such corporation, or (ii)
the stockholders of the Company approve any plan or proposal for the
liquidation or dissolution of the Company, or (iii) any person (as such
term is used in Sections 13(d) and 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), shall become
39
William V. (Bix) Moding
September 25, 1998
Page 3
the beneficial owner (within the meaning of Rule 13d-3 under the Exchange
Act) of 50% or more of the Company's outstanding shares of Common Stock
(other than any such person who had record or beneficial ownership of at
least 10% of the Company's outstanding shares of Common Stock on the date
hereof).
7. You acknowledge that you owe the Company two stock option exercise notes
with a current combined principal balance of $179,379.77. You agree to
make the next scheduled payment of $36,671.66 (including principal and
interest) on or before April 30, 1999. Additionally, the Company and you
agree that the notes will mature in full as to principal and interest on
the January 31, 2000, date of the termination of your consulting
arrangement with the Company. Accordingly, you agree that a final payment
of $160,831.62 (including principal of $153,771.86 and accrued interest of
$7,059.76) will be made no later than January 31, 2000. You also agree to
execute a standard form security agreement relating to the stock option
notes for recording by the Company to formalize your pledge of personal
assets as backup collateral for the outstanding notes in addition to the
original pledge of 50,875 shares of Techniclone common stock as primary
collateral.
8. On October 2, 1998, the Company agrees to pay you all accrued and unused
vacation pay (estimated at 80 hours, subject to final calculation) and
accrued back pay relating to your 1998 salary deferral for the period from
March 21, 1998 through October 3, 1998 (estimated at $14,000, subject to
final calculation).
9. Effective immediately, your auto allowance will be terminated.
10. In consideration of consulting services that are contemplated to be
rendered under the terms of this Agreement, you will be able to
permanently keep the Company-furnished computer and fax machine which are
located at your residence.
11. You understand and agree that the terms of this Severance Agreement are
required to be disclosed by law and that the Severance Agreement may be
filed as an Exhibit with the Company's SEC filings. Additionally, you
understand that as a current executive officer of the Company, your
resignation will be required to be disclosed in a press release by the
Company. We mutually agree to cooperate in developing and approving the
content of this press release which will be released to the public on
Monday October 5, 1998.
12. Each of the parties hereto shall "speak well" of the other. Neither you
nor any of your representatives shall make any statements that are
critical of the Company or its personnel or give any reason for your
separation from the Company other than,
40
William V. (Bix) Moding
September 25, 1998
Page 4
"You have left to pursue other personal and business interests." The
prohibition contained in the previous sentence shall not apply to
privileged communications between you and your attorneys. No officer or
director of the Company shall state to any person, whether an employee of
the Company or not, anything critical of you or give any reason for your
separation from the Company other than the quotation noted above. The
prohibition contained in the previous sentence shall not apply to
privileged communications with the Company's attorneys or to private
meetings attended only by officers and directors of the Company or
otherwise as required by legal process. The Company shall use its best
efforts to ensure that no employee of the Company does anything or states
anything which reflects unfavorably upon you or your separation from the
Company.
13. This Severance Agreement embodies a mutual compromise that we have made in
order to achieve peace, and is not to be construed as an admission of
liability or wrongdoing by either party. In consideration of this
Severance Agreement and for other valuable consideration, you, on the one
hand, and the Company, on the other hand, fully and forever releases and
discharges the other, its representatives, agents, successors and assigns,
from any and all claims, charges, causes of actions, rights or liabilities
that each party now holds or has held, or may hereafter hold, whether
known or unknown, relating to your employment, including but not limited
to, any claims for age discrimination under the Age Discrimination in
Employment Act of 1967, as amended, and you agree not to bring any legal
or administrative action based on any such claim. The Company and you
specifically intend that the above releases shall bar all claims relating
to your employment, including those which are currently unknown by either
party. Pursuant thereto each party hereby waives the protection of Civil
Codess.1542 which reads as follows:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS
WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT
TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING
THE RELEASE, IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR."
A. This Severance Agreement is being given to you on September 25,
1998. You acknowledge that you are entitled to take 21 days to
consider whether to accept this Agreement.
B. After signing this Agreement, you shall have a period of seven (7)
calendar days to revoke this Severance Agreement by providing the
Company with written notice of your revocation. To be effective,
such revocation must be in writing,
41
William V. (Bix) Moding
September 25, 1998
Page 5
must specifically revoke this Severance Agreement, and must be received by
the Company prior to the eighth calendar day following your execution of
this Agreement. This Agreement shall become effective, enforceable, and
irrevocable on the eighth calendar day following your execution of this
Severance Agreement. Any revocation of this Severance Agreement, however,
shall not affect the finality of your voluntary resignation of employment
from the Company as of October 4, 1998, and in the event of such
revocation you shall receive no compensation or other benefits under this
Severance Agreement or under your January 1, 1997 Employment Agreement.
14. The Company and you acknowledge that each party is entering into this
Severance Agreement freely and voluntarily, with a full understanding of
its terms including the release of claims. We suggest that you confer with
your attorney before signing this Severance Agreement. You also agree that
all of your employment agreements with Techniclone are terminated and that
this Severance Agreement sets forth all the terms of your agreement with
the Company regarding your resignation, severance and related benefits and
supersedes your Employment Agreement and amendments thereto, and any prior
negotiations or dealings in this regard, but that the terms in your
Employment Agreement or in any other agreement that you have signed with
the Company concerning confidential information or assignment of
inventions shall remain in effect in accordance with the terms thereof.
15. Notwithstanding the release of claims outlined in paragraph 13. above, you
reserve the right to bring legal or administrative action to enforce the
collection of amounts that will become due under your consulting
arrangement or the agreement for Techniclone to deliver stock option shares
to you and pay withholding taxes related thereto. Also, the Company
reserves the right to pursue legal or administrative action to enforce
collection of principal and interest due under the stock option notes if
scheduled payments are not made by you when due.
42
William V. (Bix) Moding
September 25, 1998
Page 6
Please contact me if you have any questions or comments. I wish you the
best in your future endeavors.
To confirm that you agree to these terms, please sign and date the
enclosed copy of this letter and return it to me as soon as possible. In
the event you decline to sign this letter, it may not be used as evidence
against the Company for any purpose.
Very truly yours,
/s/ Larry O. Bymaster
--------------------------------
Larry O. Bymaster
President and Chief Executive Officer
I agree to the terms stated in this letter.
/s/ William V. Moding
--------------------------------
William V. Moding
/s/ October 2, 1998
--------------------------------
Date
43
EXHIBIT NO. 10.46
OPTION AGREEMENT
THIS OPTION AGREEMENT ("AGREEMENT") is entered into this 23 day of
October, 1998, by and between TECHNICLONE CORPORATION, a Delaware corporation
("COMPANY"), and BIOTECHNOLOGY DEVELOPMENT, LTD., a Nevada limited partnership
("OWNER").
R E C I T A L S
- - - - - - - -
A. Company and Owner entered into a Distribution Agreement dated
February 29, 1996 ("DISTRIBUTION AGREEMENT") whereby Owner purchased the
distribution rights for the Product in the Territory (as those terms are defined
in the Distribution Agreement) the ("DISTRIBUTION RIGHTS").
B. Owner purchased the Distribution Rights for $3,000,000 together with
an agreement to pay Company the greater of 23% of the Net Selling Price of the
Product or $900 per Dose (as those terms are defined in the Distribution
Agreement).
C. In the negotiations between the Company and Owner for the
Distribution Rights, Owner agreed that the Company would have a thirty (30)
month option to purchase the Distribution Rights from Owner (the "ORIGINAL
OPTION").
D. Owner is willing to grant Company an extension and modification of
such Original Option rights for the consideration set forth herein.
NOW, THEREFORE, in consideration of the foregoing premises, the parties
hereby represent, warrant, covenant and agree as follows:
ARTICLE 1
TERMS OF OPTION
---------------
1.1 GRANT OF OPTION. Owner hereby grants to Company and Company hereby
accepts an option (the "OPTION") to purchase the Distribution Rights granted
under the Distribution Agreement for the Option Term as set forth in SECTION 1.2
under the terms and conditions provided herein.
1.2 TERM. The term of the option granted herein shall commence on the
execution date of this Agreement and below, shall expire at 5:00 p.m. on
December 1, 1998 (the "OPTION TERM"). The Option may be extended at the sole
election of the Company for up to three (3) additional periods as set forth in
SECTION 1.4 (each deemed an extension of the "OPTION TERM") upon the timely
payment to Company of the amounts required pursuant to SECTION 1.4. If the last
day of any Option Term should be a non-business day (weekend or holiday), the
Option Term shall automatically be extended until 5:00 p.m. on the next business
day.
1.3 EXERCISE OF OPTION. If the Company elects to exercise the Option
granted herein, the Company shall deliver to Owner (a) a written notice of such
exercise on or before the tenth (10th) day preceding the expiration of the
Option Term ("OPTION NOTICE"), and (b) on or before the expiration of the Option
Term, the exercise price set forth on EXHIBIT A to this Agreement and by this
reference incorporated herein.
44
1.4 OPTION CONSIDERATION.
(a) As consideration for the grant of the Option and any
extension of the Option Term, the Company shall pay Owner the
following:
(i) on the execution date of this Agreement, $93,750
as consideration for the Option with an Option Term running
until December 1, 1998;
(ii) on or before December 1, 1998, $112,500 as
consideration to extend the Option Term from December 1, 1998
until March 1, 1999;
(iii) on or before March 1, 1999, $112,500 as
consideration to extend the Option Term from March 1, 1999
until June 1, 1999; and
(iv) on or before June 1, 1999, $112,500 as
consideration to extend the Option Term from June 1, 1999
until August 30, 1999.
(b) In the event that the Company shall elect not to pay any
amount due under this SECTION 1.4 on or before its due date, the Option
provided herein shall terminate as of 5:00 p.m. Pacific Time on the
tenth day following written notice received by the Company from Owner
of Company's failure to make such payment by its due date, provided
that such payment shall remain unpaid at the end of such ten day
period, and the Company shall have no further right to purchase the
Distribution Rights hereunder.
(c) Upon execution of this Agreement, Company shall grant to
Owner a three year option to purchase up to 125,000 shares of Company's
common stock at an exercise price of $3 per share under the terms of
that certain Stock Option Agreement attached hereto as EXHIBIT B.
1.5 FAILURE TO EXERCISE OPTION. If this Option is not exercised by
Company prior to the expiration of the Option Term (as may be extended from time
to time pursuant to Section 1.4), then:
(a) this Option shall terminate and Company shall have no
further right to purchase the Distribution Rights;
(b) Owner may elect to market and distribute the Product in
the Territory; and
(c) If Owner requests access to Company's U.S. clinical data,
then Owner shall pay to Company a five percent (5%) royalty on all
future Product gross sales in the Territory and a nonrefundable cash
payment on One Million Dollars ($1,000,000) on the date such clinical
trial data is provided to Owner. Owner shall have the right to audit
the Company's U.S. clinical data to which it seeks access, under a
covenant of confidentiality, prior to such clinical data being provided
to Owner. If Owner enters into a Subdistribution arrangement (as
described in Section 3.4 of the Distribution Agreement, then Company
agrees that its fifty percent (50%) share of any Subdistribution fees
will be reduced by $1,000,000 if Owner has requested access to the
Company's U.S. clinical data and previously paid the $1,000,000 to
Company as set forth in this SECTION 1.5(c).
45
ARTICLE 2
GENERAL PROVISIONS
------------------
2.1 PARAGRAPH HEADINGS. The paragraph headings used in this Agreement
are for purposes of convenience only. They shall not be construed to limit or
extend the meaning of any part of this Agreement.
2.2 NOTICES. Any notice, demand, approval, consent or other
communication required or desires to be given under this Agreement shall be in
writing and shall be either personally served or mailed in the United States
mail, certified, return receipt requested, potage prepaid, addressed to the
party to be served with the copies indicated below, as the last address given by
that party to the other under the provisions of this section. All such
communications shall be deemed delivered at the earlier of actual receipt or
five (5) business days following mailing as aforesaid.
Owner: Biotechnology Development, Ltd.
c/o Tom Hartley
222 South Rainbow, Suite 218
Las Vegas, Nevada 89128
Attention: Edward Legere
Techniclone: Techniclone Corporation
14282 Franklin Avenue
Tustin, California 92680
Attention: Chief Executive Officer
2.3 BINDING EFFECT. All the terms, covenants and conditions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors.
2.4 ENTIRE AGREEMENT. This Agreement sets forth the entire
understanding and agreement between the parties with respect to the subject
matter hereof, and supersedes and replaces any prior understanding, agreement or
statement, written or oral, with respect to the same. No provision of the
Agreement shall be construed to confer any rights or remedies on any person
other than parties hereto.
2.5 CALIFORNIA LAW. This Agreement shall be governed by and interpreted
in accordance with the laws of the State of California applicable to agreements
made and to be performed entirely within such state.
2.6 TIME OF THE ESSENCE. Time is of the essence in the performance of
each and every provision of this Agreement.
2.7 ATTORNEYS' FEES. In the event of any controversy, claim or dispute
between the parties hereto arising out of or relating to this Agreement or any
of the documents provided for herein, or the breach thereof, the prevailing
party shall be entitled to recover from the losing party reasonable attorneys'
fees, expenses and costs.
2.8 ASSIGNMENT. This Agreement shall not be assignable by either party
without the consent of the other.
2.9 PARTIES IN INTEREST. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement on any persons other than the parties to it and their respective
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third persons to any party to this
Agreement, nor shall any provision give any third persons any right of
subrogation or action over or against any party to this Agreement.
46
2.10 MODIFICATION. This Agreement shall not be modified except by a
writing signed on behalf of each of the parties hereto.
2.11 SEVERABILITY. If any term, provision, covenant or condition of
this Agreement is found by a court of competent jurisdiction to be invalid, void
or unenforceable, then such term, provision, covenant or condition shall be
deemed to be stricken from this Agreement and the remainder of this Agreement
shall remain in full force and effect and shall in no way be effected, impaired
or invalidated thereby.
2.12 COUNTERPARTS. This Agreement may be executed in several
counterparts and such counterparts together shall constitute but one and the
same instrument.
IN WITNESS WHEREOF, this Option Agreement is executed by the parties
hereto on the date first above written.
BIOTECHNOLOGY DEVELOPMENT, LTD.
By: BUEN HERMANOS, INC.,
its General Partner
By: /s/ Edward Legere
--------------------------------------------
Edward Legere, President
TECHNICLONE CORPORATION
By: /s/ Larry O. Bymaster
--------------------------------------------
Larry O. Bymaster, Chief Executive Officer
47
EXHIBIT A
TO
OPTION AGREEMENT
If Company exercises its Option to purchase the Distribution Rights
from Owner it shall: (i) pay Owner Four Million Five Hundred Thousand Dollars
($4,500,000); (ii) grant to Owner a five year option to purchase up to 1,000,000
shares of Company's common stock at an exercise price of $5 per share pursuant
to the terms of that certain Stock Option Agreement attached hereto as EXHIBIT
C; and (iii) pay to Owner a five percent (5%) royalty on the gross revenue of
LYM-1 product in the Territory.
48
EXHIBIT B
TO
OPTION AGREEMENT
NEITHER THIS OPTION NOR THE UNDERLYING SHARES OF COMMON STOCK (THE "UNDERLYING
STOCK") HAVE BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED,
OR ANY STATE SECURITIES LAW. NEITHER THIS OPTION NOR THE UNDERLYING STOCK, NOR
ANY PORTION THEREOF OR INTEREST THEREIN, MAY BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF UNLESS THE SAME IS REGISTERED AND QUALIFIED IN ACCORDANCE WITH SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAW, OR IN THE OPINION OF COUNSEL
REASONABLY SATISFACTORY TO THE COMPANY AS TO FORM AND SUBSTANCE, SUCH
REGISTRATION AND QUALIFICATION ARE NOT REQUIRED.
Number: BTD-02 Option to Purchase 125,000 shares of Common Stock
OPTION TO PURCHASE COMMON STOCK
OF
TECHNICLONE CORPORATION,
A DELAWARE CORPORATION
VOID AFTER OCTOBER 22, 2001
This certifies that Biotechnology Development, Ltd., a Nevada limited
partnership, or registered assigns ("HOLDER"), is entitled, subject to the terms
set forth below, to purchase from Techniclone Corporation, a Delaware
corporation (the "COMPANY"), One Hundred Twenty Five Thousand (125,000) (the
"OPTION NUMBER"), fully paid and nonassessable shares of the Company's Common
Stock as constituted on October 23, 1998 (the "ISSUE DATE") at Three Dollars
($3.00) per share (the "EXERCISE PRICE"). The Exercise Price and number and
character of such shares of Common Stock are subject to adjustment as provided
below. The term "COMMON STOCK" shall mean, unless the context otherwise
requires, the Company's Common Stock. The term "OPTIONS" as used herein shall
include this Option and any Options delivered in substitution or exchange
therefor as provided herein.
1. EXERCISE.
Holder may exercise this Option in whole at any time or in part from
time to time, on any business day, prior to the time this Option terminates as
provided in SECTION 4 below, by delivery at the principal office of the Company,
14282 Franklin Avenue, Tustin, California 92780, of the following:
(a) this Option,
49
(b) the Subscription Form attached to this Option duly executed and
specifying the number of share of Common Stock to be purchased hereunder, and
(c) payment of the sum (the "PURCHASE PRICE") obtained by multiplying (i)
the number of shares of Common Stock to be purchased by (ii) the Exercise Price.
The Purchase Price shall be paid in cash or by certified or official bank
check, payable to the order of the Company.
This Option may be exercised for less than the full number of shares of
Common Stock at the time called for hereby. Upon such partial exercise, this
Option shall be surrendered, and a new Option of the same tenor and for purchase
of the number of shares not purchased upon such exercise shall be issued by the
Company to Holder.
A Option shall be deemed to have been exercised immediately prior to the
close of business on the date of its surrender for exercise as provided above,
and the person entitled to receive the shares of Common Stock issuable upon such
exercise shall be treated for all purposes as the holder of such shares of
record as of the close of business on such date. As soon as practicable on or
after such date, the Company shall issue and deliver to the person or persons
entitled to receive the same a certificate or certificates for the number of
full shares of Common Stock issuable upon such exercise, together with cash, in
lieu of any fraction of a share, equal to such fraction of the current market
value of one full share.
2. ADJUSTMENTS.
(a) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Company at any
time or from time to time after the Issue Date effects a subdivision of the
outstanding Common Stock pursuant to a stock split or similar event, the
Exercise Price of this Option shall be proportionately decreased, and
conversely, if the Company at any time or from time to time after the Issue Date
combines the outstanding shares of Common Stock into a smaller number of shares
in a reverse stock split or similar event, the Exercise Price of this Option
shall be proportionately increased. Upon the adjustment of the Exercise Price
pursuant to the foregoing provisions, the number of shares of Common Stock
issuable upon the exercise of this Option shall be adjusted to the nearest full
share by multiplying the number of shares of Common Stock issuable upon exercise
of this Option by a fraction, the numerator of which is the Exercise Price
immediately prior to such adjustment and the denominator of which is the
Exercise Price immediately after such adjustment. Any adjustment under this
subsection (a) shall be effective at the close of business on the date the
subdivision or combination becomes effective.
(b) ADJUSTMENT FOR CERTAIN DIVIDENDS AND DISTRIBUTIONS. If the Company at
any time or from time to time after the Issue Date makes, or fixes a record date
for the determination of holders of Common Stock entitled to receive a dividend
or other distribution payable in additional shares of Common Stock, then and in
each such event the number of shares of Common Stock subject to this Option
shall be increased and the Exercise Price then in effect shall be decreased as
of the date of such issuance or, in the event such record date is fixed, as of
the close of business on such record date, by:
(i) multiplying the Exercise Price then in effect by a fraction
(1) the numerator of which is the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date, and (2) the
denominator of which shall be the total number of shares of Common
Stock issued and outstanding immediately prior to the time of such
issuance or the close of business on such record date plus the number
of shares of Common Stock issuable in payment of such dividend or
distribution; and
50
(ii) multiplying the number of shares of Common Stock subject to
this Option by a fraction (1) the numerator of which is the total
number of shares of Common Stock issued and outstanding immediately
prior to the time of such issuance or the close of business on such
record date plus the number of shares of Common Stock issuable in
payment of such dividend or distribution, and (2) the denominator of
which shall be the total number of shares of Common Stock issued and
outstanding immediately prior to the time of such issuance or the
close of business on such record date.
If, however, such record date is fixed and such dividend is not fully
paid or if such distribution is not fully made on the date fixed therefor, the
number of shares of Common Stock subject to this Option and the Exercise Price
thereof shall be recomputed accordingly as of the close of business on such
record date and thereafter shall be adjusted pursuant to this subsection (b) as
of the time of actual payment of such dividends or distributions.
(c) ADJUSTMENT FOR RECLASSIFICATION, EXCHANGE AND SUBSTITUTION. In the
event that at any time or from time to time after the Issue Date any Common
Stock is changed into the same or a different number of shares of any class or
classes of stock, whether by recapitalization, reclassification or otherwise
(other than a subdivision or combination of shares or stock dividend or a
reorganization, merger, consolidation or sale of assets provided for elsewhere
in this SECTION 2), then and in any such event each Holder shall thereafter have
the right to receive upon exercise hereof the kind and amount of stock and other
securities and property receivable upon such recapitalization, reclassification
or other change, by holders of the maximum number of shares of Common Stock
which Holder could have received upon the exercise of this Option immediately
prior to such recapitalization, reclassification or change, all subject to
further adjustment as provided herein.
(d) REORGANIZATION, MERGERS, CONSOLIDATIONS OR SALES OF ASSETS. If at any
time or from time to time after the Issue Date there is a capital reorganization
of the Common Stock (other than a recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this SECTION 2)
or merger or consolidation of the Company with or into another corporation, or
the sale of all or substantially all of the Company's properties and assets to
any other person, then Holder shall be entitled to receive upon the exercise of
the Option, in lieu of the Common Stock, the number of shares of stock or other
securities or property of the Company, or of the successor corporation,
resulting from such merger or consolidation or sale, to which a holder of the
number of shares of Common Stock deliverable upon exercise would have been
entitled on such capital reorganization, merger, consolidation or sale, provided
that this Option is exercised simultaneously with the capital reorganization of
the Common Stock (other than a recapitalization, subdivision, combination,
reclassification or exchange of shares provided for elsewhere in this SECTION 2)
or a merger or consolidation of the Company with or into another corporation, or
the sale of all or substantially all of the Company's properties and assets to
any other person.
(e) NOTICE OF RECORD DATE. In case:
(i) the Company shall make a record of the holders of its Common
Stock (or other stock or securities at the time receivable upon the
exercise of the Options) for the purpose of entitling them to receive any
dividend or other distribution, or any right to subscribe for or purchase
any shares of stock of any class or any other securities, or to receive
any other right, or
51
(ii) of any capital reorganization of the Company, any
reclassification of the capital stock of the Company, any consolidation
or merger of the Company with or into another corporation, or any
conveyance of all or substantially all of the assets of the Company to
another corporation, or
(iii) of any voluntary dissolution, liquidation or winding-up of the
Company,
then, and in each such case, the Company will mail or cause to be mailed to the
Holder of this Option at the time outstanding a notice specifying, as the case
may be, (a) the date on which a record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right, or (b) the date on which such reorganization,
reclassification, consolidation, merger, conveyance, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
Holder of this Option (or such stock or securities at the time receivable upon
the exercise of the Options) shall be entitled to exchange this Option for
shares of Common Stock (or such other stock or securities at the time receivable
upon the exercise of the Options).
3. LOSS OR MUTILATION.
Upon receipt by the Company of evidence satisfactory to it (in the
exercise of reasonable discretion) of the ownership of this Option by Holder and
of the loss, theft, destruction or mutilation of any Option and, in the case of
loss, theft, or destruction, of indemnity satisfactory to it (in the exercise of
reasonable discretion), and, in the case of mutilation, upon surrender and
cancellation thereof, the Company will execute and deliver in lieu thereof a new
Option of like tenor.
4. TERM OF OPTION.
The Option shall terminate on October 22, 2001 at 11:59 p.m. California
time.
5. RESERVATION OF COMMON STOCK.
The Company shall at all times reserve and keep available for issuance
upon the exercise of Options such number of its authorized but unissued shares
of Common Stock as will be sufficient to permit the exercise in full of all
outstanding Options.
6. RESTRICTION ON TRANSFER.
This Option shall be immediately transferable to Crescent Mortgage
Corporation, located at 610 West Rio Road, Charlottesville, Virginia 22901.
Except as otherwise provided herein, any attempted alienation, assignment,
pledge, hypothecation, attachment, execution or similar process, whether
voluntary or involuntary, with respect to all or any part of the Option or any
right thereunder, shall be null and void and, at the Company's option, shall
cause all of Holder's rights under this Agreement to terminate.
52
7. SECURITIES LAWS REPRESENTATIONS.
In accepting this Option, Holder hereby represents and warrants to the
Company that it is acquiring the Options for investment purposes only, for its
own account, and not as nominee or agent for any other person and not with the
view to, or for resale in connection with, any distribution thereof or the
underlying Common Stock within the meaning of the Securities Act of 1933, as
amended (the "SECURITIES ACT"). Holder further represents that (i) it has a
preexisting personal or business relationship with the Company and/or its
officers and directors and that (ii) Holder is an "accredited investor" as that
term is defined in the regulations promulgated under the Securities Act.
8. NOTICES.
All notices and other communications from the Company to Holder shall be
mailed by first class registered or certified mail, postage prepaid, to the
address furnished to the Company in writing by the last Holder of this Option
who shall have furnished an address to the Company in writing.
9. CHANGE; WAIVER.
Neither this Option nor any term hereof may be changed, waived,
discharged or terminated orally but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought, which, in the case of the Company, shall be the President
or other executive officer duly authorized to execute such change, waiver,
discharge, or termination.
10. HEADINGS.
The headings in this Option are for purposes of convenience of reference
only, and shall not be deemed to constitute a part hereof.
11. LAW GOVERNING AND VENUE.
This Option is delivered in California and shall be construed and
enforced in accordance with and governed by the laws of such State, without
giving effect to principles of conflict of laws and that any dispute concerning
any matter contained herein or relating hereto shall be heard in the Federal and
State of California courts located in Orange County, California.
12. ATTORNEYS' FEES.
In the event of any dispute, claim or controversy concerning this Option,
the prevailing party shall be entitled to recover all costs and expenses,
including without limitation, all attorneys' fees and costs, from the
nonprevailing party hereto.
53
Dated: October 23, 1998
Company:
TECHNICLONE CORPORATION
By:/s/ Larry O. Bymaster
---------------------------------------
Title: President & Chief Executive Officer
Holder: BIOTECHNOLOGY DEVELOPMENT, LTD.
By:_____________________________
Title:__________________________
Address:
________________________________
________________________________
54
EXHIBIT C
TO
OPTION AGREEMENT
(1,000,000 Share Stock Option Agreement - to be agreed upon and attached hereto)
55
5
1,000
6-MOS
APR-30-1998
MAY-01-1998
Oct-31-1998
1,599
0
51
0
87
1,991
11,278
2,113
11,687
3,095
0
0
0
67
6,520
11,687
0
161
0
6,971
0
0
336
(6,810)
0
(6,810)
0
0
0
(6,810)
(.12)
(.12)
