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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED APRIL 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-17085
PEREGRINE PHARMACEUTICALS, INC.
(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.)
14272 FRANKLIN AVENUE, SUITE 100, TUSTIN, CALIFORNIA 92780-7017
(Address of principal executive offices) (Zip Code)
(714) 508-6000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
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 ____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant was approximately $195,083,000 as of July 19, 2001, based upon
a closing price of $2.05 per share. Excludes 4,827,293 shares of common stock
held by executive officers, directors, and shareholders whose ownership exceeds
5% of the common stock outstanding as of July 19, 2001.
As of July 19, 2001, there were 99,989,766 shares of the Registrant's
common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of the Form 10-K is incorporated by reference from the
Registrant's Definitive Proxy Statement for its 2001 Annual Shareholders'
Meeting.
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PEREGRINE PHARMACEUTICALS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED APRIL 30, 2001
TABLE OF CONTENTS
PART I
Item 1. Business 3
Item 2. Properties 20
Item 3. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholders' Matters 21
Item 6. Selected Financial Data 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 28
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 28
PART III
Item 10. Directors and Executive Officers of the Registrant 28
Item 11. Executive Compensation 28
Item 12. Security Ownership of Certain Beneficial Owners
and Management 28
Item 13. Certain Relationships and Related Transactions 28
PART IV
Item 14. Exhibits, Consolidated Financial Statement
Schedules, and Reports on Form 8-K 29
2
PART I
------
ITEM 1. BUSINESS
Except for historical information contained herein, this Annual Report
on Form 10-K 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-K, 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. When used in this
Form 10-K, the words "may," "should," "plans," "believe," "anticipate,"
"estimate," "expect," their opposites and similar expressions are intended to
identify forward-looking statements. The Company cautions readers that such
statements are not guarantees of future performance or events and are subject to
a number of factors that may tend to influence the accuracy of the statements.
Factors that may cause such a difference include, but are not limited to, those
discussed in "Risk Factors and Forward-Looking Statements" on page 15.
COMPANY OVERVIEW
Peregrine Pharmaceuticals, Inc. (formerly Techniclone Corporation),
located in Tustin, California, is a biopharmaceutical company engaged in the
development and commercialization of cancer therapeutics and cancer diagnostics
through a series of proprietary platform technologies using monoclonal
antibodies. As used in this Form 10-K, the terms "we", "us", "our", "Company"
and "Peregrine" refers to Peregrine Pharmaceuticals, Inc., and its wholly owned
subsidiary, Vascular Targeting Technologies, Inc. (formerly Peregrine
Pharmaceuticals, Inc.).
Peregrine's main focus is on the development of its Collateral
Targeting Agent technologies. Collateral Targeting Agents typically use
antibodies that bind to or target stable structures found in most solid tumors,
such as structures found in the necrotic core of the tumor or markers found
specifically on tumor blood vessels. In pre-clinical and/or clinical studies,
these antibodies are capable of targeting and delivering therapeutic killing
agents that destroy cancerous tumor cells. Peregrine currently has exclusive
rights to over 40 issued U.S. and foreign patents protecting various aspects of
its technology and has additional pending patent applications that it believes
will further strengthen its position using Collateral Targeting Agents.
3
We have put together the following chart to assist you in understanding
how our three Collateral Targeting Agent technologies, Tumor Necrosis Therapy
("TNT"), Vascular Targeting Agents ("VTA's"), and Vasopermeation Enhancement
Agents ("VEA's"), function:
- --------------------------------------------------------------------------------
TNT |X| Binds to dead and dying cells found primarily at the necrotic
core of tumors.
|X| Since virtually all solid tumors have a necrotic core, a
single TNT agent can potentially target a number of different
solid tumors.
|X| Can be attached to killing agents, such as radiation or
cytokines, in order to kill living tumor cells near the
necrotic core.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VTA'S |X| Bind to markers found selectively on tumor blood vessels and
blocks the flow of oxygen and nutrients to underlying tumor
tissue by activating a thrombotic pathway.
|X| Blocking blood vessels in a tumor can kill thousands to tens
of thousands of cancer cells, thus causing tumor death.
|X| Represent a very efficient method of killing tumors while
minimizing systemic toxicity.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VEA'S |X| Use a targeting agent to deliver an effector that makes the
blood vessels inside the tumor more leaky (permeable).
|X| The increased permeability of the tumor blood vessels can
make it possible to deliver a higher concentration of
killing agents into the tumor potentially resulting in a
better anti-tumor effect.
- --------------------------------------------------------------------------------
In addition, the following chart summarizes the development status of
the Company's platform Collateral Targeting Agent technologies:
TECHNOLOGY STUDY INDICATION DEVELOPMENT STATUS
---------------- --------------------------- ---------------------------
TNT / Cotara(TM) Brain Cancer Phase II
TNT / Cotara(TM) Colorectal Cancer Phase I
TNT / Cotara(TM) Advanced Soft-tissue Phase I
Sarcoma
TNT / Cotara(TM) Pancreatic Phase I
TNT / Cotara(TM) Liver Cancer Phase I
TNT / Cotara(TM) Pancreatic, Prostate, Phase I/II in Mexico City; closed for
Liver and Brain Cancers enrollment; clinical data used to initiate
additional trials in the U.S.
VTA Not applicable Pre-clinical in collaboration with OXiGENE, Inc.
VEA Not applicable Pre-clinical
In addition to Collateral Targeting Agents, we have a direct
tumor-targeting agent, Oncolym(R), for the treatment of Non-Hodgkins B-cell
Lymphoma ("NHL"). The Oncolym(R) antibody is linked to a radioactive isotope
(131I) and the combined molecule is injected into the blood stream of the
lymphoma patient where it recognizes and binds to the cancerous lymphoma tumor
sites, thereby delivering the radioactive isotope directly to the tumor site.
During June 2001, we assumed the rights previously licensed by Schering A.G. and
we will continue to enroll patients in a single dose Phase I/II clinical trial
that was developed by Schering A.G.
4
The following is a more in depth discussion of our Collateral Targeting
Agent technologies.
TUMOR NECROSIS THERAPY ("TNT")
TNT is our most clinically advanced Collateral Targeting Agent, which
acts by binding to dead and dying cells found primarily at the necrotic core of
the tumor. TNT antibodies are potentially capable of carrying a variety of
agents including radioisotopes, chemotherapeutic agents and cytokines to the
interior of solid tumors. The Company's first TNT-based product, Cotara(TM), is
a chimeric (antibody which is partially human and partially mouse) TNT antibody
conjugated to a radioisotope, I-131. The Company currently has five ongoing
trials for the treatment of various solid tumor indications using Cotara(TM).
TNT represents a novel approach to cancer therapy for the treatment of
sold tumors. Instead of targeting living cancer cells, TNT targets dead and
dying cells, which can account for up to 50% of the mass of a tumor found
primarily at the tumor core. TNT binds to Deoxyribonucleic Acid ("DNA") or
DNA-associated proteins, such as histones, found within the nucleus of every
cell. TNT is only able to reach the DNA target in cells having porous nuclear
and cellular membranes, since porosity is a property uniquely associated with
dead and dying cells. As such, DNA functions as a highly abundant but selective
target. This DNA target is not believed to modulate as do targets associated
with other tumor-specific cell surface antigens that are commonly used as
targets with other antibody-based therapeutic modalities. Thus, compared to a
cell surface marker, the DNA target may be a more stable and reliable target.
Once concentrated in necrotic regions throughout the tumor, radiolabeled TNT can
potentially bombard neighboring viable cancer cells with beta radiation, which
has a penetration of 100-300 cell layers for an extended period of time,
resulting in death of the tumor cells surrounding the necrotic core.
Each successive treatment with TNT potentially kills more cancer cells,
thereby increasing the necrotic area of the tumor. Thus, TNT potentially becomes
more effective upon subsequent doses, contrary to conventional chemotherapy,
which becomes less effective with subsequent doses due to increased drug
resistance. In essence, TNT potentially destroys the tumor from the inside out.
The TNT targeting mechanism could be the basis for a class of new products
effective across a wide-range of solid tumor types, including brain, lung,
colon, breast, liver, prostate and pancreatic cancers.
During September 1995, the Company entered into an agreement with
Cancer Therapeutics, Inc. whereby the Company granted to Cancer Therapeutics,
Inc. the exclusive right to sublicense TNT to a major pharmaceutical company
solely in the Peoples Republic of China. The technology was then sublicensed to
Brilliance Shanghai Pharmaceuticals, Inc. ("Brilliance") from Cancer
Therapeutics, Inc. and Brilliance has been conducting clinical trials in China
using TNT for approximately the last five (5) years. Recently, Brilliance has
informed the Company that they were in the process of submitting an application
for regulatory approval from the Chinese Regulatory Authority. The Company's
agreement with Cancer Therapeutics, Inc. is summarized in the notes to the
consolidated financial statements.
VASCULAR TARGETING AGENTS ("VTAs").
VTAs utilize monoclonal antibodies and other targeting agents that
recognize markers found on tumor blood vessels. The VTAs act in a two step
process whereby the VTA first binds to the tumor blood vessels and then induces
5
a blood clot in the tumor blood vessels. The formation of the blood clot stops
the flow of oxygen and nutrients to the tumor cells, resulting in a wave of
tumor cell death. VTAs have the potential to be effective against a wide variety
of solid tumors since every solid tumor in excess of two millimeters in size
forms a vascular network to enable it to continue growing and since tumor
vasculature markers are believed to be consistent among various tumor types.
Another potential advantage of the VTA technology is that the cells targeted by
VTAs do not mutate to become drug resistant. Drug resistance caused by the
instability and mutability of cancer cells is a significant problem with
conventional therapeutic agents that must directly target the cancer cells of
the tumor.
In pre-clinical animal studies, VTAs have been able to induce the
formation of clots in tumor blood vessels within 30 minutes leading to tumor
cell death. Within days, large tumor masses have been shown to disintegrate and
have left nearby healthy tissue intact and fully functional.
The VTA technology differs from conventional anti-angiogenesis therapy
in that VTAs act by shutting off the supply of oxygen and nutrients to tumor
cells by inducing clot formation in existing tumor-blood vessels. By contrast,
anti-angiogenesis compounds typically work by inhibiting the growth of new tumor
blood vessels. In inhibiting the growth of new tumor blood vessels, tumor growth
may be diminished, but the existing tumor can maintain its bulk by utilizing the
existing tumor blood vessels. The VTA approach, therefore, is designed to
provide a therapeutic effect for the debulking of existing tumors.
During May 2000, the Company entered into a joint venture agreement
with OXiGENE, Inc. for the development of the VTA technology. Under the terms of
the joint venture, the Company has agreed to supply its VTA intellectual
property to the joint venture. In exchange for this, OXiGENE, Inc. has agreed to
provide its next generation tubulin-binding compounds and fund up to $20,000,000
for development costs plus milestone payments as further explained in the notes
to our consolidated financial statements. The Company and OXiGENE, Inc. have
named the new joint venture entity Arcus Therapeutics, LLC. Pre-clinical
research is currently being conducted by Dr. Philip Thorpe and his scientific
team at the University of Texas Southwestern Medical Center at Dallas under a
sponsored research agreement.
VASOPERMEATION ENHANCEMENT AGENTS ("VEAs").
VEAs currently use the same targeting agent as TNT to deliver an agent
that makes the blood vessels inside the tumor more leaky (permeable). The
increased permeability of the tumor blood vessels makes it possible to deliver
an increased concentration of killing agents into the tumor where they can
potentially kill the living tumor cells. In pre-clinical studies, VEAs were able
to increase the uptake of drugs or antibodies within a tumor by 200% to 400%.
VEAs are currently in pre-clinical development in collaboration with Dr. Alan
Epstein and his scientific team at the University of Southern California Medical
Center under a sponsored research agreement.
OUR BUSINESS STRATEGY
Our mission is to increase the quality of life of people suffering from
cancer and to increase shareholder value by rapidly commercializing our platform
technologies through in-house development, joint ventures, strategic alliances
and licensing agreements. Our objective is to focus our resources on clinical
trials to seek regulatory approval while enhancing our strategic partnership
arrangements for our broad platform technologies. The most critical aspect of
our business plan involves clinical trials of our various platform technologies.
6
CLINICAL TRIALS
Over the past fiscal year, we have expanded our clinical trial program
using Cotara(TM) in the U.S. from one clinical trial for the treatment of brain
cancer to five separate clinical trials for the treatment of five solid tumor
indications. With the preliminary data obtained from a clinical trial in Mexico
City during the past year using Cotara(TM), we were able to plan and initiate
four additional clinical trials this past fiscal year in the U.S. These trials
are designed to determine the drug's safety and dosing profile. In addition, we
plan on commencing a Phase III study in the U.S. during the next fiscal year,
upon the approval from the Food & Drug Administration, for the treatment of
brain cancer. Although this study may be acceptable to the U.S. Food and Drug
Administration ("FDA"), the study would probably not be acceptable to the
European Medicines Evaluation Agency ("EMEA"). Therefore, the Company is looking
to design a study that it believes will be acceptable to the U.S. FDA, the EMEA
and Canadian regulatory authorities. This study is contemplated to be about
twice the size of a U.S. only study and will require additional financial
resources. The successful completion of such a study and potential approval
would have a significant impact on the revenue potential of Cotara(TM) and would
give the Company more leverage in negotiating with a potential marketing
partner. The Company intends to commence additional studies this year for other
solid tumor indications using Cotara(TM). The following is a summary of our
clinical trial program using Cotara(TM) in five separate clinical trials in the
U.S.:
DEVELOPMENT STATUS CANCER
(TRIAL START DATE) INDICATION CLINICAL TRIAL SITE(S)
- ------------------------------------------- -------------- ---------------------------------------------------
U.S. multi-center Phase II trial using Malignant The Medical University of South Carolina; Temple
intratumoral administration of Cotara(TM) Glioma University; University of Utah-Salt Lake City;
(December 1998). Phase III planned to (Brain Carolina Neurosurgery & Spine Associates in
commence during fiscal year 2002. Cancer) Charlotte, North Carolina; Barrow Neurological
Institute in Phoenix, Arizona; the University of
Miami; and Northwestern University
Phase I trial using intravenous Colorectal Stanford University Medical Center
administration (October 2000). Cancer
Phase I trial using intravenous Advanced Stanford University Medical Center
administration (April 2001). Soft Tissue
Sarcoma
Phase I trial using intravenous Pancreatic Stanford University Medical Center
administration (April 2001). or Biliary
Cancer
Phase I Study of Cotara(TM) after Liver or Mayo Clinic in Rochester, Minnesota
Radiofrequency Ablation of Hepatic
Hepatic Cancer (April 2001) Cancer
Phase I/II trial using intravenous, Pancreatic, Mexico City, Mexico
intrathecal, and intratumoral Prostate,
administration (May 1999). Study Liver and
results have been used to initiate Brain Cancers
new U.S. studies using Cotara(TM).
Study is closed to new patients.
7
In addition to Collateral Targeting Agents, the Company has a direct
tumor targeting agent, Oncolym(R), designed as a therapy against Non-Hodgkin's
B-cell Lymphoma cancer ("NHL"). Oncolym(R) is currently in a Phase I/II clinical
trial for the treatment of intermediate and high grade NHL using a single dose
injection, which was developed by Schering A.G. This clinical study is designed
to measure safety and dosing of a single dose of Oncolym(R) in intermediate and
high grade Non-Hodgkins B-cell Lymphoma. The study is designed to test a range
of doses in order to optimize the treatment regimen while evaluating the
dosimetry, biodistribution, safety and efficacy of Oncolym(R). During June 2001,
the Company assumed the rights that were previously licensed by Schering A.G. in
March 1999. The Company believes it will continue the clinical trial plans
developed by Schering A.G. and will continue to treat patients at clinical trial
sites established by Schering A.G. The Company is currently evaluating the
potential to license Oncolym(R) to other companies.
In addition to clinical trials, pursuant to our strategic plan, we
intend to optimize our platform technologies and increase shareholder value by
entering into strategic partnerships, joint ventures, licensing arrangements,
research collaborations and any other strategic arrangement that we believe will
increase shareholder value. Even though we enter into these types of
arrangements, our broad Collateral Targeting Agent technologies allows us to
out-license certain aspects of our technology while maintaining certain rights
to technologies we plan to develop in-house. We believe that these license
collaborations are the second most important aspect of our strategic plan.
LICENSE COLLABORATIONS
During the fiscal year ended April 30, 2001, we entered into the
following four strategic arrangements:
MONTH / YEAR STRATEGIC PARTNER;
PLATFORM TECHNOLOGY COMPLETED SPECIFIC USES ARRANGEMENT
- --------------------- ------------------ ----------------------------------------------- ----------------------------
VTA May / All aspects of the VTA OXiGENE, Inc.; Joint
2000 targeting molecule which is linked to one of Venture agreement
several different types of effector
molecules, including drugs, coagulants,
radioisotopes and toxins. Company
maintained rights to VTAs that are not
linked to an effector molecule.
VTA August / VTA technology in conjunction with Scotia Holdings, Inc.;
2000 Photodynamic Therapy License agreement
VTA February / VTA in conjunction with Vascular SuperGen, Inc.;
2001 Endothelial Growth Factor License agreement
TNT October / TNT combined with Cytokines Merck KgaA; License
2000 agreement
During May 2000, the Company entered into a joint venture with OXiGENE,
Inc. ("OXiGENE"). Under the terms of the joint venture agreement, the Company
has agreed to supply its VTA intellectual property to the joint venture while
OXiGENE has primarily agreed to fund up to $20,000,000 in development expenses
of the joint venture based on its development success. The Company and OXiGENE
have named the new entity ARCUS Therapeutics, LLC ("Arcus").
8
During August 2000, the Company entered into a licensing agreement with
Scotia Pharmaceuticals Limited ("Scotia") to license a segment of its VTA
technology, specifically related to targeting Photodynamic Therapy agents
("PDT"), for the worldwide exclusive rights to this area. Recently, an
administrator has been appointed to oversee the finances of Scotia and the
company is currently in receivership based on a press release issued in March
2001. Under the terms of the license agreement, if Scotia enters into bankruptcy
protection or is in receivership, all rights previously acquired by Scotia will
revert back to Peregrine. The Company is currently in discussions with Scotia
and the parties involved in the receivership to resolve the matter.
During February 2001, the Company completed a licensing deal with
SuperGen, Inc. ("SuperGen") to license a segment of its VTA technology,
specifically related to Vascular Endothelial Growth Factor ("VEGF").
During October 2000, the Company entered into a licensing agreement
with Merck KGaA to license a segment of its TNT technology for use in the
application of cytokine fusion proteins.
The overall goal of our licensing strategy is to develop as many
corporate relationships as possible for the development of our platform
technologies, thus increasing the chances that one or several anti-cancer
products will be commercialized utilizing our technologies. We believe that
there are numerous opportunities for non-exclusive licenses of our TNT, VTA and
VEA platform technologies. In addition, by granting non-exclusive licensing to
other companies, we maintain the ability to continue to develop our own
products, such as Cotara(TM), for commercialization. For the Company's
technologies that may have the largest market potential, the Company may pursue
joint collaboration agreements in which the outside collaborator may fund all
early pre-clinical and clinical trial work and then the final stage of clinical
testing may be jointly funded. Under such arrangement, profits would then be
split under a revenue sharing structure, which may allow the Company to achieve
a much higher revenue stream from these technologies without having to realize
significant near term cash out flows. We believe these approaches should
increase the revenue potential of these platform technologies and will allow us
to commercialize our own proprietary anti-cancer products. A more detail
discussion on all of the Company's significant collaboration agreements is
further discussed in the notes to the consolidated financial statements
contained herein.
While we continue in-house to develop our technologies and continue
clinical trials, we must maintain manufacturing capabilities to manufacture and
further develop our antibody technologies while we look to University research
for new ideas to expand our technology pipeline.
ANTIBODY MANUFACTURING FACILITIES
Operating a Good Manufacturing Practices ("GMP") manufacturing facility
requires highly specialized personnel and equipment that must be maintained on a
continual basis. We believe that maintaining the Company's GMP manufacturing
facility for clinical trial production is an efficient use of our resources at
this time due to the lack of manufacturing capacity in the biopharmaceutical
industry. We intend to continue manufacturing antibodies to support our clinical
development programs and we are planning to use the Company's excess capacity to
provide GMP manufacturing for other companies.
9
UNIVERSITY COLLABORATIONS
Peregrine's scientific team has engaged University researchers at the
University of Southern California Medical Center and the University of Texas
Southwestern Medical Center. These collaborations are helping to
cost-effectively and quickly strengthen our intellectual property and expand our
technology pipeline. We will continue to outsource our research efforts through
our agreements with the University of Southern California Medical Center and the
University of Texas Southwestern Medical Center at Dallas. In addition, we will
maintain a core group of employees that will plan, coordinate and monitor all
product development and clinical trial activities being conducted by outside
parties.
OUR LOCATION
Our principal executive offices are located at 14272 Franklin Avenue,
Suite 100, Tustin, California 92780-7017, and our telephone number is (714)
508-6000.
COMPETITION
The biotechnology and pharmaceutical industries are highly competitive
and any product candidates will have to compete with existing and future cancer
therapies. Our competitive position is based on our proprietary technology,
know-how and U.S. and foreign patents covering our collateral targeting agent
technologies (TNT, VTA and VEA) and our direct targeting agent technology,
Oncolym(R), for the therapeutic treatment of human cancers. We currently have
exclusive rights to over 40 issued U.S. and foreign patents protecting various
aspects of our technology and we have additional pending patent applications
that we believe will further strengthen our intellectual property position. We
plan to compete on the basis of the advantages of our technologies, the quality
of our products, the protection afforded by our issued patents and our
commitment to research and develop innovative technologies.
Various other companies, some or all of which have larger financial
resources than us, are currently engaged in research and development of
monoclonal antibodies and in cancer prevention and treatment. There can be no
assurance that such companies, other companies or various other academic and
research institutions will not develop and market monoclonal antibody products
or other products to prevent or treat cancer prior to the introduction of, or in
competition with, our present or future products. In addition, there are many
firms with established positions in the diagnostic and pharmaceutical industries
which may be better equipped than us to develop monoclonal antibody technology
or other products to diagnose, prevent or treat cancer and to market their
products. Accordingly, we plan to, whenever feasible, enter into joint venture
relationships with these competing firms or with other firms with appropriate
capabilities for the development and marketing of specific products and
technologies so that our competitive position might be enhanced. There can be no
assurance that research and development by others will not render the Company's
technology or potential products obsolete or non-competitive or result in
treatments superior to any therapy developed by the Company, or that any therapy
developed by the Company will be preferred to any existing or newly developed
technologies.
10
GOVERNMENT REGULATION OF PRODUCTS
Regulation by governmental authorities in the United States and other
countries is a significant factor in our ongoing research and development
activities and in the production and marketing of our products under
development. The amount of time and expense involved in obtaining necessary
regulatory approval depends upon the type of product. The procedure for
obtaining FDA regulatory approval for a new human pharmaceutical product, such
as Cotara(TM), VTA, VEA and Oncolym(R), involves many steps, including
laboratory testing of those products in animals to determine safety, efficacy
and potential toxicity, the filing with the FDA of a Notice of Claimed
Investigational Exemption for Use of a New Drug prior to the initiation of
clinical testing of regulated drug and biologic experimental products, and
clinical testing of those products in humans. We have filed a Notice of Claimed
Investigational Exemption for Use of a New Drug with the FDA for the development
of Cotara(TM) and Oncolym(R) as a material intended for human use, but have not
filed such a Notice with respect to any other products. The regulatory approval
process is administered by the FDA's Center for Biologics Research and Review
and is similar to the process used for any other new drug product intended for
human use.
The pre-marketing clinical testing program required for approval of a
new drug or biologic typically involves a three-phase process. Phase I consists
of testing for the safety and tolerance of the drug with a small group of
patients, and also yields preliminary information about the effectiveness of the
drug and dosage levels. Phase II involves testing for efficacy, determination of
optimal dosage and identification of possible side effects in a larger patient
group. Phase III clinical trials consist of additional testing for efficacy and
safety with an expanded patient group. After completion of clinical studies for
a biologics product, a Biologics License Application (BLA) is submitted to the
FDA for product marketing approval and for licensing of the product
manufacturing facilities. In responding to such an application, the FDA could
grant marketing approval, request clarification of data contained in the
application or require additional testing prior to approval. We have not, to
date, filed a BLA for any of our product candidates.
If approval is obtained for the sale of a new drug, FDA regulations
will also apply to the manufacturing process and marketing activities for the
product and may require post-marketing testing and surveillance programs to
monitor the effects of the product. The FDA may withdraw product approvals if
compliance with regulatory standards, including labeling and advertising, is not
maintained or if unforeseen problems occur following initial marketing. The
National Institutes of Health has issued guidelines applicable to the research,
development and production of biological products, such as our product
candidates. Other federal agencies and congressional committees have indicated
an interest in implementing further regulation of biotechnology applications. We
cannot predict, however, whether new regulatory restrictions on the
manufacturing, marketing, and sale of biotechnology products will be imposed by
state or federal regulators and agencies.
In addition, we are subject to regulation under state, federal, and
international laws and regulations regarding occupational safety, laboratory
practices, the use and handling of radioactive isotopes, environmental
protection and hazardous substance control, and other regulations. Our clinical
trial and research and development activities involve the controlled use of
hazardous materials, chemicals and radioactive compounds. Although we believe
that our safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, the risk of
accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, we could be held liable for any
damages that result and any such liability could exceed the financial resources
of the Company. In addition, disposal of radioactive materials used in our
clinical trials and research efforts may only be made at approved facilities.
11
Our product candidates, if approved, may also be subject to import laws
in other countries, the food and drug laws in various states in which the
products are or may be sold and subject to the export laws of agencies of the
United States government.
The Company believes that it is in material compliance with all
applicable laws and regulations including those relating to the handling and
disposal of hazardous and toxic waste.
During fiscal year 1999, the Office of Orphan Products Development of
the FDA determined that Oncolym(R) and Cotara(TM) qualify for orphan designation
for the treatment of intermediate and high-grade Non-Hodgkins B-cell Lymphoma
and for the treatment of glioblastoma multiforme and anaplastic astrocytoma
(brain cancer), respectively. The 1983 Orphan Drug Act (with amendments passed
by Congress in 1984, 1985, and 1988) includes various incentives that have
stimulated interest in the development of orphan drug and biologic products.
These incentives include a seven-year period of marketing exclusivity for
approved orphan products, tax credits for clinical research, protocol
assistance, and research grants. Additionally, legislation re-authorizing FDA
user fees also created an exemption for orphan products from fees imposed when
an application to approve the product for marketing is submitted.
OUR PATENTS AND TRADE SECRETS
We have relied on the internal achievements, as well as the direct
sponsorship of university researchers, for development of our platform
technologies. We currently have exclusive rights to over 40 issued U.S. and
foreign patents protecting various aspects of our technology and additional
pending patent applications that we believe will further strengthen our patent
position. We believe we will continue to learn, on a timely basis, of advances
in the biological sciences which might complement or enhance our existing
technologies. We intend to pursue opportunities to license our platform
technologies and any advancements or enhancements, as well as to pursue the
incorporation of our technologies in the development of our own products.
We have filed several patent applications either directly or as a
co-sponsor/licensee. The Company treats particular aspects of the production and
radiolabeling of monoclonal antibodies and related technologies as trade
secrets. We intend to pursue patent protection for inventions related to
antibody-based technologies that we cannot protect as trade secrets.
Some of the Company's antibody production and use methods are patented
by independent third parties. We are currently negotiating with certain third
parties to acquire licenses needed to produce and commercialize antibodies,
including the Company's TNT antibody. The Company believes that these licenses
are generally available from the licensors to all interested parties. The terms
of the licenses, obtained and expected to be obtained, are not expected to
significantly impact the cost structure or marketability of chimeric or human
based products.
In general, the patent position of a biotechnology firm is highly
uncertain and no consistent policy regarding the breadth of allowed claims has
emerged from the actions of the U.S. Patent Office with respect to biotechnology
patents. Accordingly, there can be no assurance that the Company's patents,
including those issued and those pending, will provide protection against
competitors with similar technology, nor can there be any assurance that such
patents will not be infringed upon or designed around by others.
12
International patents relating to biologics are numerous and there can
be no assurance that current and potential competitors have not filed or in the
future will not file patent applications or receive patents relating to products
or processes utilized or proposed to be used by the Company. In addition, there
is certain subject matter which is patentable in the United States but which may
not generally be patentable outside of the United States. Statutory differences
in patentable subject matter may limit the protection the Company can obtain on
some of its products outside of the United States. These and other issues may
prevent the Company from obtaining patent protection outside of the United
States. Failure to obtain patent protection outside the United States may have a
material adverse effect on the Company's business, financial condition and
results of operations.
We know of no third party patents which are infringed by our present
activities or which would, without infringement or license, prevent the pursuit
of our business objectives. However, there can be no assurances that such
patents have not been or will not be issued and, if so issued, that we will be
able to obtain licensing arrangements for necessary technologies on terms
acceptable to the Company. We also intend to continue to rely upon trade secrets
and improvements, unpatented proprietary know-how, and continuing technological
innovation to develop and maintain our competitive position in research and
diagnostic products. We typically place restrictions in our agreements with
third parties, which contractually restricts their right to use and disclose any
of the Company's proprietary technology with which they may be involved. In
addition, we have internal non-disclosure safeguards, including confidentiality
agreements, with our employees. There can be no assurance, however, that others
may not independently develop similar technology or that the Company's secrecy
will not be breached.
MANUFACTURING AND PRODUCTION OF OUR PRODUCTS
CONTRACT MANUFACTURING. From February 2000 through March 2001, we
temporarily closed our GMP manufacturing facility in an effort to conserve
financial resources while we attempted to locate contract manufacturers with
excess capacity. During April 2001, we resumed the use of our manufacturing
facility for clinical trial production due to the lack of antibody manufacturing
capacity and the significant commitment costs associated with a third party
antibody manufacturer. In addition, we plan to use our facility to manufacture
antibodies for other companies based on an increase in demand and the limited
capacity in the market place. We are currently preparing our manufacturing
facility to provide contract manufacturing services to other companies. The
Company in the process of making procedural changes to accommodate contract
manufacturing, including the modification of Standard Operating Procedures,
cleaning validation, and other procedures necessary to become a contract
manufacturer. While we prepare the facility for contract manufacturing, we will
be manufacturing and stock piling our own antibodies to support our Cotara(TM)
and Oncolym(TM) clinical trials programs into the future. We have retained key
development personnel, who will be responsible for developing analytical methods
and processes that will facilitate the manufacturing of our antibodies and
antibodies as contract manufacturer. For commercial production, we plan to
either expand our current manufacturing facility to meet commercial production
needs or contract out our commercial antibody production needs to companies with
excess capacity. There can be no assurance that material produced by contract
manufacturers will be suitable for human use in clinical trials or that
commercial supply will be available to meet the demand for our products.
RADIOLABELING. Once the Cotara(TM) and Oncolym(R) antibodies have been
manufactured in-house or by contract manufacturers, the antibodies are shipped
to facilities for radiolabeling (the process of attaching the radioactive agent,
I-131, to the antibody). From the radiolabeling facilities, the radiolabeled
Corata(TM) and Oncolym(R) antibodies are shipped directly to the clinical sites
for use in clinical trials.
13
We have a contract with one radiolabeling facility for labeling our
clinical trial material. The Company is currently evaluating several options for
commercial radiolabeling. We are currently in the process of developing a
program which will enable our Cotara(TM) and Oncolym(R) products to be labeled
with I-131 in sufficient quantities for use in expanded clinical trials and for
commercial supply. Any commercial radiolabeling supply arrangement will require
the investment of significant funds by the Company in order for a radiolabeling
vendor to develop the expanded facilities necessary to support the Company's
products. There can be no assurance that material produced by this radiolabeling
facility will be suitable for human use in clinical trials or that commercial
supply will be available to meet the demand for radiolabeled product. In
addition, we have been working with Paul Scherer Institut in Switzerland on the
process development and formulation work for the Cotara(TM) and Oncolym(R)
radiolabeled products currently under clinical development.
RAW MATERIALS. Various common raw materials are used in the manufacture
of our products and in the development of our technologies. These raw materials
are generally available from several alternate distributors of laboratory
chemicals and supplies. The Company has not experienced any significant
difficulty in obtaining these raw materials and does not consider raw material
availability to be a significant factor in its business. The Company uses
purified materials with strict requirements for sterility and pyrogenicity.
MARKETING OF OUR POTENTIAL PRODUCTS
We intend to sell our products, if approved, in the United States and
internationally in collaboration with marketing partners or through an internal
sales force. If the FDA approves Cotara(TM) or our other product candidates
under development, the marketing of these product candidates will be contingent
upon the Company entering into an agreement with a company to market our
products or upon the Company recruiting, training and deploying its own sales
force. We do not presently possess the resources or experience necessary to
market TNT or our other product candidates and we currently have no arrangements
for the distribution of our product candidates. 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 to establish such a sales force in a timely or cost effective manner
or that such a sales force will be capable of generating demand for the
Company's product candidates.
OUR EMPLOYEES
As of July 15, 2001, the Company employed 26 full-time employees and
one part-time employee, which included 21 technical and support employees who
carry out the research, product development and clinical trials of the Company
and six administrative employees including the President and CEO. Our staff
includes three Ph.D.'s and two M.D.'s. The Company believes its relationships
with its employees are good. The Company's employees are not represented by a
collective bargaining organization and the Company has not experienced a work
stoppage.
14
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
The following discussion outlines certain factors that could affect the
Company's financial statements for fiscal 2002 and beyond and could cause them
to differ materially from those that may be set forth in forward-looking
statements made by or on behalf of the Company.
IF WE CANNOT OBTAIN ADDITIONAL FUNDING, OUR PRODUCT DEVELOPMENT AND
COMMERCIALIZATION EFFORTS MAY BE REDUCED OR DISCONTINUED.
As of July 15, 2001, we had $7,073,000 in cash and cash equivalents. We
have expended substantial funds on the research, development and clinical trials
of our product candidates. As a result, we have had negative cash flows from
operations since inception and we expect the negative cash flows from operations
to continue until we are able to generate sufficient revenue from the sale
and/or licensing of our products. Although we have sufficient cash on hand to
meet our obligations on a timely basis through the next twelve (12) months, we
will continue to require additional funding to sustain our research and
development efforts, provide for additional clinical trials, expand our
manufacturing and product commercialization capabilities, and continue our
operations until we are able to generate sufficient revenue from the sale and/or
licensing of our products.
We plan to obtain required financing through one or more methods
including, obtaining additional equity or debt financing and negotiating
additional licensing or collaboration agreements for our platform technologies.
There can be no assurances that we will be successful in raising such funds on
terms acceptable to us, or at all, or that sufficient additional capital will be
raised to complete the research, development, and clinical testing of our
product candidates.
We currently have access to equity funding under a Common Stock Equity
Line ("Equity Line") with two institutional investors. Under the amended 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 until all common shares previously registered under the Equity Line have
been exhausted. As of July 15, 2001, the Company had approximately 2,558,000
shares available for issuance under the Equity Line which are priced at a 17.5%
discount to market during the ten (10) day pricing period immediately preceding
the Put date, as defined in the agreement.
WE HAVE HAD SIGNIFICANT LOSSES AND WE ANTICIPATE FUTURE LOSSES.
All of our products are currently in development, preclinical studies
or clinical trials, and no revenues have been generated from commercial product
sales. To achieve and sustain profitable operations, we must successfully
develop and obtain regulatory approval for our products, either alone or with
others, and must also manufacture, introduce, market and sell our products. The
costs associated with clinical trials, contract manufacturing and contract
isotope combination services are very expensive and the time frame necessary to
achieve market success for our products is long and uncertain. We do not expect
to generate significant product revenues for at least the next 12 months. There
can be no guarantee that we will ever generate product revenues sufficient to
become profitable or to sustain profitability.
PROBLEMS IN PRODUCT DEVELOPMENT MAY CAUSE OUR CASH DEPLETION RATE TO INCREASE.
Our ability to obtain financing and to manage expenses and our cash
depletion rate is key to the continued development of product candidates and the
completion of ongoing clinical trials. Our cash depletion rate will vary
substantially from quarter to quarter as we fund non-recurring items associated
15
with clinical trials, product development, antibody manufacturing, isotope
combination services (radiolabeing), patent legal fees and various consulting
fees. If we encounter unexpected difficulties with our operations or clinical
trials, we may have to expend additional funds, which would increase our cash
depletion rate.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY NOT BE SUCCESSFUL.
Since inception, we have been engaged in the development of drugs and
related therapies for the treatment of people with cancer. Our product
candidates have not received regulatory approval and are generally in clinical
and pre-clinical stages of development. If the results from any of the clinical
trials are poor, those results will adversely affect our ability to raise
additional capital, which will affect our ability to continue full-scale
research and development for our antibody technologies. In addition, our product
candidates may take longer than anticipated to progress through clinical trials
or patient enrollment in the clinical trials may be delayed or prolonged
significantly, thus delaying the clinical trials. Delays in patient enrollment
will result in increased costs and further delays. If we experience any such
difficulties or delays, we may have to reduce or discontinue development,
commercialization or clinical testing of some or all of our product candidates.
In addition, product candidates resulting from our research and development
efforts, if any, are not expected to be available commercially for at least the
next year. Also, our products currently in clinical trials represent a departure
from more commonly used methods for cancer treatment. These products, if
approved, may experience under-utilization by doctors who are unfamiliar with
their application in the treatment of cancer. As with any new drug, doctors may
be inclined to continue to treat patients with conventional therapies, such as
chemotherapy, rather than new alternative therapies. We or our marketing partner
may be required to implement an aggressive education and promotion plan with
doctors in order to gain market recognition, understanding and acceptance of our
products. In addition, our product candidates, if approved, may prove
impracticable to manufacture in commercial quantities at a reasonable cost
and/or with acceptable quality. Any of these factors could negatively affect our
financial position and results of operations. Accordingly, we cannot guarantee
that our product development efforts, including clinical trials, or
commercialization efforts will be successful or that any of our products, if
approved, can be successfully marketed.
OUR DEPENDENCY ON ONE RADIOLABELING SUPPLIER MAY NEGATIVELY IMPACT OUR ABILITY
TO COMPLETE CLINICAL TRIALS AND MARKET OUR PRODUCTS.
We currently procure, and intend in the future to procure, our antibody
radioactive isotope combination services ("radiolabeling") under a negotiated
contract with one entity for all clinical trials. We cannot guarantee that this
suppler will be able to continue to qualify its facility or label and supply our
antibody in a timely manner. Prior to commercial distribution of any of our
products, if approved, we will be required to identify and contract with a
company for commercial antibody manufacturing and radioactive isotope
combination services. We also currently rely on, and expect in the future to
rely on, our current suppliers for all or a significant portion of the raw
material requirements for our antibody products. An antibody that has been
combined with a radioactive isotope cannot be stockpiled against future
shortages. Accordingly, any change in our existing or future contractual
relationships with, or an interruption in supply from, any such third-party
service provider or antibody supplier could negatively impact our ability to
complete ongoing clinical trials and to market our products, if approved.
16
WE DO NOT HAVE A SALES FORCE TO MARKET OUR PRODUCTS, IF APPROVED.
At the present time, we do not have a sales force to market any of our
products, if approved. We intend to sell our products in the United States and
internationally in collaboration with one or more marketing partners. If we
receive approval from the United States Food and Drug Administration for our
initial product candidates, the marketing of these products will be contingent
upon our ability to either license or enter into a marketing agreement with a
large company or our ability to recruit, develop, train and deploy our own sales
force. We do not presently possess the resources or experience necessary to
market any of our product candidates and we cannot assure that we will be able
to enter into any such agreements in a timely manner or on commercially
favorable terms, if at all. Development of an effective sales force requires
significant financial resources, time and expertise. We cannot assure that we
will be able to obtain the financing necessary to establish such a sales force
in a timely or cost effective manner, if at all, or that such a sales force will
be capable of generating demand for our product candidates, if and when they are
approved.
WE MAINTAIN ONLY LIMITED PRODUCT LIABILITY INSURANCE AND MAY BE EXPOSED TO
CLAIMS IF OUR INSURANCE COVERAGE IS INSUFFICIENT.
The manufacture and sale of human therapeutic products involves an
inherent risk of product liability claims. We maintain limited product liability
insurance. We cannot assure that we will be able to maintain existing insurance
or obtain additional product liability insurance on acceptable terms or with
adequate coverage against potential liabilities. Product liability insurance is
expensive, difficult to obtain and may not be available in the future on
acceptable terms, if at all. Our inability to obtain sufficient insurance
coverage on reasonable terms or to otherwise protect against potential product
liability claims in excess of our insurance coverage, if any, or a product
recall could negatively impact our financial position and results of operations.
THE LIQUIDITY OF OUR COMMON STOCK WILL BE ADVERSELY AFFECTED IF OUR COMMON STOCK
IS DELISTED FROM THE NASDAQ SMALLCAP MARKET.
Our common stock is presently traded on The Nasdaq SmallCap Market. To
maintain inclusion on The Nasdaq SmallCap Market, we must continue to meet the
following six listing requirements:
1. Net tangible assets of at least $2,000,000 or market
capitalization of at least $35,000,000 or net income of at
least $500,000 in either our latest fiscal year or in two of
our last three fiscal years;
2. Public float of at least 500,000 shares;
3. Market value of our public float of at least $1,000,000;
4. A minimum closing bid price of $1.00 per share of common
stock, without falling below this minimum bid price for a
period of 30 consecutive trading days;
5. At least two market makers; and
6. At least 300 stockholders, each holding at least 100 shares of
common stock.
If we are delisted by the The Nasdaq SmallCap Market, the market value
of our common stock could fall and holders of our common stock would likely find
it more difficult to dispose of their common stock.
17
THE SALE OF SUBSTANTIAL SHARES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
As of July 15, 2001, we had approximately 99,990,000 shares of common
stock outstanding. In addition, we could issue up to approximately 19,057,000
additional shares of common stock upon the exercise of outstanding options and
warrants at an average exercise price of $1.48 per share for proceeds of up to
approximately $28,017,000, if exercised on a 100% cash basis. In addition, we
have reserved for future issuance approximately 2,558,000 shares of common stock
under the Equity Line and 158,000 shares available for grant under the Company's
1996 Option Plan. All Common Shares issued under the Equity Line and all options
granted under the 1996 Option Plan are at our sole discretion.
A portion of the outstanding options and warrants and the purchase
price for the shares of common stock and warrants to be issued under the Equity
Line are at a significant discount to the market price. The sale and issuance of
these shares of common stock, as well as subsequent sales of shares of common
stock in the open market, may cause the market price of our common stock to fall
and might impair our ability to raise additional capital through sales of equity
or equity-related securities, whether under the Equity Line or otherwise.
OUR HIGHLY VOLATILE STOCK PRICE AND TRADING VOLUME MAY ADVERSELY AFFECT THE
LIQUIDITY OF OUR COMMON STOCK.
The market price of our common stock and the market prices of
securities of companies in the biotechnology sector has generally been highly
volatile and is likely to continue to be highly volatile. The trading volume of
our common stock has been highly volatile, ranging from as few as 91,000 shares
per day to as many as 3.7 million shares per day during the fiscal year ended
April 30, 2001, and is likely to continue to be highly volatile. The market
price of our common stock may be significantly impacted by many factors,
including, but not limited to:
|X| Announcements of technological innovations or new commercial
products by us or our competitors;
|X| Publicity regarding actual or potential clinical trial results
relating to products under development by us or our
competitors;
|X| Our financial results or that of our competitors;
|X| Announcements of licensing agreements, joint ventures,
strategic alliances, and any other transaction that involves
the sale or use of our technologies or competitive
technologies;
|X| Developments and/or disputes concerning our patent or
proprietary rights;
|X| Regulatory developments and product safety concerns;
|X| General stock trends in the biotechnology and pharmaceutical
industry sectors;
|X| Economic trends and other external factors, including but not
limited to, interest rate fluctuations, economic recession,
inflation, foreign market trends, national crisis, and
disasters; and
|X| Health care reimbursement reform and cost-containment measures
implemented by government agencies.
These and other external factors have caused and may continue to cause
the market price and demand for our common stock to fluctuate substantially,
which may limit or prevent investors from readily selling their shares of common
stock and may otherwise negatively affect the liquidity of our common stock.
18
WE MAY NOT BE ABLE TO COMPETE WITH OUR COMPETITORS IN THE BIOTECHNOLOGY
INDUSTRY.
The biotechnology industry is intensely competitive. It is also subject
to rapid change and sensitive to new product introductions or enhancements. We
expect to continue to experience significant and increasing levels of
competition in the future. Some or all of these companies may have greater
financial resources, larger technical staffs, and larger research budgets than
we have, as well as greater experience in developing products and running
clinical trials. In addition, there may be other companies which are currently
developing competitive technologies and products or which may in the future
develop technologies and products which are comparable or superior to our
technologies and products. Accordingly, we cannot assure you that we will be
able to compete successfully with our existing and future competitors or that
competition will not negatively affect our financial position or results of
operations in the future.
WE MAY NOT BE SUCCESSFUL IF WE ARE UNABLE TO OBTAIN AND MAINTAIN PATENTS AND
LICENSES TO PATENTS.
Our success depends, in large part, on our ability to obtain or
maintain a proprietary position in our products through patents, trade secrets
and orphan drug designations. We have been granted several United States patents
and have submitted several United States patent applications and numerous
corresponding foreign patent applications, and have also obtained licenses to
patents or patent applications owned by other entities. However, we cannot
assure you that any of these patent applications will be granted or that our
patent licensors will not terminate any of our patent licenses. We also cannot
guarantee that any issued patents will provide competitive advantages for our
products or that any issued patents will not be successfully challenged or
circumvented by our competitors. Although we believe that our patents and our
licensors' patents do not infringe on any third party's patents, we cannot be
certain that we can avoid litigation involving such patents or other proprietary
rights. Patent and proprietary rights litigation entails substantial legal and
other costs, and we may not have the necessary financial resources to defend or
prosecute our rights in connection with any litigation. Responding to, defending
or bringing claims related to patents and other intellectual property rights may
require our management to redirect our human and monetary resources to address
these claims and may take years to resolve.
OUR PRODUCT DEVELOPMENT AND COMMERCIALIZATION EFFORTS MAY BE REDUCED OR
DISCONTINUED DUE TO DELAYS OR FAILURE IN OBTAINING REGULATORY APPROVALS.
We will need to do additional development and clinical testing prior to
seeking any regulatory approval for commercialization of our product candidates
as all of our products are in clinical and pre-clinical development. Testing,
manufacturing, commercialization, advertising, promotion, export and marketing,
among other things, of our proposed products are subject to extensive regulation
by governmental authorities in the United States and other countries. The
testing and approval process requires substantial time, effort and financial
resources and we cannot guarantee that any approval will be granted on a timely
basis, if at all. Companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in conducting advanced human clinical trials,
even after obtaining promising results in earlier trials. Furthermore, the
United States Food and Drug Administration may suspend clinical trials at any
time on various grounds, including a finding that the subjects or patients are
being exposed to an unacceptable health risk. Even if regulatory approval of a
product is granted, such approval may entail limitations on the indicated uses
for which it may be marketed. Accordingly, we may experience difficulties and
delays in obtaining necessary governmental clearances and approvals to market
our products, and we may not be able to obtain all necessary governmental
19
clearances and approvals to market our products. At least initially, we intend,
to the extent possible, to rely on licensees to obtain regulatory approval for
marketing our products. The failure by us or our licensees to adequately
demonstrate the safety and efficacy of any of our product candidates under
development could delay, limit or prevent regulatory approval of the product,
which may require us to reduce or discontinue development, commercialization or
clinical testing of some or all of our product candidates.
OUR MANUFACTURING AND USE OF HAZARDOUS AND RADIOACTIVE MATERIALS MAY RESULT IN
OUR LIABILITY FOR DAMAGES, INCREASED COSTS AND INTERRUPTION OF ANTIBODY
SUPPLIES.
The manufacturing and use of our products require the handling and
disposal of the radioactive isotope, I-131. We currently rely on, and intend in
the future to rely on, our current contract manufacturer to combine antibodies
with the radioactive isotope, I-131, in our products and to comply with various
local, state, national or international regulations regarding the handling and
use of radioactive materials. Violation of these regulations by these companies
or a clinical trial site could significantly delay completion of the trials.
Violations of safety regulations could occur with these manufacturers, so there
is also a risk of accidental contamination or injury. Accordingly, we could be
held liable for any damages that result from an accident, contamination or
injury caused by the handling and disposal of these materials, as well as for
unexpected remedial costs and penalties that may result from any violation of
applicable regulations. In addition, we may incur substantial costs to comply
with environmental regulations. In the event of any noncompliance or accident,
the supply of antibodies for use in clinical trials or commercial products could
also be interrupted.
OUR OPERATIONS AND FINANCIAL PERFORMANCE COULD BE NEGATIVELY AFFECTED IF WE
CANNOT ATTRACT AND RETAIN KEY PERSONNEL.
Our success is dependent, in part, upon a limited number of key
executive officers, technical personnel, and scientific consultants. We also
believe that our future success will depend largely upon our ability to attract
and retain highly-skilled research and development and technical personnel. We
face intense competition in our recruiting activities, including competition
from larger companies with greater resources. We do not know if we will be
successful in attracting or retaining skilled personnel. The loss of certain key
employees or our inability to attract and retain other qualified employees could
negatively affect our operations and financial performance.
ITEM 2. PROPERTIES
The Company's corporate, research and development, and clinical trial
operations are located in two Company-leased office and laboratory buildings
with aggregate square footage of approximately 47,770 feet. The facilities are
adjacent to one another and are located at 14272 and 14282 Franklin Avenue,
Tustin, California 92780-7017. The Company makes combined monthly lease payments
of approximately $58,000 for these facilities with a 3.35% rental increase every
two years, with the next rental increase scheduled for December 2002. The lease
has a twelve-year term with two five-year extensions. The Company has subleased
all of its excess space and monthly rental income from sub-tenants is currently
$29,000. The Company believes its facilities are adequate for its current needs
and that suitable additional substitute space would be available if needed.
ITEM 3. LEGAL PROCEEDINGS
During March 2000, the Company was served with a notice of lawsuit
filed in Orange County Superior Court for the State of California by a former
officer of the Company who resigned from the Company on November 3, 1999. The
lawsuit alleged a single cause of action for breach of contract During January
20
2001, the Company entered into a global settlement agreement based on the advice
from the settlement judge, which dismissed all parties including a director of
the Company. In conjunction with the global settlement agreement, the Company
paid the plaintiff $250,000, which is included in general and administrative
expenses for fiscal year 2001 in the accompanying consolidated financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the quarter ended April 30, 2001.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS
(a) MARKET INFORMATION. The Company is listed on the SmallCap market of
the Nasdaq Stock Market under the trading symbol "PPHM"(formerly "TCLN"). The
following table shows the high and low sales price of the Company's common stock
for each quarter in the two years ended April 30, 2001:
COMMON STOCK SALES PRICE
HIGH LOW
---------------- -------------
FISCAL YEAR 2001
Quarter Ended April 30, 2001 $2.00 $1.06
Quarter Ended January 31, 2001 $2.88 $0.38
Quarter Ended October 31, 2000 $3.84 $1.94
Quarter Ended July 31, 2000 $4.75 $2.50
FISCAL YEAR 2000
Quarter Ended April 30, 2000 $16.63 $2.56
Quarter Ended January 31, 2000 $5.56 $0.25
Quarter Ended October 31, 1999 $1.13 $0.28
Quarter Ended July 31, 1999 $2.00 $0.94
(b) HOLDERS. As of July 15, 2001, the number of shareholders of record
of the Company's common stock was 5,572.
(c) DIVIDENDS. No dividends on common stock have been declared or paid
by the Company. The Company intends to employ all available funds for the
development of its business and, accordingly, does not intend to pay any cash
dividends in the foreseeable future.
(d) RECENT SALES OF UNREGISTERED SECURITIES. The following is a summary
of transactions by the Company during the quarterly period commencing on
February 1, 2001 and ending on April 30, 2001 involving the issuance and sale of
the Company's common stock that were not registered under the Securities Act of
1933, as amended (the "Securities Act").
During April 2001, the Company issued an aggregate of 740,740 shares of
the Company's common stock to the two institutional investors and the placement
agent under the Equity Line, for an aggregate purchase price of $700,000. In
conjunction with the Equity Line draw, the Company issued warrants to the two
institutional investors and the placement agent to purchase up to an aggregate
of 107,744 shares of common stock, which warrants are immediately exercisable on
a cashless basis only and expire through December 31, 2005.
21
On April 26, 2001, the Company issued 22,888 shares of common stock
upon the cashless exercise of warrants to purchase 84,034 shares of common
stock. The warrants were issued in conjunction with a private placement entered
into in April 1998.
The issuance of the securities of the Company in each of the above
transactions 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 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from audited
consolidated financial statements of the Company for each of the five years in
the period ended April 30, 2001. These selected financial summaries should be
read in conjunction with the financial information contained for each of the
three years in the period ended April 30, 2001, included in the consolidated
financial statements and notes thereto, Management's Discussion and Analysis of
Results of Operations and Financial Condition, and other information provided
elsewhere herein.
CONSOLIDATED STATEMENTS OF OPERATIONS
FIVE YEARS ENDED APRIL 30,
- ----------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- -------------- --------------- -------------- --------------
License revenue .......... $ 979,000 $ 50,000 $ - $ - $ -
Net loss ................. $ (9,535,000) $ (14,514,000) $ (19,493,000) $ (11,824,000) $ (33,181,000)
Net loss attributable to
common shareholders ...... $ (9,535,000) $ (14,516,000) $ (20,039,000) $ (15,265,000) $ (33,725,000)
Basic and diluted loss
per share ................ $ (0.10) $ (0.18) $ (0.30) $ (0.49) $ (1.57)
Weighted average number
of shares of common stock
outstanding .............. 95,212,423 81,195,049 66,146,628 30,947,758 21,429,858
CONSOLIDATED BALANCE SHEET DATA
AS OF APRIL 30,
- ----------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
--------------- -------------- --------------- -------------- --------------
Cash and cash equivalents $ 6,327,000 $ 4,131,000 $ 2,385,000 $ 1,736,000 $ 12,229,000
Working capital
(deficit) ............... $ 1,446,000 $ (3,668,000) $ (2,791,000) $ (2,508,000) $ 10,618,000
Total Assets ............ $ 7,900,000 $ 5,953,000 $ 7,370,000 $ 12,039,000 $ 18,701,000
Long-term debt .......... $ 2,000 $ 89,000 $ 3,498,000 $ 1,926,000 $ 1,970,000
Accumulated deficit ..... $ (116,729,000) $(107,194,000) $ (92,678,000) $ (72,639,000) $ (57,374,000)
Stockholders' equity
(deficit) ............... $ 2,686,000 $ (2,721,000) $ (2,133,000) $ 5,448,000 $ 14,568,000
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is included to describe the Company's
financial position and results of operations for each of the three years in the
period ended April 30, 2001. The consolidated financial statements and notes
thereto contain detailed information that should be referred to in conjunction
with this discussion.
OVERVIEW. Peregrine, located in Tustin, California, is a
biopharmaceutical company engaged in the development and commercialization of
cancer therapeutics and cancer diagnostics through a series of proprietary
platform technologies using monoclonal antibodies. Peregrine's main focus is on
the development of its Collateral Targeting Agent technologies. Collateral
Targeting Agents use antibodies that bind to or target stable structures found
in most solid tumors, such as the necrotic core of the tumor or blood vessels
found in most solid tumors. In pre-clinical and clinical studies, these
antibodies are capable of targeting and delivering therapeutic killing agents to
the tumor thereby destroying cancerous tumor cells. In addition, the Company has
a direct tumor targeting antibody, Oncolym(R), which recognizes and binds to
cancerous lymphoma tumor sites. During June 2001, the Company assumed the rights
to Oncolym(R) previously licensed to Schering A.G. and plans to continue the
ongoing Phase I/II clinical trial for the treatment of intermediate and high
grade Non-Hodgkin's B-cell Lymphoma ("NHL").
YEAR ENDED APRIL 30, 2001 COMPARED TO THE YEAR ENDED APRIL 30, 2000
Before we discuss the Company's total expenses (cash and non-cash
expenses), we would like to discuss the Company's operational burn rate (cash
expenses used in operations, net of interest and other income) for the fiscal
year ended April 30, 2001 compared to the same period in the prior year. The
operational burn rate is calculated by taking the net loss from operations and
subtracting all non-cash items, such as depreciation and amortization, stock
issued for services, losses on the disposal of property and stock-based
compensation expense.
The Company's operational burn rate of approximately $7,212,000 (or
$601,000 per month) for the fiscal year ended April 30, 2001, as compared to the
operational burn rate of $8,973,000 (or $748,000 per month) for the fiscal year
ended April 30, 2000, represents a decrease of $1,761,000 (or $147,000 per
month). The decrease in the operational burn rate primarily relates to a
decrease in expenses associated with antibody and radiolabeling manufacturing
and scale-up efforts, which were incurred in the prior year. In addition, there
was a current year decrease in patent legal fees and sponsored research fees
associated with the VTA technology, which have been primarily funded under a
joint venture with OXiGENE, Inc. Moreover, the current year decrease in cash
expenses is due to a decrease in general and administrative expenses, including
decreased aggregate gross salaries and severance expenses. Moreover, the
operational burn rate was reduced by an increase in interest income, as a result
of a higher cash balance on hand during the current year, combined with a net
decrease in lease expense as the Company has subleased all of its excess space.
Our total operational burn rate may vary substantially from year to
year based on patient enrollment rates of our ongoing and planned clinical trial
programs and the funding of non-recurring items, which may include but are not
limited to, items associated with product development, contract manufacturing,
contract radiolabeling and the related commercial scale-up efforts for contract
manufacturing and contract radiolabeling.
23
NET LOSS. The Company's net loss of approximately $9,535,000 for the
fiscal year ended April 30, 2001 represents a decrease in net loss of $4,979,000
(or 34%) in comparison to the net loss of approximately $14,514,000 for the
fiscal year ended April 30, 2000. The decrease in net loss is primarily due to a
decrease in total operating expenses of $3,278,000 and a decrease in interest
expense of $148,000 combined with a $929,000 increase in revenue and a $624,000
increase in interest and other income.
REVENUE. The increase in revenue of $929,000 during the year ended
April 30, 2001 compared to the same period in the prior year is primarily due to
an increase in license revenue resulting from four licensing collaborations that
were finalized during fiscal year 2001. The Company does not expect to generate
product sales for at least the next year.
TOTAL OPERATING EXPENSES. The Company's total operating expenses
decreased $3,278,000 during the year ended April 30, 2001 compared to the same
period in the prior year. The decrease in total operating expenses is primarily
related to a one-time prior year expense of $1,863,000 related to the provision
for a note receivable (a non-cash charge) whereby the Company established a 100%
provision for a note receivable from the buyer of the Company's leased
facilities. In addition, the decrease in operating expenses was supplemented by
a decrease in research and development expenses of $695,000, a decrease in
general and administrative expenses of $545,000 and a decrease in loss on the
disposal and write-down of property of $318,000, primarily related to expenses
recorded in the prior year regarding the write-down of laboratory equipment held
for sale. These amounts were offset by a current period increase in stock-based
compensation expense (a non-cash charge) of $143,000.
RESEARCH AND DEVELOPMENT EXPENSES. The decrease in research and
development expenses of $695,000 during the year ended April 30, 2001 compared
to the same period in the prior year is primarily due to a decrease in expenses
associated with manufacturing and radiolabeling. The Company has reduced the
number of personnel in the Manufacturing Department and other ancillary
departments as the Company did not manufacture clinical antibody material during
the majority of fiscal year 2001. The Company has scaled down its manufacturing
operations to support only clinical trials. The Company still plans to maintain
its manufacturing facility for clinical trial production of antibodies based
primarily on the lack of antibody manufacturing capacity and the significant
commitment costs associated with third-party antibody manufacturers. In
addition, the Company has significantly decreased research and development
spending associated with the development of a commercial radiolabeling facility
and process. The Company has also reduced the research and development fees
associated with radiolabeling by consolidating the clinical radiolabeling
activities for both Oncolym(R) and Cotara(TM) to one company in the U.S. The
above decreases were supplemented by decreases in patent legal fees, patent
maintenance fees and sponsored research fees associated with the VTA technology.
Pursuant to the joint venture agreement with OXiGENE, Inc., OXiGENE, Inc. has
agreed to fund up to $20,000,000 in development expenses associated with the
joint venture's development of the VTA technology. The current year decreases in
research and development expenses were offset by an increase in clinical trial
expenses associated with the ongoing Phase II clinical trial using Cotara(TM)
for the treatment of brain cancer, the Phase I studies at Stanford University
Medical Center using Cotara(TM) for the treatment of colorectal, pancreatic and
soft-tissue sarcoma cancers, and the Phase I/II study using Oncolym(R) for the
treatment of Non-Hodgkin's B-cell Lymphoma, which was being developed by
Schering A.G. During June 2001, the Company assumed the rights previously
licensed to Schering A.G. and plans to continue the Phase I/II clinical trial
established by Schering A.G. and will assume all future costs of the trial, as
defined in the License Agreement. The Company expects research and development
expenses to increase over the next year as it funds the increased clinical trial
activities, including anticipated new studies, and the expenses associated with
a Phase III clinical trial for the treatment of brain cancer, if approved by the
FDA.
24
GENERAL AND ADMINISTRATIVE EXPENSES. The decrease in general and
administrative expenses of $545,000 during the year ended April 30, 2001
compared to the same period in the prior year resulted primarily from a net
decrease in aggregate gross salaries expensed in the Administration Department.
These amounts were offset by an increase in annual shareholder meeting costs due
to the increased printing and distribution costs of the annual meeting
materials, resulting from the increased number of shareholders compared to the
prior year. In addition, the decrease in expenses was offset by an increase in
public relation expenses associated with the development of the Company's new
web site and an increase in consulting fees related to public and media
relations. The Company expects general and administrative expenses for fiscal
year 2002 to be consistent with fiscal 2001.
STOCK-BASED COMPENSATION EXPENSE. The increase in stock-based
compensation expense (a non-cash charge) of $143,000 for the year ended April
30, 2001 compared to the same period in the prior year is primarily due to the
fair value of options granted to non-employee consultants of the Company during
April 2000 who are assisting the Company with the development of its platform
technologies. The options were valued using the Black-Scholes valuation model
and are being amortized over the estimated period of service or related vesting
period. In addition, the Company incurred additional expenses during April 2001
regarding the modification of stock options. The above increases were primarily
offset by a prior year one-time expense of $313,000 for the issuance of a
warrant to Swartz Private Equity, LLC ("SPE") to purchase up to 750,000 shares
of the Company's common stock in consideration of a commitment by SPE to fund a
$35,000,000 equity line financing over a three year term. This agreement was
entered into and approved by the previous Board of Directors. Mr. Eric Swartz, a
member of the Board of Directors, maintains a 50% ownership in SPE.
INTEREST AND OTHER INCOME. The increase in interest and other income
of $624,000 during the year ended April 30, 2001 compared to the same period in
the prior year is primarily due to an increase in interest income earned on the
Company's increased level of cash and cash equivalents on hand combined with an
increase in other income related to the collection of a $175,000 past due
promissory note.
INTEREST EXPENSE. The decrease in interest expense of $148,000 during
the year ended April 30, 2001 compared to the same period in the prior year is
primarily due to a lower average outstanding note payable balance to
Biotechnology Development Ltd. during the current year.
YEAR ENDED APRIL 30, 2000 COMPARED TO YEAR ENDED APRIL 30, 1999
NET LOSS. The Company's net loss of approximately $14,514,000 for the
fiscal year ended April 30, 2000 represents a decrease in net loss of $4,979,000
(or 26%) in comparison to the net loss of approximately $19,493,000 for the
fiscal year ended April 30, 1999. The decreased loss resulted primarily from a
decrease in total operating expenses of $4,838,000 and a decrease in interest
expense of $46,000 combined with a $50,000 increase in revenues and a $45,000
increase in interest and other income.
REVENUE. The increase in revenue of $50,000 during the year ended April
30, 2000 compared to the same period in the prior year resulted from an up-front
fee paid to the Company for a 90-day right to enter into a formal license
agreement for a specific use of our TNT technology.
25
TOTAL OPERATING EXPENSES. The decrease in operating expenses of
$4,838,000 from fiscal year 1999 to fiscal year 2000 resulted primarily from a
decrease in license fees of $4,500,000 recorded in fiscal year 1999 to
re-acquire certain marketing rights with respect to Oncolym(R) from BTD, a
decrease in loss on the disposal of property of $920,000, primarily related to
the sale of the Company's two buildings in fiscal 1999, which were subsequently
leased back, a decrease in research and development expenses of $720,000 and a
decrease in general and administrative expenses of $1,544,000. These amounts
were offset by an increase in stock-based compensation expense (a non-cash
charge) of $983,000 and a one-time non-cash expense of $1,863,000 for the 100%
reserve established on a note receivable from the buyer of the Company's leased
facilities.
RESEARCH AND DEVELOPMENT EXPENSES. The decrease in research and
development expenses of $720,000 during the year ended April 30, 2000 compared
to the same period in the prior year resulted primarily from decreased payroll,
consulting and other ancillary costs of the manufacturing facility, which was
shut down during fiscal year 2000. In addition, clinical trial expenses
decreased during fiscal year 2000 primarily as a result of the Oncolym(R) Phase
II/III clinical trial being halted by Schering A.G. during fiscal 2000 combined
with slower patient enrollment into the Cotara(TM) brain study from November
1999 through February 2000 due to the Company's limited amount of cash on hand
during that period of time. The above fiscal year 2000 decreases in research and
development expenses were offset by an increase in product development expenses
related to the Cotara(TM) and Oncolym(R) antibodies, increased radiolabeling
development expenses and increased sponsored research fees paid to the
University of Texas Southwestern Medical Center and the University of Southern
California.
GENERAL AND ADMINISTRATIVE EXPENSES. The decrease in general and
administrative expenses of $1,544,000 during the year ended April 30, 2000 in
comparison to the prior year ended April 30, 1999 resulted primarily from
decreased severance expenses and payroll costs associated with Company layoffs
and resignations during the middle of fiscal year 2000. On November 3, 1999, the
Company's former Chief Executive Officer and Chief Financial Officer resigned
and such positions were replaced with internal positions, thus decreasing the
quarterly general and administrative personnel costs. In addition, the Company
had fiscal 2000 decreases in legal fees, consulting fees, shareholder meeting
costs and other reductions in general expenses due to the Company's cost
containment efforts to reduce the Company's administrative costs.
STOCK-BASED COMPENSATION EXPENSE. The increase in stock-based
compensation (a non-cash charge) of $983,000 during the year ended April 30,
2000 in comparison to the prior year ended April 30, 1999 resulted primarily
from the one-time expense recorded for the estimated fair value (utilizing the
Black-Scholes valuation model) of a warrant to purchase up to 750,000 shares of
the Company's common stock issued to Swartz Private Equity, LLC (SPE) in
consideration of a commitment by SPE to fund a $35,000,000 equity line financing
over a three year term. This agreement was entered into and approved by the
previous Board of Directors. Mr. Eric Swartz, a member of the Board of
Directors, maintains a 50% ownership in Swartz Private Equity, LLC. In addition,
the Company incurred additional stock-based compensation expense during the
fiscal year ended April 30, 2000 compared to the same period in the prior year
for certain milestone based options which were achieved during fiscal 2000.
INTEREST AND OTHER INCOME. The increase in interest and other income of
$45,000 during the year ended April 31, 2000 in comparison to the year ended
April 30, 1999 resulted primarily from an increase in interest income associated
with the $1,925,000 note receivable the Company received in conjunction with the
sale and subsequent leaseback of the Company's facilities during December 1998.
26
INTEREST EXPENSE. The decrease in interest expense of $46,000 during
the year ended April 30, 2000 in comparison to the year ended April 30, 1999
resulted primarily from a one-time fiscal year 1999 transaction whereby the
Company incurred additional interest expense on construction costs (to enhance
the Company's manufacturing facility) combined with the lack of interest on
mortgage debt for the Company's two facilities, which was paid off in December
1998 in conjunction with the sale/leaseback transaction. The above decreases in
interest expense were off-set by an increase in interest expense on a $3,300,000
note payable issued to BTD, which was issued when the Company re-acquired
certain Oncolym(R) rights in March 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of July 15, 2001, the Company had $7,073,000 in cash and cash
equivalents. The Company has financed its operations primarily through the sale
of common stock, which has been supplemented with payments received from various
licensing collaborations. During fiscal year 2001, the Company supported its
cash used in operation of $6,234,000 from its financing activities primarily
through the sale of its common stock under an Equity Line, whereby the Company
raised net proceeds of $9,373,000. In addition during fiscal year 2001, the
Company paid $3,300,000 in principal on a note payable to BTD, which was paid in
full as of April 30, 2001. Subsequent to April 30, 2001, the Company received
gross proceeds of $3,000,000 under the Equity Line. Without obtaining additional
financing or entering into additional licensing arrangements for the Company's
other product candidates, the Company believes that it has sufficient cash on
hand (excluding any future draws under the Equity Line), to meet its obligations
on a timely basis for at least the next 12 month based on its current
projections and its ability to adjust spending and clinical trial enrollment
rates.
The Company has experienced negative cash flows from operations since
its inception and expects the negative cash flows from operations to continue
for the foreseeable future. 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 and radiolabeling
continues. As a result of increased activities in connection with the clinical
trials for Cotara(TM) and Oncolym(R), and the development costs associated with
Vasopermeation Enhancement Agents (VEAs), the Company expects that the monthly
negative cash flow will continue. The development of the Company's Vascular
Targeting Agent (VTA) technology will be funded primarily by OXiGENE, Inc. under
a joint venture agreement entered into during May 2000, whereby OXiGENE, Inc.
will be funding up to $20,000,000 in development costs.
The Company has the ability, subject to certain conditions, to obtain
future funding under the Equity Line, as amended on June 2, 2000, whereby, the
Company may, in its sole discretion, and subject to certain restrictions,
periodically sell ("Put") shares of the Company's common stock until all common
shares previously registered under the Equity Line have been exhausted. As of
July 15, 2001, the Company had approximately 2,558,000 shares registered and
available under the Equity Line for future Puts. Under the amendment, up to
$2,800,000 of Puts can be made every month if the Company's closing bid price is
$2.00 or higher during the 10-day pricing period. If the Company's closing bid
price is between $1.00 and $2.00, then the Company can Put up to $1,500,000 per
month and if the Company's closing bid price falls below $1.00 on any trading
day during the ten trading days prior to the Put, the Company's ability to
access funds under the Equity Line in the Put is limited to 15% of what would
otherwise be available. If the closing bid price of the Company's common stock
falls below $0.50 or if the Company is delisted from The Nasdaq SmallCap Market,
27
the Company would have no access to funds under the Equity Line. Future Puts are
priced at a discount equal to the greater of 17.5% of the lowest closing bid
price during the ten trading days immediately preceding the date on which such
shares are sold to the institutional investors or $0.20. At the time of each
Put, the investors will be issued warrants, exercisable only on a cashless basis
and expiring through December 31, 2005, to purchase up to 15% of the amount of
common stock issued to the investors at the same price as the shares of common
stock sold in the Put.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in United States interest rates would affect the interest
earned on the Company's cash and cash equivalents. Based on the Company's
overall interest rate exposure at April 30, 2001, a near-term change in interest
rates, based on historical movements, would not materially affect the fair value
of interest rate sensitive instruments. The Company's debt instruments have
fixed interest rates and terms and therefore, a significant change in interest
rates would not have a material adverse effect on the Company's financial
position or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements included in this Report
at pages F-1 through F-25.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement for the Company's 2001
Annual Shareholders' Meeting.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement for the Company's 2001
Annual Shareholders' Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated herein by
reference from the Company's definitive proxy statement for the Company's 2001
Annual Shareholder's Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During September 1995, the Company entered into an agreement with
Cancer Therapeutics, Inc. whereby the Company granted to Cancer Therapeutics,
Inc. the exclusive right to sublicense TNT to a major pharmaceutical company
solely in the Peoples Republic of China for a period of 10 years, subject to the
major pharmaceutical company obtaining product approval within 36 months. In
exchange for this right, the major pharmaceutical company would be required to
fund not less than $3,000,000 for research and development expenses of Cancer
Therapeutics related to TNT and the Company would retain exclusive rights to all
28
research, product development and data outside of the Peoples Republic of China.
The technology was then sublicensed to Brilliance Shanghai Pharmaceuticals, Inc.
("Brilliance"). In addition, the Company is entitled to receive 50% of all
revenues received by Cancer Therapeutics with respect to its sublicensing of TNT
to Brilliance. During March 2001, the Company extended the exclusive licensing
period granted to Cancer Therapeutics, which now expires on December 31, 2016.
Dr. Clive Taylor, a member of the Company's Board of Directors, owns 26% of
Cancer Therapeutics and is an officer and director of Cancer Therapeutics. Dr.
Taylor has abstained from voting at meetings of the Company's board of directors
on any matters relating to Cancer Therapeutics or Brilliance. Through fiscal
year ended April 30, 2001, Cancer Therapeutics has not derived any revenues from
its agreement with Brilliance.
PART IV
-------
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) Consolidated Financial Statements
---------------------------------
The financial statements and schedules listed below are filed as part
of this Report:
Page
----
Report of Independent Auditors F-1
Consolidated Balance Sheets as of F-2
April 30, 2001 and 2000
Consolidated Statements of Operations F-4
for each of the three years in the period
ended April 30, 2001
Consolidated Statements of Stockholders' F-5
Equity (Deficit) for each of the three
years in the period ended April 30, 2001
Consolidated Statements of Cash Flows F-6
for each of the three years in the period
ended April 30, 2001
Notes to Consolidated Financial Statements F-8
(2) Financial Statement Schedules
-----------------------------
II Valuation and Qualifying Accounts F-25
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
29
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- --------------------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Techniclone Corporation, a
Delaware corporation (Incorporated by reference to Exhibit B to
the Company's 1996 Proxy Statement as filed with the Commission
on or about August 20, 1996).
3.2 Bylaws of Peregrine Pharmaceuticals, Inc. (formerly Techniclone
Corporation), a Delaware corporation (Incorporated by reference
to Exhibit C to the Company's 1996 Proxy Statement as filed with
the Commission on or about August 20, 1996).
3.3 Certificate of Designation of 5% Adjustable Convertible Class C
Preferred Stock as filed with the Delaware Secretary of State on
April 23, 1997. (Incorporated by reference to Exhibit 3.1
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about May 12, 1997).
3.4 Certificate of Amendment to Certificate of Incorporation of
Techniclone Corporation to effect the name change to Peregrine
Pharmaceuticals, Inc., a Delaware corporation. ***
4.1 Form of Certificate for Common Stock (Incorporated by reference
to the exhibit of the same number contained in Registrant's
Annual Report on Form 10-K for the year end April 30, 1988).
4.7 5% Preferred Stock Investment Agreement between Registrant and
the Investors (Incorporated by reference to Exhibit 4.1 contained
in Registrant's Current Report on Form 8-K as filed with the
Commission on or about May 12, 1997).
4.8 Registration Rights Agreement between the Registrant and the
holders of the Class C Preferred Stock (Incorporated by reference
to Exhibit 4.2 contained in Registrant's Current Report on Form
8-K as filed with the Commission on or about May 12, 1997).
4.9 Form of Stock Purchase Warrant to be issued to the holders of the
Class C Preferred Stock upon conversion of the Class C Preferred
Stock (Incorporated by reference to Exhibit 4.3 contained in
Registrant's Current Report on Form 8-K as filed with the
Commission on or about May 12, 1997).
4.10 Regulation D Common Equity Line Subscription Agreement dated June
16, 1998 between the Registrant and the Equity Line Subscribers
named therein (Incorporated by reference to Exhibit 4.4 contained
in Registrant's Current Report on Form 8-K dated as filed with
the Commission on or about June 29, 1998).
30
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- --------------------------------------------------------------------------------------------
4.11 Form of Amendment to Regulation D Common Stock Equity Line
Subscription Agreement (Incorporated by reference to Exhibit 4.5
contained in Registrant's Current Report on Form 8-K filed with
the Commission on or about June 29, 1998).
4.12 Registration Rights Agreement between the Registrant and the
Subscribers (Incorporated by reference to Exhibit 4.6 contained
in Registrant's Current Report on Form 8-K as filed with the
Commission on or about June 29, 1998).
4.13 Form of Stock Purchase Warrant to be issued to the Equity Line
Subscribers pursuant to the Regulation D Common Stock Equity
Subscription Agreement (Incorporated by reference to Exhibit 4.7
contained in Registrant's Current Report on Form 8-K as filed
with the Commission on or about June 29, 1998).
4.14 Placement Agent Agreement dated as of June 16, 1998, by and
between the Registrant and Swartz Investments LLC, a Georgia
limited liability company d/b/a Swartz Institutional Finance
(Incorporated by reference to the exhibit contained in
Registration's Registration Statement on Form S-3 (File No.
333-63773)).
4.15 Second Amendment to Regulation D Common Stock Equity Line
Subscription Agreement dated as of September 16, 1998, by and
among the Registrant, The Tail Wind Fund, Ltd. and Resonance
Limited (Incorporated by reference to the exhibit contained in
Registration's Registration Statement on Form S-3 (File No.
333-63773)).
4.16 Form of Non-qualified Stock Option Agreement by and between
Registrant, Director and certain consultants dated December 22,
1999 (Incorporated by reference to the exhibit contained in
Registrant's Registration Statement on Form S-3 (File No.
333-40716)).
10.23 Incentive Stock Option, Non-qualified Stock Option and Restricted
Stock Purchase Plan - 1986 (Incorporated by reference to the
exhibit contained in Registrant's Registration Statement on Form
S-8 (File No. 33-15102))*
10.24 Cancer Biologics Incorporated Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan -
1987 (Incorporated by reference to the exhibit contained in
Registrant's Registration Statement on Form S-8 (File No.
33-8664)).*
31
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- --------------------------------------------------------------------------------------------
10.26 Amendment to 1986 Stock Option Plan dated March 1, 1988
(Incorporated by reference to the exhibit of the same number
contained in Registrant's Annual Report on Form 10-K for the year
ended April 30, 1988).*
10.31 Agreement dated February 5, 1996, between Cambridge Antibody
Technology, Ltd. and Registrant (Incorporated by reference to
Exhibit 10.1 contained in Registrant's Current Report on Form 8-K
dated February 5, 1996, as filed with the Commission on or about
February 8, 1996).
10.32 Distribution Agreement dated February 29, 1996, between
Biotechnology Development, Ltd. and Registrant (Incorporated by
reference to Exhibit 10.1 contained in Registrant's Current
Report on Form 8-K dated February 29, 1996, as filed with the
Commission on or about March 7, 1996).
10.33 Option Agreement dated February 29, 1996, by and between
Biotechnology Development, Ltd. and Registrant (Incorporated by
reference to Exhibit 10.2 contained in Registrant's Current
Report on Form 8-K dated February 29, 1996, as filed with the
Commission on or about March 7, 1996).
10.40 1996 Stock Incentive Plan (Incorporated by reference to the
exhibit contained in Registrant's Registration Statement in form
S-8 (File No. 333-17513)).*
10.41 Stock Exchange Agreement dated as of January 15, 1997 among the
stockholders of Peregrine Pharmaceuticals, Inc. and Registrant
(Incorporated by reference to Exhibit 2.1 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended January 31,
1997).
10.42 First Amendment to Stock Exchange Agreement among the
Stockholders of Peregrine Pharmaceuticals, Inc. and Registrant
(Incorporated by reference to Exhibit 2.1 contained in
Registrant's Current Report on Form 8-K as filed with the
Commission on or about May 12, 1997).
10.43 Termination and Transfer Agreement dated as of November 14, 1997
by and between Registrant and Alpha Therapeutic Corporation
(Incorporated by reference to Exhibit 10.1 contained in
Registrant's Current Report on Form 8-K as filed with the
commission on or about November 24, 1997).
10.46 Option Agreement dated October 23, 1998 between Biotechnology
Development Ltd. and the Registrant (Incorporated by reference to
the exhibit contained in Registrant's Quarterly Report on Form
10-Q for the fiscal quarter ended October 31, 1998, as filed with
the SEC on or about December 15, 1998).
32
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- --------------------------------------------------------------------------------------------
10.47 Real Estate Purchase Agreement by and between Techniclone
Corporation and 14282 Franklin Avenue Associates, LLC dated
December 24, 1998 (Incorporated by reference to Exhibit 10.47 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1999).
10.48 Lease and Agreement of Lease between TNCA, LLC, as Landlord, and
Techniclone Corporation, as Tenant, dated as of December 24, 1998
(Incorporated by reference to Exhibit 10.48 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended January 31,
1999).
10.49 Promissory Note dated as of December 24, 1998 between Techniclone
Corporation (Payee) and TNCA Holding, LLC (Maker) for $1,925,000
(Incorporated by reference to Exhibit 10.49 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended January 31,
1999).
10.50 Pledge and Security Agreement dated as of December 24, 1998 for
$1,925,000 Promissory Note between Grantors and Techniclone
Corporation (Secured Party) (Incorporated by reference to Exhibit
10.50 to Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1999).
10.51 Final fully-executed copy of the Regulation D Common Stock Equity
Line Subscription Agreement dated as of June 16, 1998 between the
Registrant and the Subscribers named therein (Incorporated by
reference to exhibit 10.51 contained in the Registrant's
Registration Statement on Form S-3/A as filed with the Commission
on April 30, 1999).
10.53 Termination Agreement dated as of March 8, 1999 by and between
Registrant and Biotechnology Development Ltd. (Incorporated by
reference to Exhibit 10.53 to Registrant's Annual Report on Form
10-K for the year ended April 30, 1999).
10.54 Secured Promissory Note for $3,300,000 dated March 8, 1999
between Registrant and Biotechnology Development Ltd.
(Incorporated by reference to Exhibit 10.54 to Registrant's
Annual Report on Form 10-K for the year ended April 30, 1999).
10.55 Security Agreement dated March 8, 1999 between Registrant and
Biotechnology Development Ltd. (Incorporated by reference to
Exhibit 10.52 to Registrant's Annual Report on Form 10-K for the
year ended April 30, 1999).
10.56 License Agreement dated as of March 8, 1999 by and between
Registrant and Schering A.G. (Incorporated by reference to
Exhibit 10.56 to Registrant's Annual Report on Form 10-K for the
year ended April 30, 1999).**
33
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- --------------------------------------------------------------------------------------------
10.57 Patent License Agreement dated October 8, 1998 between Registrant
and the Board of Regents of the University of Texas System for
patents related to Targeting the Vasculature of Solid Tumors
(Vascular Targeting Agent patents) (Incorporated by reference to
Exhibit 10.57 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1999).
10.58 Patent License Agreement dated October 8, 1998 between Registrant
and the Board of Regents of the University of Texas System for
patents related to the Coagulation of the Tumor Vasculature
(Vascular Targeting Agent patents) (Incorporated by reference to
Exhibit 10.58 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 31, 1999).
10.59 License Agreement between Northwestern University and Registrant
dated August 4, 1999 covering the LYM-1 and LYM-2 antibodies
(Oncolym(R)) (Incorporated by reference to Exhibit 10.59 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 31, 1999).
10.63 Change in Control Agreement dated September 27, 1999 between
Registrant and Terrence Chew, V.P of Clinical and Regulatory
Affairs (Incorporated by reference to Exhibit 10.63 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1999).*
10.64 Regulation D Subscription Agreement dated January 6, 2000 between
Registrant and Subscribers, Swartz Investments, LLC and
Biotechnology Development, LTD. (Incorporated by reference to
Exhibit 10.64 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended January 31, 2000).
10.65 Registration Right Agreement dated January 6, 2000 between
Registrant and Subscribers of the Regulation D Subscription
Agreement dated January 6, 2000 (Incorporated by reference to
Exhibit 10.65 to Registrant's Quarterly Report on Form 10-Q for
the quarter ended January 31, 2000).
10.66 Form of Warrant to be issued to Subscribers pursuant to the
Regulation D Subscription Agreement dated January 6, 2000
(Incorporated by reference to Exhibit 10.66 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended January 31,
2000).
10.67 Warrant to purchase 750,000 shares of Common Stock of Registrant
issued to Swartz Private Equity, LLC dated November 19, 1999
(Incorporated by reference to Exhibit 10.67 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended January 31,
2000).
34
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
- --------------------------------------------------------------------------------------------
10.68 Amendment Agreement dated June 14, 2000 to the License Agreement
dated March 8, 1999 by and between Registrant and Schering A.G.
(Incorporated by reference to Exhibit 10.68 to Registrant's
Registration Statement on Form S-3 (File No. 333-40716).
10.69 Waiver Agreement effective December 29, 1999 by and between
Registrant and Biotechnology Development Ltd. (Incorporated by
reference to Exhibit 10.69 to Registrant's Registration Statement
on Form S-3 (File No. 333-40716).
10.70 Joint Venture Agreement dated May 11, 2000 by and between
Registrant and OXiGENE, Inc. (Incorporated by reference to
Exhibit 10.70 to Registrant's Registration Statement on Form S-3
(File No. 333-40716).
10.71 Third Amendment to Regulation D Common Stock Equity Line
Subscription Agreement dated June 2, 2000 by and among the
Registrant, the Tail Wind Fund, Ltd. and Resonance Limited
(Incorporated by reference to Exhibit 10.71 contained in
Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 31, 2000).
10.72 Amendment to 1996 Stock Incentive Plan dated March 14, 2001
(Incorporated by reference to the exhibit contained in
Registrant's Registration Statement on Form S-8 (File No.
333-57046)).*
21 Subsidiary of Registrant ***
23.1 Consent of Ernst & Young LLP, Independent Auditors ***
27 Financial Data Schedule ***
- -------------------------------
* This Exhibit is a management contract or a compensation plan or
arrangement.
** Portions omitted pursuant to a request of confidentiality filed
separately with the Commission.
*** Filed herewith.
(b) Reports on Form 8-K:
On April 6, 2001, the Company appointed Edward J. Legere to the offices
of President and Chief Executive Officer following the resignation of
Dr. John Bonfiglio.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
PEREGRINE PHARMACEUTICALS, INC.
Dated: July 20, 2001 By: /s/ Edward J. Legere
-----------------------------------
Edward J. Legere, President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ Edward J. Legere President & Chief Executive July 20, 2001
- ------------------------------------ Officer (Principal Executive
Edward J. Legere Officer) and Director
/s/ Paul J. Lytle Vice President of Finance July 20, 2001
- ------------------------------------ and Accounting (Principal
Paul J. Lytle Financial and Principal
Accounting Officer)
/s/ Carlton M. Johnson Director July 20, 2001
- ------------------------------------
Carlton M. Johnson
/s/ Eric S. Swartz Director July 20, 2001
- ------------------------------------
Eric S. Swartz
/s/ Clive R. Taylor, M.D., Ph.D. Director July 20, 2001
- ------------------------------------
Clive R. Taylor, M.D., Ph.D.
PEREGRINE PHARMACEUTICALS, INC.
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Peregrine Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Peregrine
Pharmaceuticals, Inc. as of April 30, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for each of the three years in the period ended April 30, 2001. Our audits
also included the financial statement schedule listed in the Index at Item
14(a). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Peregrine
Pharmaceuticals, Inc. at April 30, 2001 and 2000, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended April 30, 2001, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Orange County, California
June 29, 2001,
except for Notes 1 and 14, as to which the date is
July 15, 2001
F-1
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 2001 AND 2000
- ---------------------------------------------------------------------------------------
2001 2000
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 6,327,000 $ 4,131,000
Other receivables, net of allowance for doubtful accounts
of $54,000 (2001) and $342,000 (2000) 46,000 90,000
Prepaid expenses and other current assets 264,000 268,000
Laboratory equipment held for sale - 428,000
------------ ------------
Total current assets 6,637,000 4,917,000
PROPERTY:
Leasehold improvements 208,000 73,000
Laboratory equipment 1,818,000 860,000
Furniture, fixtures and computer equipment 704,000 806,000
------------ ------------
2,730,000 1,739,000
Less accumulated depreciation and amortization (1,613,000) (869,000)
------------ ------------
Property, net 1,117,000 870,000
OTHER ASSETS:
Note receivable, net of allowance of
$1,759,000 (2001) and $1,863,000 (2000) - -
Other, net 146,000 166,000
------------ ------------
Total other assets 146,000 166,000
------------ ------------
TOTAL ASSETS $ 7,900,000 $ 5,953,000
============ ============
F-2
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 2001 AND 2000 (CONTINUED)
- -----------------------------------------------------------------------------------------
2001 2000
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable $ 675,000 $ 522,000
Related party note payable and accrued interest payable - 3,465,000
Accrued clinical trial site fees 268,000 280,000
Accrued royalties and license fees 147,000 268,000
Accrued legal and accounting fees 206,000 186,000
Notes payable, current portion 86,000 110,000
Other current liabilities 309,000 254,000
Deferred license revenue 3,500,000 3,500,000
-------------- --------------
Total current liabilities 5,191,000 8,585,000
NOTES PAYABLE 2,000 89,000
DEFERRED LICENSE REVENUE 21,000 -
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock-$.001 par value; authorized 150,000,000
shares; outstanding 2001 - 97,288,934;
2000 - 90,612,610 97,000 91,000
Additional paid-in-capital 120,253,000 106,640,000
Deferred stock compensation (935,000) (2,258,000)
Accumulated deficit (116,729,000) (107,194,000)
-------------- --------------
Total stockholders' equity (deficit) 2,686,000 (2,721,000)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 7,900,000 $ 5,953,000
============== ==============
See accompanying notes to consolidated financial statements.
F-3
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001
- ---------------------------------------------------------------------------------------
2001 2000 1999
------------- ------------- -------------
LICENSE REVENUE $ 979,000 $ 50,000 $ -
OPERATING EXPENSES:
Research and development 7,380,000 8,075,000 8,795,000
License fee - - 4,500,000
General and administrative 2,231,000 2,776,000 4,320,000
Stock-based compensation 1,581,000 1,438,000 455,000
Loss on disposal of property and write-
down of property held for sale, net 9,000 327,000 1,247,000
Provision for note receivable - 1,863,000 -
------------- ------------- -------------
Total operating expenses 11,201,000 14,479,000 19,317,000
------------- ------------- -------------
LOSS FROM OPERATIONS (10,222,000) (14,429,000) (19,317,000)
OTHER INCOME (EXPENSE):
Interest and other income 921,000 297,000 252,000
Interest expense (234,000) (382,000) (428,000)
------------- ------------- -------------
NET LOSS $ (9,535,000) $(14,514,000) $(19,493,000)
============= ============= =============
Net loss before preferred stock
accretion and dividends $ (9,535,000) $(14,514,000) $(19,493,000)
Accretion of preferred stock discount - - (531,000)
Imputed dividends on preferred stock - (2,000) (15,000)
------------- ------------- -------------
NET LOSS APPLICABLE TO
COMMON STOCK $ (9,535,000) $(14,516,000) $(20,039,000)
============= ============= =============
WEIGHTED AVERAGE SHARES
OUTSTANDING 95,212,423 81,195,049 66,146,628
============= ============= =============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.10) $ (0.18) $ (0.30)
============= ============= =============
See accompanying notes to consolidated financial statements.
F-4
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001
- --------------------------------------------------------------------------------------------------------------------------
ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
-------------- -------------- -------------- -------------- --------------
BALANCES, MAY 1, 1998 4,807 $ - 48,547,351 $ 49,000 $ 78,524,000
Accretion of Class C preferred stock
dividends and discount ............... - - - - 531,000
Preferred stock issued upon exercise
of Class C Placement Agent Warrant ... 530 - - - 530,000
Common stock issued for cash under
Equity Line, net of offering costs
of $678,000 .......................... - - 6,656,705 6,000 5,066,000
Common stock issued upon conversion
of Class C warrants and Equity Line
warrants ............................. - - 5,909,015 6,000 3,635,000
Common stock issued upon conversion
of Class C preferred stock ........... (5,216) - 9,428,131 9,000 (9,000)
Common stock issued for cash upon
exercise of options and warrants ..... - - 528,034 1,000 316,000
Common stock issued for services,
license rights, interest, and under
severance agreements ................. - - 2,302,969 2,000 1,832,000
Deferred stock compensation ............ - - - - 2,199,000
Stock-based compensation ............... - - - - -
Reduction of notes receivable .......... - - - - -
Net loss ............................... - - - - -
-------------- -------------- -------------- -------------- --------------
BALANCES, APRIL 30, 1999 121 - 73,372,205 73,000 92,624,000
Common stock issued upon conversion of
Class C preferred stock .............. (121) - 312,807 1,000 (1,000)
Accretion of Class C dividends ......... - - - - -
Common stock issued for cash under
Equity Line, net of offering costs of
$781,000 ............................. - - 9,712,044 10,000 7,947,000
Common stock issued for cash under
Subscription Agreement with
related parties ...................... - - 2,000,000 2,000 498,000
Common stock issued upon conversion of
Class C warrants and Equity
Line warrants ........................ - - 1,048,802 1,000 41,000
Common stock issued for cash upon
exercise of options and warrants ..... - - 3,092,648 3,000 2,497,000
Common stock issued for services,
license rights, interest, and under
severance agreements ................. - - 1,074,104 1,000 1,183,000
Deferred stock compensation ............ - - - - 1,851,000
Stock-based compensation ............... - - - - -
Reduction of notes receivable .......... - - - - -
Net loss ............................... - - - - -
-------------- -------------- -------------- -------------- --------------
BALANCES, APRIL 30, 2000 - - 90,612,610 91,000 106,640,000
Common stock issued for cash under
Equity Line, net of offering costs
of $728,000 .......................... - - 5,212,564 5,000 9,368,000
Common stock issued upon conversion of
Equity Line warrants ................. - - 9,801 - -
Common stock issued for cash upon
exercise of options and warrants ..... - - 200,278 - 88,000
Common stock issued to OXiGENE, Inc.
for cash under joint venture ......... - - 585,009 1,000 1,999,000
Common stock issued to Schering A.G.
for obligations under the license
agreement amendment .................. - - 518,672 - 1,300,000
Common stock issued for cash to
SuperGen, Inc. under license agreement - - 150,000 - 600,000
Deferred stock compensation ............ - - - - 258,000
Stock-based compensation ............... - - - - -
Net loss ............................... - - - - -
-------------- -------------- -------------- -------------- --------------
BALANCES, APRIL 30, 2001 - $ - 97,288,934 $ 97,000 $ 120,253,000
============== ============== ============== ============== ==============
continued on next page:
NOTES TOTAL
DEFERRED RECEIVABLE STOCKHOLDERS'
STOCK ACCUMULATED FROM SALE OF EQUITY
COMPENSATION DEFICIT COMMON STOCK (DEFICIT)
-------------- -------------- -------------- --------------
BALANCES, MAY 1, 1998 $ (101,000) $ (72,639,000) $ (385,000) $ 5,448,000
Accretion of Class C preferred stock
dividends and discount ............... - (546,000) - (15,000)
Preferred stock issued upon exercise
of Class C Placement Agent Warrant ... - - - 530,000
Common stock issued for cash under
Equity Line, net of offering costs
of $678,000 .......................... - - - 5,072,000
Common stock issued upon conversion
of Class C warrants and Equity Line
warrants ............................. - - - 3,641,000
Common stock issued upon conversion
of Class C preferred stock ........... - - - -
Common stock issued for cash upon
exercise of options and warrants ..... - - - 317,000
Common stock issued for services,
license rights, interest, and under
severance agreements ................. - - - 1,834,000
Deferred stock compensation ............ (2,199,000) - - -
Stock-based compensation ............... 455,000 - - 455,000
Reduction of notes receivable .......... - - 78,000 78,000
Net loss ............................... - (19,493,000) - (19,493,000)
-------------- -------------- -------------- --------------
BALANCES, APRIL 30, 1999 (1,845,000) (92,678,000) (307,000) (2,133,000)
Common stock issued upon conversion of
Class C preferred stock .............. - - - -
Accretion of Class C dividends ......... - (2,000) - (2,000)
Common stock issued for cash under
Equity Line, net of offering costs of
$781,000 ............................. - - - 7,957,000
Common stock issued for cash under
Subscription Agreement with
related parties ...................... - - - 500,000
Common stock issued upon conversion of
Class C warrants and Equity
Line warrants ........................ - - - 42,000
Common stock issued for cash upon
exercise of options and warrants ..... - - - 2,500,000
Common stock issued for services,
license rights, interest, and under
severance agreements ................. - - - 1,184,000
Deferred stock compensation ............ (1,851,000) - - -
Stock-based compensation ............... 1,438,000 - - 1,438,000
Reduction of notes receivable .......... - - 307,000 307,000
Net loss ............................... - (14,514,000) - (14,514,000)
-------------- -------------- -------------- --------------
BALANCES, APRIL 30, 2000 (2,258,000) (107,194,000) - (2,721,000)
Common stock issued for cash under
Equity Line, net of offering costs
of $728,000 .......................... - - - 9,373,000
Common stock issued upon conversion of
Equity Line warrants ................. - - - -
Common stock issued for cash upon
exercise of options and warrants ..... - - - 88,000
Common stock issued to OXiGENE, Inc.
for cash under joint venture ......... - - - 2,000,000
Common stock issued to Schering A.G.
for obligations under the license
agreement amendment .................. - - - 1,300,000
Common stock issued for cash to
SuperGen, Inc. under license agreement - - - 600,000
Deferred stock compensation ............ (258,000) - - -
Stock-based compensation ............... 1,581,000 - - 1,581,000
Net loss ............................... - (9,535,000) - (9,535,000)
-------------- -------------- -------------- --------------
BALANCES, APRIL 30, 2001 $ (935,000) $(116,729,000) $ - $ 2,686,000
============== ============== ============== ==============
See accompanying notes to consolidated financial statements.
F-5
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001
- --------------------------------------------------------------------------------------------------------
2001 2000 1999
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,535,000) $(14,514,000) $(19,493,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Provision for note receivable - 1,863,000 -
Buyback of licensing rights - - 4,500,000
Depreciation and amortization 412,000 516,000 1,046,000
Loss on disposal of long-term assets and write-down
of property held for sale 9,000 327,000 1,247,000
Stock-based compensation expense and common stock
issued for interest, services, and under severance
agreements 2,881,000 2,622,000 1,089,000
Severance expense - 213,000 414,000
Changes in operating assets and liabilities, net of
effects from acquisition of subsidiaries:
Other receivables, net 44,000 142,000 (161,000)
Prepaid expenses and other current assets 4,000 69,000 13,000
Other assets - 187,000 -
Accounts payable and other accrued liabilities (58,000) (813,000) (200,000)
Accrued clinical trial site fees (12,000) (411,000) 691,000
Deferred license revenue 21,000 500,000 3,000,000
------------- ------------- -------------
Net cash used in operating activities (6,234,000) (9,299,000) (7,854,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property 2,000 - 3,924,000
Purchases of property (242,000) (201,000) (542,000)
(Increase) decrease in other assets 20,000 47,000 (320,000)
------------- ------------- -------------
Net cash provided by (used in) investing activities (220,000) (154,000) 3,062,000
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of preferred stock - - 530,000
Net proceeds from issuance of common stock 12,061,000 10,999,000 9,030,000
Payment of Class C preferred stock dividends - (2,000) (15,000)
Payments on notes receivable from sale of common stock - 307,000 78,000
Principal payments on notes payable (3,411,000) (105,000) (4,382,000)
Proceeds from issuance of notes payable - - 200,000
------------- ------------- -------------
Net cash provided by financing activities 8,650,000 11,199,000 5,441,000
------------- ------------- -------------
F-6
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- ------------------------------------------------------------------------------------------------
2001 2000 1999
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS $2,196,000 $1,746,000 $ 649,000
CASH AND CASH EQUIVALENTS,
Beginning of year 4,131,000 2,385,000 1,736,000
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
End of year $6,327,000 $4,131,000 $2,385,000
=========== =========== ===========
SUPPLEMENTAL INFORMATION:
Interest paid $ 399,000 $ 217,000 $ 203,000
=========== =========== ===========
Schedule of non-cash investing and financing activities:
Transfer of assets held for sale to property $ 428,000 $ - $ -
=========== =========== ===========
Purchase of laboratory equipment for notes payable $ - $ - $ 57,000
=========== =========== ===========
Note receivable from sale of property $ - $ - $1,925,000
=========== =========== ===========
For supplemental information relating to conversion of preferred stock
into common stock, common stock issued in exchange for services, provision for
note receivable, loss on disposal of property and other non-cash transactions,
see Notes 3, 4, 5, 7, 8 and 9.
See accompanying notes to consolidated financial statements.
F-7
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS DESCRIPTION
ORGANIZATION - Peregrine Pharmaceuticals, Inc. ("Peregrine" or "the
Company") was incorporated in the state of Delaware on September 25, 1996 under
the name of Techniclone Corporation. The Company changed its name to Peregrine
Pharmaceuticals Inc. in October 2000. In conjunction with the Company's name
change to Peregrine Pharmaceuticals, Inc., the Company changed the name of its
wholly-owned subsidiary to Vascular Targeting Technologies, Inc. (formally,
Peregrine Pharmaceuticals, Inc.), a Delaware corporation, acquired in April
1997.
BUSINESS DESCRIPTION - Peregrine, located in Tustin, California, is a
biopharmaceutical company engaged in the development and commercialization of
cancer therapeutics and cancer diagnostics through a series of proprietary
platform technologies using monoclonal antibodies. Peregrine's main focus is the
development of its Collateral Targeting Agent technologies. Collateral Targeting
Agents use antibodies that bind to or target stable structures found in all
solid tumors, such as the necrotic core of the tumor or blood vessels found in
all solid tumors. In pre-clinical and clinical studies, these antibodies are
capable of targeting and delivering therapeutic killing agents to the tumor
thereby destroying cancerous tumor cells. In addition, the Company has a direct
tumor targeting antibody, Oncolym(R), which recognizes and binds to cancerous
lymphoma tumor sites. During June 2001, the Company assumed the rights to
Oncolym(R) previously licensed to Schering A.G. and plans to continue the
ongoing Phase I/II clinical trial for the treatment of intermediate and high
grade Non-Hodgkin's B-cell Lymphoma ("NHL"). The Company operates in one
business segment.
At July 15, 2001, we had $7,073,000 in cash and cash equivalents. We
have expended substantial funds on the development of our product candidates and
for clinical trials. As a result, we have had negative cash flows from
operations since inception and expect the negative cash flows from operations to
continue until we are able to generate sufficient additional revenue from the
sale and/or licensing of our products. Although we have sufficient cash on hand
to meet our obligations on a timely basis for at least the next 12 months, we
will continue to require additional funding to sustain our research and
development efforts, provide for future clinical trials, expand our
manufacturing and product commercialization capabilities, and continue our
operations until we are able to generate sufficient revenue from the sale and/or
licensing of our products. We plan to obtain required financing through one or
more methods including, obtaining additional equity or debt financing and
negotiating additional licensing or collaboration agreements with another
company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
Vascular Targeting Technologies, Inc. All intercompany balances and transactions
have been eliminated.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid,
short-term investments with an initial maturity of three months or less to be
cash equivalents.
F-8
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
PROPERTY - Property is recorded at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the related asset, generally ranging from three to ten years. Amortization of
leasehold improvements is calculated using the straight-line method over the
shorter of the estimated useful life of the asset or the remaining lease term.
IMPAIRMENT - The Company assesses recoverability of its long-term
assets by comparing the remaining carrying value to the value of the underlying
collateral or the fair market value of the related long-term asset based on
undiscounted cash flows.
PREFERRED STOCK DIVIDENDS - Dividends on Class C Stock are accreted
over the life of the preferred stock and are based on the stated dividend rate
of 10% plus the dividend amount attributable to the discount at the issuance
date. To the extent that unconverted shares of Class C Stock remain outstanding,
the value of the dividend was remeasured and recorded on each date that the
conversion rate changed.
REVENUE RECOGNITION - Revenues related to licensing agreements (Note 7)
are recognized when cash has been received and all obligations of the Company
have been met, which is generally upon the transfer of the technology license or
other rights to the licensee. Up-front fees from license agreements are
generally recognized over the estimated term of the agreement.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". The bulletin draws on existing accounting rules and provides
specific guidance on how those accounting rules should be applied. Among other
things, SAB No. 101 requires that license and other up-front fees from research
collaborators be recognized over the term of the agreement unless the fee is in
exchange for products delivered or services performed that represent the
culmination of a separate earnings process. The Company adopted SAB No. 101 in
the fourth quarter of fiscal year 2001 and its adoption had no material impact
on the Company's financial position and results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company's financial
instruments consist principally of cash and cash equivalents, other receivables,
accounts payable, accrued liabilities and notes payable. The Company believes
all of the financial instruments' recorded values approximate current values.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from these estimates.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS - Net loss per share
attributable to common stockholders is calculated by taking the net loss for the
year and deducting the dividends and preferred stock issuance discount accretion
on the Class C preferred stock during the year and dividing the sum of these
amounts by the weighted average number of shares of common stock outstanding
during the year. Because the impact of options, warrants, and other convertible
instruments are antidilutive, there is no difference between basic and diluted
loss per share amounts for each of the three years in the period ended April 30,
2001. The Company has excluded the following shares issuable upon the exercise
of common stock warrants and options and conversions of outstanding preferred
stock and preferred stock dividends from the three years ended April 30, 2001
per share calculation because their effect is antidilutive:
F-9
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------------------------------
2001 2000 1999
--------- ---------- ---------
Common stock equivalent shares assuming issuance
of shares represented by outstanding stock
options and warrants utilizing the treasury stock
method............................................... 6,655,325 6,603,433 2,927,725
Common stock equivalent shares assuming issuance
of shares upon conversion of preferred stock and
Class C placement agent warrants utilizing the
if-converted method.................................. - 117,130 613,035
The common stock equivalent shares assuming issuance of shares upon
conversion of preferred stock and Class C placement agent warrants were
calculated assuming conversion of preferred stock at the beginning of the year
or at the issuance date, if later. Additionally, the stock was assumed converted
rather than redeemed, as it is the Company's intention not to redeem the
preferred stock for cash. The preferred stock is not considered a common stock
equivalent.
INCOME TAXES - The Company utilizes the liability method of accounting
for income taxes as set forth in Statement of Financial Accounting Standards
(SFAS) No. 109, "ACCOUNTING FOR INCOME TAXES." Under the liability method,
deferred taxes are determined based on the differences between the consolidated
financial statements and tax basis of assets and liabilities using enacted tax
rates. A valuation allowance is provided when it is more likely than not that
some portion or the entire deferred tax asset will not be realized.
STOCK-BASED COMPENSATION - The Company has elected to follow Accounting
Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" and
related interpretations in accounting for its employee stock options and has
made certain pro forma disclosures in accordance with the Financial Accounting
Standards Board's Statement of Financial Accounting Standards No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION."
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation--an Interpretation of APB Opinion No. 25, ("FIN 44"), which was
effective July 1, 2000. FIN 44 clarifies the application of APB Opinion No. 25
and, among other issues, clarifies the following: the definition of an employee
for purposes of applying APB Opinion No. 25; the criteria for determining
whether a plan qualifies as a non-compensatory plan; the accounting consequence
of various modifications to the terms of the previously fixed stock options or
awards; and the accounting for an exchange of stock compensation awards in a
business combination. The application of FIN 44 has not had a material impact on
the Company's financial position or results of operations.
RECLASSIFICATION - Certain amounts in the 2000 and 1999 consolidated
financial statements have been reclassified to conform to the current year
presentation.
F-10
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
RECENT ACCOUNTING PRONOUNCEMENTS - During June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" which will be effective for the Company
beginning May 1, 2001. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
imbedded in other contracts, and for hedging activities. It requires an entity
to recognize all derivatives as either assets or liabilities in the statements
of financial position and measure those instruments at fair value. The Company
believes the adoption of SFAS No. 133 will not have a material impact on the
consolidated financial statements.
3. NOTES RECEIVABLE
During December 1998, the Company completed the sale and subsequent
leaseback of its two facilities (Note 4) and recorded an initial note receivable
from buyer of $1,925,000. The note bears interest at 7.0% per annum through
December 1, 2001 and 7.5% thereafter and is collaterized under the Security and
Pledge Agreement. The note receivable is amortized over 20 years and is due upon
the earlier of 12 years or upon the sale of related facilities. In accordance
with the related lease agreement, if the Company defaults under the lease
agreement, the note receivable shall be deemed to be immediately satisfied in
full and the buyer shall have no further obligation to the Company for the note
receivable balance. Although the Company had made all payments under the lease
agreement and had not defaulted under any terms of the lease agreement, the
Company established a 100% reserve for the note receivable in the amount of
$1,863,000 during the fiscal year ended April 30, 2000. The Company will
continue to adjust the estimated allowance and record interest income on the
note receivable as payments are received. The Company has received all payments
through July 2001.
4. PROPERTY
On December 24, 1998, the Company completed the sale and subsequent
leaseback of its two facilities with an unrelated entity. The aggregate sales
price of the two facilities was $6,100,000, comprised of $4,175,000 in cash and
a note receivable of $1,925,000 (Note 3). In accordance with SFAS No. 98, the
Company accounted for the sale and subsequent leaseback transaction as a sale
and removed the net book value of land, buildings and building improvements of
$7,014,000 from the consolidated financial statements and recorded a loss on
sale of $1,171,000, which included selling expenses of $257,000.
Property held for sale represents lab equipment located in the
Company's manufacturing facility, which was marketed for sale during the quarter
ended April 30, 2000. During the quarter ended April 30, 2000, the Company
expensed $267,000 in accordance with SFAS 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" included in the
accompanying consolidated financial statements. Laboratory equipment held for
sale is stated at the lower of the net book value or fair value of the related
asset. During April 2001, the Company decided to maintain its manufacturing
facility for clinical trial production based primarily on the lack of antibody
manufacturing capacity and the significant commitment costs associated with a
third-party antibody manufacturer. As a result of this decision, the Company
transferred its assets held for sale to property at the lower of the related
assets net book value or fair value. Fair value was determined based on an
independent offer received by the Company to acquire the assets held for sale.
The resulting reclassification did not have a material effect on the
accompanying consolidated financial statements.
F-11
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
5. NOTES PAYABLE
During December 1998, the Company borrowed $200,000 from an unrelated
entity. The note is unsecured, bears interest at 7.0% per annum, and is payable
over the three years ending December 2001. Principal and interest payments of
$6,000 are due monthly.
On March 8, 1999, the Company entered into a Termination Agreement with
Biotechnology Development Ltd. ("BTD") and re-acquired the Oncolym(R)
distribution rights (Note 7). In conjunction with the Termination Agreement, the
Company issued a note payable for $3,300,000 due and payable on March 1, 2001.
The note payable originally bore simple interest at a rate of 10% per annum,
payable monthly. On December 1, 1999, the Company defaulted on its monthly
interest payment on the $3,300,000 note payable and did not file a registration
statement with the Securities and Exchange Commission to register 1,523,809
shares of common stock and warrants to purchase up to 4,825,000 shares of common
stock by December 8, 1999 due to the limited amount of cash on hand at that
time. On December 29, 1999, the Company obtained a waiver from BTD for the
deferral of interest payments for up to nine months and an extension of time to
register 1,523,809 shares of common stock and warrants to purchase up to
4,825,000 shares of common stock until the Company's next registration statement
filing. In exchange for this waiver, the Company agreed to (i) increase the rate
of interest from 10% per annum to 12% per annum on the note payable of
$3,300,000 effective December 1, 1999, (ii) replace the current collateral with
the rights to the TNT technology (iii) extend the expiration date of 5,325,000
warrants to December 1, 2005 and (iv) only in the case of a merger, acquisition,
or reverse stock split, re-price up to 5,325,000 warrants to an exercise price
of $0.34 per share. BTD is a limited partnership controlled by Mr. Edward J.
Legere, a member of the Company's Board of Directors and its President and Chief
Executive Officer. During fiscal year 2001, the Company paid the note and
accrued interest thereon in full and all collateral was released to the Company.
In addition, the Company has three separate note agreements with
aggregate original amounts due of $189,000 to finance laboratory equipment that
bear interest at rates of approximately 10% and require aggregate monthly
payments of $4,000 through June 2002.
Minimum future principal payments on notes payable as of April 30, 2001
are as follows:
Year ending April 30:
2002 $ 86,000
2003 2,000
--------------
$ 88,000
==============
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE - In December 1998, the Company sold and subsequently
leased back its two facilities in Tustin, California. The lease has an original
lease term of 12 years with two 5-year renewal options and includes
F-12
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
scheduled rental increases of 3.35% every two years. Annual rent expense under
the lease agreement totaled $735,000 during fiscal years 2001 and 2000 and
$269,000 for fiscal year 1999. At April 30, 2001, future minimum lease payments
and sublease income under noncancelable operating leases are as follows:
Year ending April 30: Lease Expense Sublease Income Net Lease Expense
----------------- ------------------ ------------------
2002 $ 698,000 $ (345,000) $ 353,000
2003 707,000 (252,000) 455,000
2004 721,000 (37,000) 684,000
2005 731,000 - 731,000
2006 745,000 - 745,000
Thereafter 3,633,000 - 3,633,000
----------------- ----------------- ------------------
$ 7,235,000 $ (634,000) $ 6,601,000
================= ================= ===================
RENTAL INCOME - The Company currently subleases portions of its unused
space. Sublease rental income totaled $257,461, $22,236 and $127,904 for fiscal
years 2001, 2000 and 1999, respectively.
7. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
ONCOLYM(R)
On March 8, 1999, the Company entered into a License Agreement with
Schering A.G. whereby Schering A.G. was granted the exclusive, worldwide right
to market and distribute Oncolym(R) products, in exchange for an initial payment
of $3,000,000 and future milestone payments plus a royalty on net sales. The
initial up-front payment of $3,000,000 received during fiscal year 1999 is
included in deferred license revenue in the accompanying consolidated financial
statements at April 30, 2001 and 2000. During June 2000, the Company and
Schering A.G. entered into an amendment to the License Agreement ("the
Amendment") whereby Schering A.G. agreed to pay for 100% of the Oncolym(R)
clinical development expenses, excluding drug related costs, for the Phase I/II
clinical trial. In exchange for this commitment, the Company agreed to transfer
$1,300,000 of its common stock to Schering A.G. as defined in the Amendment.
Eighty percent of the clinical trial costs in excess of the $1,300,000 for the
Phase I/II clinical trial was paid by Schering A.G. During June 2001, the
Company assumed the rights previously licensed to Schering A.G. and will
recognize all deferred license revenue in June 2001 when all obligations of the
Company have been met. The Company plans to continue the Phase I/II clinical
trial established by Schering A.G. and will assume all future costs of the
trial, as defined in the License Agreement.
Also in March 1999, the Company entered into a Termination Agreement
with BTD, pursuant to which the Company terminated all previous agreements with
BTD and thereby reacquired the marketing rights to Oncolym(R) products in Europe
and certain other designated foreign countries. In exchange for these rights,
the Company expensed $4,500,000 as a license fee in fiscal year 1999, which was
comprised of a secured promissory note payable in the amount of $3,300,000 and
shares of common stock equal to $1,200,000, or 1,523,809 common shares. The
number of shares of common stock issued was calculated by taking $1,200,000
divided by ninety percent (90%) of the market price of the Company's common
stock as defined in the Termination Agreement. In addition, the Company issued
warrants to purchase up to 3,700,000 shares of common stock at an exercise price
of $3.00 per share and issued warrants to purchase up to 1,000,000 shares of
common stock at an exercise price of $5.00 per share. The warrants were measured
utilizing the Black-Scholes option valuation model (Note 5).
F-13
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
On October 23, 1998, the Company entered into an Option Agreement with
BTD for an extension of time to reacquire the Oncolym(R) rights. Under the
Option Agreement, the Company paid $37,500 per month through March 8, 1999 and
also issued a warrant to purchase up to 125,000 shares of common stock at $3.00
per share. The fair value of the warrant was measured utilizing the
Black-Scholes option valuation model.
In November 1997, the Company entered into a Termination and Transfer
Agreement with Alpha Therapeutic Corporation (Alpha), whereby the Company
reacquired the rights for the development, commercialization and marketing of
Oncolym(R) in the United States and certain other countries, previously granted
to Alpha in October 1992. The Company has contingent obligations due upon filing
of a Biologics License Application ("BLA") and upon FDA approval of a BLA by the
Food and Drug Administration plus a royalty on net sales for product sold in
North, South and Central America and Asia for five (5) years after
commercialization of the product. No amounts were due or payable at April 30,
2001 under the Termination and Transfer Agreement.
On October 28, 1992, the Company entered into an agreement with an
unrelated corporation (licensee) to terminate a previous license agreement
relating to Oncolym(R). The termination agreement provides for aggregate maximum
payments of $1,100,000 to be paid by the Company based on achievement of certain
milestones, including royalties on net sales. As of April 30, 2001, the Company
had paid $100,000 and accrued for an additional $100,000 relating to the
termination agreement.
In 1985, the Company entered into a research and development agreement,
as amended in August 1999, with Northwestern University and its researchers to
develop Oncolym(R). The Company holds an exclusive world-wide license to
manufacture and market products using the Oncolym(R) antibodies. In exchange for
the world-wide license to manufacture and market the products, the Company will
pay Northwestern University a royalty on net sales.
TUMOR NECROSIS THERAPY (COTARA(TM))
During October 2000, the Company entered into a licensing agreement
with Merck KGaA to license a segment of its TNT technology for use in the
application of cytokine fusion proteins. Under the terms of the licensing
agreement, the Company will receive up-front payments of up to $400,000 upon the
satisfaction of certain conditions set forth in the agreement, of which, the
Company received $50,000 in November 1999. The Company will also receive a
royalty on net sales, as defined in the agreement, upon the commencement of
commercial sales.
In February 1996, the Company entered into a joint venture agreement
with Cambridge Antibody Technology, Inc. (CAT), an unrelated entity, which
provides for the co-sponsorship of development and clinical testing of chimeric
and human TNT antibodies. In May 1998, the Company and CAT elected to
discontinue the co-sponsorship of the development of the TNT antibodies and the
Company assumed full responsibility to fund development and clinical trials of
the TNT antibody. The Company and CAT are currently in negotiations regarding
modifications to the joint venture arrangement.
F-14
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
The Company has arrangements with certain third parties to acquire
licenses needed to produce and commercialize chimeric and human antibodies,
including the Company's TNT antibody. Management believes the terms of the
licenses will not significantly impact the cost structure or marketability of
chimeric or human TNT based products.
VASCULAR TARGETING AGENTS
During February 2001, the Company completed a licensing deal with
SuperGen, Inc. ("SuperGen") to license a segment of its VTA technology,
specifically related to Vascular Endothelial Growth Factor ("VEGF"). Under the
terms of the licensing agreement, SuperGen purchased 150,000 shares of the
Company's common stock at $4.00 per share for total proceeds to the Company of
$600,000. The Company will also receive an annual license fee of $200,000 until
SuperGen files an Investigational New Drug Application in the United States
utilizing the VEGF technology. In addition, the Company could receive up to
$7,500,000 in future milestone payments, plus receive a royalty on net sales of
all drugs commercialized by SuperGen utilizing the VEGF technology. The Company
could also receive additional consideration for each clinical candidate that
enters a Phase III clinical trial by SuperGen.
During August 2000, the Company entered into a licensing agreement with
Scotia Pharmaceuticals Limited ("Scotia") to license a segment of its VTA
technology, specifically related to targeting Photodynamic Therapy agents
("PDT"), for the worldwide exclusive rights to this area. Under the terms of the
agreement, the Company received an up-front payment of $500,000 in April 2000,
which was originally being recognized over a four-year period based on the terms
of the agreement. During January 2001, the agreement automatically terminated as
Scotia announced that it has been placed into Administration
(Receivership/Bankruptcy) as ordered by a court in London. During fiscal year
2001, the Company recognized the remaining unamortized up-front payment, which
is included in license revenue in the accompanying consolidated financial
statements.
During May 2000, the Company entered into a joint venture with OXiGENE,
Inc. ("OXiGENE"). Under the terms of the joint venture agreement, the Company
has agreed to supply its VTA intellectual property to the joint venture while
OXiGENE has paid the Company a non-refundable $1,000,000 license fee, which was
received in May 2000 and will be amortized as license revenue over a two year
period, purchased $2,000,000 of the Company's common stock (Note 8) and agreed
to (i) provide its next generation tubulin-binding compounds (ii) spend up to
$20,000,000 to fund the development expenses of the joint venture based on its
development success and (iii) pay the Company a $1,000,000 non-refundable
license fee and subscribe to an additional $1,000,000 in common stock of the
Company upon filing an Investigational New Drug Application ("IND") for the
first clinical candidate developed. Any future funding of the joint venture
after OXiGENE has paid its $20,000,000 in development expenses will be shared
equally by the Company and OXiGENE. Additionally, under the terms of the joint
venture agreement, any sublicensing fees generated within the joint venture will
be allocated 75% to the Company and 25% to OXiGENE until the Company has
received $10,000,000 in sublicensing fees. Thereafter, the joint venture
partners will share licensing fees equally. Any royalty income or profits will
also be shared equally by the joint venture partners. The Company and OXiGENE
have named the new entity ARCUS Therapeutics, LLC ("Arcus").
F-15
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
In April 1997, in conjunction with the acquisition of Vascular
Targeting Technologies, Inc. (formerly Peregrine Pharmaceuticals, Inc.), the
Company gained access to certain exclusive licenses for Vascular Targeting
Agents (VTAs) technologies. In conjunction with obtaining these exclusive
licenses, the joint venture, Arcus Therapeutics, LLC, will be required to pay
annual patent maintenance fees of $50,000 plus milestone payments and future
royalties on net sales. No product revenues have been generated from the
Company's VTA technology.
VASOPERMEATION ENHANCEMENT AGENTS AND OTHER LICENSES
During February 2000, the Company entered into an exclusive worldwide
licensing transaction with the University of Southern California for its
Permeability Enhancing Protein (PEP) in exchange for an up-front payment plus
future milestone payments and a royalty on net sales. The PEP technology is a
piece of the Company's Vasopermeation Enhancing Agent (VEA) technology, which is
designed to increase the uptake of chemotherapeutic agents into tumors. PEP is
designed to be used in conjunction with the VEA technology platform.
Prior to fiscal year 1996, the Company entered into several license and
research and development agreements with a university for the exclusive,
worldwide licensing rights to use certain patents and technologies in exchange
for fixed and contingent payments and royalties on net sales of the related
products. Minimum future royalties under these agreements are $84,500 annually.
Royalties related to these agreements amounted to $84,500 for fiscal years 2001,
2000 and 1999.
8. STOCKHOLDERS' EQUITY
CLASS C PREFERRED STOCK
On April 25, 1997, the Company entered into a 5% Preferred Stock
Investment Agreement and sold 12,000 shares of 5% Adjustable Convertible Class C
Preferred Stock (the Class C Stock) for net proceeds of $11,069,000. The holders
of the Class C Stock do not have voting rights, except as provided under
Delaware law. Dividends on the Class C Stock are payable quarterly in shares of
Class C Stock or, at the option of the Company, in cash, at the rate of 5% per
annum. The Class C Stock is convertible, at the option of the holder, into a
number of shares of common stock of the Company determined by dividing $1,000
plus all accrued but unpaid dividends by the Conversion Price. The Conversion
Price is the lower of $0.5958 (Conversion Cap) per share or the average of the
lowest trading price of the Company's common stock for the five consecutive
trading days ending with the trading day prior to the conversion date reduced by
a discount ranging from 13% to 27%.
In conjunction with the 5% Preferred Stock Investment Agreement, the
Placement Agent was granted a warrant to purchase up to 1,200 shares of Class C
Stock at $1,000 per share. The Company estimated the difference between the
grant price and the fair value of the placement agent warrants on the date of
grant to be approximately $862,000, which was recorded as a cost of the offering
in the accompanying consolidated financial statements. During fiscal year 1999,
the Placement Agent purchased 530 shares of Class C Stock for gross proceeds of
$530,000.
F-16
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
In accordance with the Agreement, upon conversion of the Class C Stock
into common stock, the preferred stockholders were granted warrants to purchase
one-fourth of the number of shares of common stock issued upon conversion. The
warrants are exercisable at $0.6554, or 110% of the Conversion Cap and expire in
April 2002. No value has been ascribed to these warrants, as the warrants are
considered non-detachable. During fiscal years 2000 and 1999, warrants to
purchase 78,201 and 2,357,019 shares of common stock were issued upon conversion
of 121 and 5,216 shares of Class C Stock, respectively. During fiscal years
ended April 30, 2000 and 1999, 63,537 and 6,207,290 warrants, respectively, were
exercised on a combined cash and cashless basis in exchange for 63,537 and
5,894,733 shares of common stock and net proceeds to the Company of $42,000 and
$3,641,000, respectively. At April 30, 2001, 49,908 Class C warrants were
outstanding.
The Class C Stock agreement included a provision for conversion of the
preferred stock into common stock at a discount during the term of the
agreements. As a result of these conversion features, the Company was accreting
an amount from accumulated deficit to additional paid-in capital equal to the
preferred stock discount. The preferred stock discount was computed by taking
the difference between the fair value of the Company's common stock on the date
the Class C Preferred Stock agreement was finalized and the conversion price,
assuming the maximum discount allowable under the terms of the agreement,
multiplied by the number of common shares into which the preferred stock would
have been convertible into (assuming the maximum discount allowable). The
preferred stock discount was being amortized over the period from the date of
issuance of the preferred stock to the Conversion or discount period (or sixteen
months) using the effective interest method. If preferred stock conversions
occur before the maximum discount is available, the discount amount is adjusted
to reflect the actual discount. During fiscal year 1999, the Company recorded
$531,000 for the Class C Stock discount.
COMMON STOCK EQUITY LINE AGREEMENT
During June 1998, the Company secured access to a Common Stock Equity
Line ("Equity Line") with two institutional investors, as amended on June 2,
2000 (the Amendment). Under the amended 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 until all common shares
previously registered under the Equity Line have been exhausted. As of April 30,
2001, the Company had approximately 5,227,000 shares available under the Equity
Line. Under the amendment, up to $2,800,000 of Puts can be made every month if
the Company's closing bid price is $2.00 or higher during the 10-day pricing
period. If the Company's closing bid price is between $1.00 and $2.00, then the
Company can Put up to $1,500,000 per month and if the Company's closing bid
price falls below $1.00 on any trading day during the ten trading days prior to
the Put, the Company's ability to access funds under the Equity Line in the Put
is limited to 15% of what would otherwise be available. If the closing bid price
of the Company's common stock falls below $0.50 or if the Company is delisted
from The Nasdaq SmallCap Market, the Company would have no access to funds under
the Equity Line.
In accordance with Emerging Issues Task Force Issue No. 96-13,
"ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS", contracts that require a
company to deliver shares as part of a physical settlement should be measured at
the estimated fair value on the date of the initial Put. As such, the Company
had an independent appraisal performed to determine the estimated fair market
value of the various financial instruments included in the Equity Line and
recorded the related financial instruments as reclassifications between equity
F-17
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
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 the Equity Line of $400,000 as additional consideration and have
been included in the accompanying financial statements. The above recorded
amounts were offset by $700,000 related to the restrictive nature of the common
stock issued under the initial Put in June 1998 and the estimated fair market
value of the Equity Line Put option of $840,000. During January 2001, the
Emerging Issues Task Force ("EITF") issued EITF No. 00-19, "ACCOUNTING FOR
DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO, AND POTENTIALLY SETTLED IN, THE
COMPANY'S OWN STOCK". Pursuant to EITF 00-19, if a contract could potentially be
settled in cash and such settlement is not within the control of the issuer, the
derivative is accounted for as an asset or liability, and changes in fair value
are recognized in income, unless it qualifies for hedge accounting pursuant to
FAS 133, as amended. EITF 00-19 is effective for all transactions entered into
after September 20, 2000. As of April 30, 2001, EITF 00-19 had no material
impact on the Company's consolidated financial statements for the years ended
April 30, 2001.
Puts under the Equity Line are priced at a discount equal to the
greater of $0.20 or 17.5% of the lowest closing per share bid price during the
ten trading days immediately preceding the date on which such shares are sold to
the institutional investors.
During fiscal years 2001, 2000 and 1999, the Company received gross
proceeds of $10,200,000, $8,838,000 and $5,750,000 in exchange for 5,212,564,
9,532,559 and 5,775,224 shares of common stock under the Equity Line,
respectively, including commission shares. On April 15, 1999 and July 15, 1999,
the Company issued an additional 881,481 and 179,485 shares of common stock
covering the initial three and six month adjustment dates as defined in the
agreement, respectively. There are no future reset provisions under the Equity
Line.
At the time of each Put, the investors will be issued warrants,
exercisable only on a cashless basis to purchase up to 10%, (increased to 15%
under the Amendment) of the amount of common stock issued to the investor at the
same price as the purchase of the shares sold in the Put. During fiscal years
2001, 2000 and 1999, the Company issued 654,630, 953,246 and 566,953 warrants
under the Equity Line, respectively, including commission warrants. During
fiscal years 2001, 2000 and 1999, the Company issued 9,801, 985,265 and 14,282
shares of common stock upon the cashless exercise of 42,413, 1,216,962 and
52,173 Equity Line warrants, respectively. As of April 30, 2001, the Company had
outstanding warrants to purchase up to 881,002 shares of common stock under the
Equity Line.
Placement agent fees under each draw of the Equity Line are issued to
Dunwoody Brokerage Services, Inc., which are equal to 10% of the common shares
(commission shares) and warrants (commission warrants) issued to the
institutional investors plus an overall cash commission equal to 7% of the gross
draw amount. Mr. Eric Swartz, a member of the Board of Directors, maintains a
contractual right to 50% of the shares and warrants issued under the Equity
Line. The Equity Line was consummated in June 1998 when Mr. Swartz had no Board
affiliation with the Company.
F-18
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
OTHER EQUITY TRANSACTIONS
During June 2000, the Company issued 518,672 shares of common stock to
Schering A.G. in exchange for Schering A.G.'s commitment to pay for 100% of the
Oncolym(R) clinical development expenses, excluding drug related costs, for the
Phase I/II clinical trial, in accordance with the amended License Agreement
dated March 8, 1999 (Note 7).
On November 19, 1999, in consideration of a commitment by Swartz
Private Equity, LLC ("SPE") to fund a $35,000,000 equity line financing over a
three year term, the Company issued SPE a five-year warrant to purchase up to
750,000 shares of the Company's common stock at an initial exercise price of
$0.46875 per share ("Commitment Warrant") subject to reset provisions as defined
in the agreement. This agreement was entered into and approved by the previous
Board of Directors. Mr. Eric Swartz, a member of the Board of Directors,
maintains a 50% ownership in SPE. The Company utilized the Black-Scholes
valuation model to calculate the fair value of the warrant, which was recorded
as stock-based compensation in the accompanying consolidated financial
statements. As of April 30, 2001, 699,000 Commitment Warrants were outstanding.
During fiscal year 2000 and 1999, the Company issued an aggregate of
739,333 and 569,667 shares of common stock under two separate severance
agreements.
During fiscal year 2000 and 1999, the Company issued 334,771 and 72,258
shares of its common stock to various unrelated entities in exchange for
services rendered. The issuance of shares of common stock in exchange for
services were recorded based on the more readily determinable value of the
services received or the fair value of the common stock issued.
In April 1998, through a private placement, the Company sold 1,120,065
shares of restricted common stock and granted warrants to purchase 280,015
shares of its common stock at $1.00 per share. During fiscal year 2001 and 2000,
warrants to purchase 115,546 and 164,469 shares of common stock were exercised
on a combined cash and cashless basis in exchange for 54,400 and 164,469 shares
of common stock, respectively. As of April 30, 2001, there were no private
placement warrants outstanding.
During fiscal year 2000, the Company received principal payments
aggregating $307,000 plus accrued interest on notes receivable from the sale of
common stock. The notes were paid in full and were due from a former officer and
a former director of the Company.
F-19
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
In accordance with the Company's Equity Line, option plans and warrant
agreements, the Company has reserved approximately 21,977,000 shares of its
common stock at April 30, 2001 for future issuance, as follows:
Number of
shares reserved
--------------------
Shares reserved for issuance under Equity Line 5,227,000
Options issued and outstanding 7,795,000
Warrants issued and outstanding 8,955,000
--------------------
Total reserved for shares 21,977,000
====================
9. STOCK OPTIONS AND WARRANTS
The Company has two incentive stock option plans with outstanding
options as of April 30, 2001. The plans were adopted or assumed in conjunction
with a merger in April 1995 (CBI Plan) and September 1996 (1996 Plan). The plans
provide for the granting of options to purchase shares of the Company's common
stock at prices not less than the fair market value of the stock at the date of
grant and generally expire ten years after the date of grant. In addition,
during fiscal year 2001 and 2000, the Company granted 700,000 and 1,500,000
non-qualified options, respectively, which have not been registered under the
above Plans.
The 1996 Plan originally provided for the issuance of options to
purchase up to 4,000,000 shares of the Company's common stock. The number of
shares for which options may be granted under the 1996 Plan automatically
increases for all subsequent common stock issuances by the Company in an amount
equal to 20% of such subsequent issuances up to a maximum of 10,000,000 options
as long as the total shares allocated to the 1996 Plan do not exceed 20% of the
Company's authorized stock. As a result of issuances of common stock by the
Company subsequent to the adoption of the 1996 Plan, the number of shares for
which options may be granted has increased to 10,000,000. Options granted
generally vest over a period of four years with a maximum term of ten years.
Option activity for each of the three years ended April 30, 2001 is as follows:
2001 2000 1999
---------------------------- -------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- ------ -------------- ------ --------------
BALANCE,
Beginning of year 7,614,029 $1.42 6,387,667 $1.00 4,477,326 $0.70
Granted 1,127,000 $2.09 8,326,603 $1.41 3,910,541 $1.36
Exercised (94,878) $0.35 (3,569,001) $0.93 (1,127,701) $0.54
Canceled (850,749) $6.00 (3,531,240) $1.15 (872,499) $1.62
----------- ------------ ------------
BALANCE,
End of year 7,795,402 $1.03 7,614,029 $1.42 6,387,667 $1.00
=========== ============ ============
F-20
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
Additional information regarding options outstanding as of April 30,
2001 is as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- --------------------------------------
WEIGHTED AVERAGE
REMAINING WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF PER SHARE NUMBER OF SHARES CONTRACTUAL LIFE PER SHARE SHARES PER SHARE EXERCISE
EXERCISE PRICES OUTSTANDING (YEARS) EXERCISE PRICE EXERCISABLE PRICE
- ---------------------- ------------------- -------------------- -------------------- ----------------- --------------------
$ 0.34 - $ 0.60 4,101,835 7.30 $ 0.39 1,728,367 $ 0.45
$ 0.97 - $ 2.19 3,025,567 8.40 $ 1.29 1,144,801 $ 1.21
$ 2.78 - $ 5.28 668,000 9.00 $ 3.76 108,750 $ 3.89
--------------- -----------------
$ 0.34 - $ 5.28 7,795,402 7.87 $ 1.03 2,981,918 $ 0.87
=============== =================
At April 30, 2001, options to purchase 1,215,918 shares were available
for grant under the Company's 1996 Plan. There are no remaining shares available
for grant under the CBI Plan.
Stock-based compensation expense recorded during each of the three
years in the periods ended April 30, 2001 primarily relates to stock option
grants made to consultants and has been measured utilizing the Black-Scholes
option valuation model. Stock-based compensation expense recorded during fiscal
year 2001, 2000 and 1999 amounted to $1,581,000, $1,438,000 and $455,000,
respectively, and is being amortized over the estimated period of service or
related vesting period.
The Company utilizes the guidelines in Accounting Principles Board
Opinion No. 25 for measurement of stock-based transactions for employees. Had
the Company used a fair value model for measurement of stock-based transactions
for employees under Financial Accounting Standards Board Statement No. 123 and
amortized the expense over the vesting period, pro forma information would be as
follows:
2001 2000 1999
-------------- -------------- --------------
Net loss applicable to
common stock, as reported $ (9,535,000) $ (14,516,000) $ (20,039,000)
Net loss applicable to
common stock, pro forma $ (10,526,000) $ (16,645,000) $ (22,570,000)
Net loss per share, as reported $ (0.10) $ (0.18) $ (0.30)
Net loss per share, pro forma $ (0.11) $ (0.21) $ (0.34)
The fair value of the options granted in fiscal years 2001, 2000 and
1999 were estimated at the date of grant using the Black-Scholes option pricing
model, assuming an average expected life of approximately four years, a
risk-free interest rate ranging from 4.5% to 6.39% and a volatility factor
ranging from 117% to 172%. The Black-Scholes option valuation model was
developed for use in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. Option valuation models require
the input of highly subjective assumptions, including the expected stock
volatility. Because the Company's options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair values estimated, in the
opinion of management, the existing models do not necessarily provide a reliable
measure of the fair value of its options. The weighted average estimated fair
value in excess of the grant price for employee stock options granted during
fiscal years 2001, 2000 and 1999 was $2.23, $0.70 and $0.90, respectively.
F-21
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
As of April 30, 2001, warrants to purchase an aggregate of 8,954,910
shares of the Company's common stock were outstanding. The warrants are
exercisable at prices ranging between $0.24 and $5.00 per share with an average
exercise price of $2.19 per share and expire through December 31, 2005. The
value of the warrants was based on a Black Scholes formula after considering
terms in the related warrant agreements.
10. INCOME TAXES
The provision for income taxes consists of the following for the three
years ended April 30, 2001:
2001 2000 1999
-------------- -------------- --------------
Provision for federal income taxes at
statutory rate $ (3,242,000) $ (4,935,000) $ (6,628,000)
Permanent differences (2,000) 5,000 21,000
State income taxes, net of federal benefit (286,000) (435,000) (585,000)
Other 332,000 211,000 318,000
Change in valuation allowance 3,198,000 5,154,000 6,874,000
-------------- -------------- -------------
Provision $ - $ - $ -
============== ============== =============
Deferred income taxes reflect the net effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. Significant components of the
Company's deferred tax assets at April 30, 2001 and 2000 are as follows:
2001 2000
--------------- ---------------
Net operating loss carryforwards $ 25,366,000 $ 21,138,000
Stock-based compensation 1,736,000 1,290,000
General business and research and development credits 118,000 118,000
Deferred revenue 1,295,000 1,295,000
Accrued license note payable - 1,221,000
Accrued liabilities 883,000 457,000
--------------- ---------------
29,398,000 25,519,000
Less valuation allowance (29,398,000) (25,519,000)
--------------- ---------------
Net deferred taxes $ - $ -
=============== ===============
At April 30, 2001, the Company and its subsidiary have federal net
operating loss carryforwards of $70,127,000 and tax credit carryforwards of
$118,000. During fiscal year 2001 and 2000, net operating loss carryforwards of
F-22
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
$349,000 and $344,000 expired with the remaining net operating losses expiring
through 2021. The net operating losses of $2,986,000 applicable to its
subsidiary can only be offset against future income of its subsidiary. The tax
credit carryforwards generally expire in 2008 and are available to offset future
taxes of the Company or its subsidiary.
Due to ownership changes in the Company's common stock, there will be
limitations on the Company's ability to utilize its net operating loss
carryforwards in the future. The impact of the restricted amount has not been
calculated as of April 30, 2001.
11. RELATED PARTY TRANSACTIONS
On December 29, 1999, Swartz Investments, LLC and BTD agreed to provide
interim funding to the Company for up to $500,000 to continue the operations of
the Company and to avoid the Company from filing for protection from its
creditors. During this period of time, the closing stock price was $0.41 per
share, the Company had a minimal amount of cash on hand, significant payables to
vendors and patent attorneys, and the Company was near a time of being delisted
from The NASDAQ Stock Market. During January 2000, the Company entered into the
final agreement, a Regulation D Subscription Agreement, whereby the Company
received $500,000 in exchange for an aggregate of 2,000,000 shares of common
stock and issued warrants to purchase up to 2,000,000 shares of common stock at
$0.25 per share. Mr. Eric Swartz, a member of the Board of Directors, maintains
a 50% ownership in Swartz Investments, LLC. BTD is controlled by Mr. Edward J.
Legere, who is also a member of the Board of Directors and is the President and
Chief Executive Officer of the Company.
During September 1995, the Company entered into an agreement with
Cancer Therapeutics, Inc. whereby the Company granted to Cancer Therapeutics,
Inc. the exclusive right to sublicense TNT to a major pharmaceutical company
solely in the Peoples Republic of China for a period of 10 years, subject to the
major pharmaceutical company obtaining product approval within 36 months. In
exchange for this right, the major pharmaceutical company would be required to
fund not less than $3,000,000 for research and development expenses of Cancer
Therapeutics related to TNT and the Company would retain exclusive rights to all
research, product development and data outside of the Peoples Republic of China.
The technology was then sublicensed to Brilliance Shanghai Pharmaceuticals, Inc.
("Brilliance"). In addition, the Company is entitled to receive 50% of all
revenues received by Cancer Therapeutics with respect to its sublicensing of TNT
to Brilliance. During March 2001, the Company extended the exclusive licensing
period granted to Cancer Therapeutics, which now expires on December 31, 2016.
Dr. Clive Taylor, a member of the Company's Board of Directors, owns 26% of
Cancer Therapeutics and is an officer and director of Cancer Therapeutics. Dr.
Taylor has abstained from voting at meetings of the Company's board of directors
on any matters relating to Cancer Therapeutics or Brilliance. Through fiscal
year ended April 30, 2001, Cancer Therapeutics, Inc. has not derived any
revenues from its agreement with Brilliance.
12. BENEFIT PLAN
During fiscal year 1997, the Company adopted a 401(k) benefit plan
(Plan) for all employees who are over age 21, work at least 24 hours per week
and have three or more months of continuous service. The Plan provides for
employee contributions of up to a maximum of 15% of their compensation or
$10,500. The Company made no matching contributions to the Plan for fiscal years
2001, 2000 and 1999.
F-23
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001 (CONTINUED)
- --------------------------------------------------------------------------------
13. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial information for each of the two most
recent fiscal years is as follows:
Quarter Ended
--------------------------------------------------------------------------------------------------------------
APRIL JANUARY OCTOBER JULY APRIL JANUARY OCTOBER JULY
30, 31, 31, 31, 30, 31, 31, 31,
2001 2001 2000 2000 2000 2000 1999 1999
---- ---- ---- ---- ---- ---- ---- ----
License
Revenue ......... $ 562,000 $ 156,000 $ 156,000 $ 105,000 $ - $ 50,000 $ - $ -
Net Loss .......... $(2,263,000) $(2,648,000) $(2,567,000) $(2,057,000) $(3,064,000) $(2,799,000) $(5,662,000) $(2,989,000)
Net Loss Applicable
to Common Stock .. $(2,263,000) $(2,648,000) $(2,567,000) $(2,057,000) $(3,064,000) $(2,799,000) $(5,663,000) $(2,990,000)
Basic and Diluted
Loss Per Share ... $ (0.02) $ (0.03) $ (0.03) $ (0.02) $ (0.04) $ (0.03) $ (0.07) $ (0.04)
14. SUBSEQUENT EVENTS
Subsequent to April 30, 2001, the Company received gross proceeds of
$3,000,000 under the Equity Line in exchange for 2,592,591 shares of the
Company's common stock, including commission shares. As of July 15, 2001, the
Company had a cash and cash equivalents balance of $7,073,000.
F-24
PEREGRINE PHARMACEUTICALS, INC. SCHEDULE II
VALUATION OF QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2001
- --------------------------------------------------------------------------------------------
BALANCE AT CHARGED BALANCE
BEGINNING TO COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
----------- --------- -------- ---------- ---------
Valuation reserve for other receivables for
the year ended April 30, 1999 $ 175,000 $ 26,000 $ - $ 201,000
Valuation reserve for other receivables for
the year ended April 30, 2000 $ 201,000 $ 141,000 $ - $ 342,000
Valuation reserve for other receivables for
the year ended April 30, 2001 $ 342,000 $ - $(288,000) $ 54,000
F-25