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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-17085
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)
Registrant's telephone number, including area code: (714) 508-6000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED,
SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES X NO .
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES X NO .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS: (INDICATE THE NUMBER OF SHARES
OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST
PRACTICABLE DATE.)
141,268,182 shares of common stock
as of March 12, 2004
PEREGRINE PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 2004
TABLE OF CONTENTS
THE TERMS "WE", "US", "OUR," AND "THE COMPANY" AS USED IN THIS REPORT ON FORM
10-Q REFERS TO PEREGRINE PHARMACEUTICALS, INC. AND ITS WHOLLY-OWNED
SUBSIDIARIES, AVID BIOSERVICES, INC. AND VASCULAR TARGETING TECHNOLOGIES, INC.
PART I FINANCIAL INFORMATION PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets at January 31, 2004 and April 30, 2003....1
Consolidated Statements of Operations for the three and nine
months ended January 31, 2004 and 2003..............................3
Consolidated Statement of Stockholders' Equity for the nine
months ended January 31, 2004.......................................4
Consolidated Statements of Cash Flows for the nine months ended
January 31, 2004 and 2003.............................................5
Notes to Consolidated Financial Statements............................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................20
Company Overview.....................................................20
Risk Factors of Our Company..........................................27
Item 3. Quantitative and Qualitative Disclosures About Market Risk...........27
Item 4. Controls and Procedures..............................................27
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................28
Item 2. Changes in Securities and Use of Proceeds............................28
Item 3. Defaults Upon Senior Securities......................................28
Item 4. Submission of Matters to a Vote of Security Holders..................28
Item 5. Other Information....................................................28
Item 6. Exhibits and Reports on Form 8-K.....................................29
Signatures...........................................................30
i
PART I FINANCIAL INFORMATION
----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AT JANUARY 31, 2004 AND APRIL 30, 2003
- ------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30,
2004 2003
------------- -------------
UNAUDITED
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 15,740,000 $ 3,137,000
Trade and other receivables, net of allowance for doubtful
accounts of $63,000 (January) and $59,000 (April) 1,443,000 245,000
Short-term investment -- 242,000
Inventories 1,188,000 376,000
Prepaid expenses and other current assets 745,000 257,000
------------- -------------
Total current assets 19,116,000 4,257,000
PROPERTY:
Leasehold improvements 389,000 291,000
Laboratory equipment 2,169,000 1,936,000
Furniture, fixtures and computer equipment 646,000 724,000
------------- -------------
3,204,000 2,951,000
Less accumulated depreciation and amortization (2,276,000) (2,115,000)
------------- -------------
Property, net 928,000 836,000
OTHER ASSETS:
Note receivable, net of allowance of $1,598,000 (January)
and $1,645,000 (April) -- --
Debt issuance costs, net -- 176,000
Other 230,000 130,000
------------- -------------
Total other assets 230,000 306,000
------------- -------------
TOTAL ASSETS $ 20,274,000 $ 5,399,000
============= =============
See accompanying notes to consolidated financial statements
1
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AT JANUARY 31, 2004 AND APRIL 30, 2003 (CONTINUED)
- ----------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30,
2004 2003
-------------- --------------
UNAUDITED
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,101,000 $ 560,000
Accrued clinical trial site fees 22,000 260,000
Accrued legal and accounting fees 270,000 194,000
Accrued royalties and license fees 156,000 149,000
Accrued payroll and related costs 398,000 314,000
Other current liabilities 282,000 300,000
Deferred revenue 1,690,000 531,000
-------------- --------------
Total current liabilities 3,919,000 2,308,000
CONVERTIBLE DEBT, net of discount -- 760,000
DEFERRED REVENUE 144,000 200,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-$.001 par value; authorized 200,000,000 shares;
outstanding - 140,333,971 (January); 119,600,501 (April) 140,000 120,000
Additional paid-in capital 167,275,000 142,274,000
Deferred stock compensation (35,000) (257,000)
Accumulated deficit (151,169,000) (140,006,000)
-------------- --------------
Total stockholders' equity 16,211,000 2,131,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 20,274,000 $ 5,399,000
============== ==============
See accompanying notes to consolidated financial statements
2
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2004 AND 2003 (UNAUDITED)
- -------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
REVENUES:
Contract manufacturing revenue $ 211,000 $ 162,000 $ 1,403,000 $ 1,257,000
License revenue 18,000 350,000 56,000 350,000
-------------- -------------- -------------- --------------
Total revenues 229,000 512,000 1,459,000 1,607,000
COST AND EXPENSES:
Cost of contract manufacturing 223,000 270,000 1,207,000 1,301,000
Research and development 2,723,000 1,676,000 6,570,000 7,126,000
Selling, general and administrative 1,096,000 681,000 3,224,000 2,204,000
-------------- -------------- -------------- --------------
Total cost and expenses 4,042,000 2,627,000 11,001,000 10,631,000
-------------- -------------- -------------- --------------
LOSS FROM OPERATIONS (3,813,000) (2,115,000) (9,542,000) (9,024,000)
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest and other income 70,000 57,000 219,000 197,000
Interest and other expense (394,000) (592,000) (1,840,000) (864,000)
-------------- -------------- -------------- --------------
NET LOSS $ (4,137,000) $ (2,650,000) $ (11,163,000) $ (9,691,000)
============== ============== ============== ==============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic and Diluted 137,835,689 118,831,011 132,147,463 115,463,097
============== ============== ============== ==============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.03) $ (0.02) $ (0.08) $ (0.08)
============== ============== ============== ==============
See accompanying notes to consolidated financial statements
3
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL DEFERRED TOTAL
COMMON STOCK PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
-------------- ---------- -------------- ---------- -------------- --------------
BALANCES - May 1, 2003 119,600,501 $ 120,000 $ 142,274,000 $(257,000) $(140,006,000) $ 2,131,000
Common stock issued for cash under June
6, 2003 Common Stock Purchase Agreement,
net of issuance costs of $104,000 2,412,448 2,000 1,969,000 -- -- 1,971,000
Common stock issued for cash under June
26, 2003 Common Stock Purchase Agreement,
net of issuance costs of $101,000 1,599,997 2,000 1,737,000 -- -- 1,739,000
Common stock issued for cash under option
granted under June 26, 2003 Common Stock
Purchase Agreement, net of issuance costs
of $55,000 1,599,997 2,000 1,784,000 -- -- 1,786,000
Common stock issued for cash under July
24, 2003 Common Stock Purchase Agreement,
net of issuance costs of $13,000 2,000,000 2,000 2,885,000 -- -- 2,887,000
Common stock issued for cash under
September 18, 2003 Common Stock Purchase
Agreement, net of issuance costs of $19,000 2,800,000 2,000 5,271,000 -- -- 5,273,000
Common stock issued for cash under November
17, 2003 Common Stock Purchase Agreement,
net of issuance costs of $1,000 2,000,000 2,000 4,254,000 -- -- 4,256,000
Common stock issued for cash under January
22, 2004 Common Stock Purchase Agreement,
net of issuance costs of under $1,000 250,000 -- 625,000 -- -- 625,000
Common stock issued to Aeres Biomedical Ltd.
for research services under a research
collaboration agreement, net of issuance
costs of under $1,000 243,101 -- 648,000 -- -- 648,000
Common stock issued upon conversion of
convertible debt 2,817,645 3,000 2,392,000 -- -- 2,395,000
Common stock issued upon exercise of
options and warrants, net of issuance
costs of $134,000 5,010,282 5,000 3,396,000 -- -- 3,401,000
Reversal of deferred stock compensation
associated with the cancellation of
unvested options -- -- (52,000) 28,000 -- (24,000)
Compensation charge for variable
stock options -- -- 33,000 -- -- 33,000
Deferred stock compensation -- -- 59,000 (59,000) -- --
Stock-based compensation -- -- -- 253,000 -- 253,000
Net loss -- -- -- -- (11,163,000) (11,163,000)
-------------- ---------- -------------- ---------- -------------- --------------
BALANCES - January 31, 2004 140,333,971 $ 140,000 $ 167,275,000 $ (35,000) $(151,169,000) $ 16,211,000
============== ========== ============== ========== ============== ==============
See accompanying notes to consolidated financial statements
4
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 AND 2003 (UNAUDITED)
- ------------------------------------------------------------------------------------------
NINE MONTHS ENDED JANUARY 31,
2004 2003
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(11,163,000) $ (9,691,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 277,000 277,000
Stock-based compensation 262,000 418,000
Amortization of discount on convertible debt
and debt issuance costs 1,811,000 745,000
Stock issued for services under research collaboration 164,000 --
Changes in operating assets and liabilities:
Trade and other receivables (1,198,000) (820,000)
Short-term investment 242,000 --
Inventories (812,000) (1,286,000)
Prepaid expenses and other current assets (4,000) 28,000
Accounts payable 541,000 (510,000)
Deferred revenue 1,103,000 1,670,000
Accrued clinical trial site fees (238,000) (364,000)
Other accrued expenses and current liabilities 149,000 25,000
------------- -------------
Net cash used in operating activities (8,866,000) (9,508,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (369,000) (183,000)
Proceeds from sale of property -- 11,000
Increase in other assets (100,000) --
------------- -------------
Net cash used in investing activities (469,000) (172,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance
costs of $427,000 21,938,000 4,737,000
Proceeds from issuance of convertible debt, net of
issuance costs of $363,000 -- 3,370,000
Rescind prior sale of common stock to related party -- (500,000)
Principal payments on notes payable -- (67,000)
------------- -------------
Net cash provided by financing activities 21,938,000 7,540,000
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,603,000 (2,140,000)
CASH AND CASH EQUIVALENTS, beginning of period 3,137,000 6,072,000
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $ 15,740,000 $ 3,932,000
============= =============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property acquired in exchange for note payable $ -- $ 82,000
============= =============
Conversion of Convertible Debt into common stock $ 2,395,000 $ 1,355,000
============= =============
Common stock issued under research collaboration $ 648,000 $ --
============= =============
See accompanying notes to consolidated financial statements
5
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Peregrine Pharmaceuticals, Inc. ("Peregrine") and its wholly-owned
subsidiaries, Avid Bioservices, Inc. ("Avid"), and Vascular Targeting
Technologies, Inc. (collectively the "Company"). All intercompany balances and
transactions have been eliminated.
As of January 31, 2004, the Company had $15,740,000 in cash and cash
equivalents on hand. The Company has expended substantial funds on the
development of its product candidates and for clinical trials and it has
incurred negative cash flows from operations for the majority of its years since
inception. The Company expects negative cash flows from operations to continue
until it is able to generate sufficient revenue from the contract manufacturing
services provided by Avid and/or from the sale and/or licensing of its products
under development.
Revenues earned by Avid during the nine months ended January 31, 2004
amounted to $1,403,000. The Company expects that Avid will continue to generate
revenues which should lower consolidated cash flows used in operations, although
the Company expects those near term revenues will be insufficient to cover
consolidated cash flows used in operations. As such, the Company will continue
to seek to raise additional capital to provide for its operations, including the
anticipated development and clinical trial costs of Cotara(TM) and its
Anti-Phospholipid Therapy program, the anticipated development costs associated
with Vasopermeation Enhancement Agents ("VEA's") and Vascular Targeting Agents
("VTA's"), and the potential expansion of the Company's manufacturing
capabilities.
Assuming the Company does not raise any additional capital from
financing activities or from the sale or licensing of its technologies, the
Company believes it has sufficient cash on hand to meet its obligations on a
timely basis through at least the next twelve months.
In addition to equity financing, the Company is actively exploring
various other sources of cash by leveraging its various assets. The transactions
being explored by the Company for its technologies include licensing, partnering
or the sale of Cotara(TM), Oncolym(R), or various portions of its VTA and VEA
technologies that it does not plan on developing internally.
In addition to the potential licensing, partnering or sale of the
Company's technologies to raise capital, the Company is also exploring a
possible strategic transaction related to its subsidiary, Avid. In this regard,
the Company is exploring the possibility of partnering, or a complete sale of
Avid as a means of raising additional capital. The Company has not classified
the related assets as held for sale in accordance with Statement of Financial
Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS, since the Company is strictly exploring the possibility of a
partnering or sale arrangement and the partnering or sale of the asset is not
currently probable under Statement of Financial Accounting Standards No. 5,
ACCOUNTING FOR Contingencies.
6
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
There can be no assurances that the Company will be successful in
raising sufficient capital on terms acceptable to it, or at all (from either
debt, equity or the licensing, partnering or sale of technology assets and/or
the sale of all or a portion of Avid), or that sufficient additional revenues
will be generated from Avid or under potential licensing agreements to sustain
its operations beyond the next twelve months.
The accompanying interim consolidated financial statements are
unaudited; however they contain all adjustments (consisting of only normal
recurring adjustments) which, in the opinion of management, are necessary to
present fairly the consolidated financial position of the Company at January 31,
2004, and the consolidated results of its operations and its consolidated cash
flows for the three and nine-month periods ended January 31, 2004 and 2003.
Although the Company believes that the disclosures in the financial statements
are adequate to make the information presented herein not misleading, certain
information and footnote disclosures normally included in the consolidated
financial statements have been condensed or omitted pursuant to Article 10 of
Regulation S-X of the Securities Exchange Act of 1934. The consolidated
financial statements included herein should be read in conjunction with the
consolidated financial statements of the Company, included in the Company's
Annual Report on Form 10-K for the year ended April 30, 2003, which was filed
with the Securities and Exchange Commission on July 29, 2003. Results of
operations for the interim periods covered by this quarterly report may not
necessarily be indicative of results of operations for the full fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
ALLOWANCE FOR DOUBTFUL RECEIVABLES - We continually monitor our
allowance for all receivables. A considerable amount of judgment is required in
assessing the ultimate realization of these receivables and we estimate an
allowance for doubtful accounts based on factors that appear reasonable under
the circumstances.
SHORT-TERM INVESTMENTS - The Company classifies its short-term
investments as trading securities under the requirements of Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"), ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. SFAS No. 115 considers trading
securities as securities that are bought with the intention of being sold in the
near term for the general purpose of realizing profits. Trading securities are
recorded at fair market value and gains and losses on trading securities are
included in interest and other income in the accompanying consolidated financial
statements.
INVENTORIES - Inventories are stated at the lower of cost or market and
primarily includes raw materials, direct labor and overhead costs associated
with the services provided by our wholly-owned subsidiary, Avid. Inventories
consist of the following at January 31, 2004 and April 30, 2003:
JANUARY 31, APRIL 30,
2004 2003
----------- -----------
Raw materials $ 312,000 $ 205,000
Work-in-process 876,000 171,000
----------- -----------
Total Inventories $1,188,000 $ 376,000
=========== ===========
7
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK - The majority of trade and other
receivables are from customers in the United States and Israel. Most contracts
require up-front payments and installment payments as the contract progresses.
The Company performs periodic evaluations of its ongoing customers and generally
does not require collateral, but can terminate the contract if a material
default occurs. Reserves are maintained for potential credit losses, and such
losses have been minimal and within management's estimates.
COMPREHENSIVE LOSS - Comprehensive loss is equal to net loss for all
periods presented.
DEFERRED REVENUE - Deferred revenue primarily consists of up-front
contract fees and installment payments received prior to the recognition of
revenues under contract manufacturing and development agreements and up-front
license fees received under technology license agreements. Deferred revenue is
generally recognized once the service has been provided, all obligations have
been met and/or upon shipment of the product to the customer.
REVENUE RECOGNITION - The Company currently derives revenues primarily
from licensing agreements associated with Peregrine's technologies under
development and from contract manufacturing services provided by Avid.
The Company recognizes revenues pursuant to Staff Accounting Bulletin
No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS ("SAB No. 101") as well as
the recently issued Staff Accounting Bulletin No. 104 , REVENUE RECOGNITION.
These bulletins draw on existing accounting rules and provide specific guidance
on how those accounting rules should be applied. Revenue is generally realized
or realizable and earned when (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or services have been rendered, (iii) the seller's
price to the buyer is fixed or determinable, and (iv) collectibility is
reasonably assured.
Revenues associated with licensing agreements primarily consist of
nonrefundable up-front license fees and milestone payments. Revenues under
licensing agreements are recognized based on the performance requirements of the
agreement. Nonrefundable up-front license fees received under license
agreements, whereby continued performance or future obligations are considered
inconsequential to the relevant licensed technology, are generally recognized as
revenue upon delivery of the technology. Nonrefundable up-front license fees,
whereby ongoing involvement or performance obligations exist, are generally
recorded as deferred revenue and generally recognized as revenue over the term
of the performance obligation or relevant agreement. Under some license
agreements, the obligation period may not be contractually defined. Under these
circumstances, the Company exercises judgment in estimating the period of time
over which certain deliverables will be provided to enable the licensee to
practice the license.
Contract manufacturing revenues are generally recognized once the
service has been provided and/or upon shipment of the product to the customer.
The Company also records a provision for estimated contract losses, if any, in
the period in which they are determined.
In July 2000, the Emerging Issues Task Force ("EITF") released Issue
99-19 ("EITF 99-19"), REPORTING REVENUE GROSS AS A PRINCIPAL VERSUS NET AS AN
AGENT. EITF 99-19 summarized the EITF's views on when revenue should be recorded
at the gross amount billed to a customer because it has earned revenue from the
sale of goods or services, or the net amount retained (the amount billed to the
customer less the amount paid to a supplier) because it has earned a fee or
commission. In addition, the EITF released Issue 00-10 ("EITF 00-10"),
8
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS, and Issue 01-14 ("EITF
01-14"), INCOME STATEMENT CHARACTERIZATION OF REIMBURSEMENTS RECEIVED FOR
"OUT-OF-POCKET" EXPENSES INCURRED. EITF 00-10 summarized the EITF's views on how
the seller of goods should classify in the income statement amounts billed to a
customer for shipping and handling and the costs associated with shipping and
handling. EITF 01-14 summarized the EITF's views on when the reimbursement of
out-of-pocket expenses should be characterized as revenue or as a reduction of
expenses incurred. The Company's revenue recognition policies are in compliance
with EITF 99-19, EITF 00-10 and EITF 01-14 whereby the Company records revenue
for the gross amount billed to customers (the cost of raw materials, supplies,
and shipping, plus the related handling mark-up fee) and records the cost of the
amounts billed as cost of sales as the Company acts as a principal in these
transactions.
RESEARCH AND DEVELOPMENT - Research and development costs are charged
to expense when incurred in accordance with Statement of Financial Accounting
Standards No. 2, ACCOUNTING FOR RESEARCH AND DEVELOPMENT COSTS. Research and
development expenses primarily include (i) payroll and related costs associated
with research and development personnel, (ii) costs related to clinical and
pre-clinical testing of the Company's technologies under development, (iii) the
costs to manufacture the product candidates, including raw materials and
supplies, (iv) patent filing fees (v) expenses for research and services
rendered under outside contracts, including sponsored research funding, and (vi)
facility expenses.
BASIC AND DILUTIVE NET LOSS PER COMMON SHARE - Basic and dilutive net
loss per common share is calculated in accordance with Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE. Basic net loss per common
share is computed by dividing the net loss by the weighted average number of
common shares outstanding during the period and excludes the dilutive effects of
options, warrants and convertible instruments. Diluted net loss per common share
is computed by dividing the net loss by the sum of the weighted average number
of common shares outstanding during the period plus the potential dilutive
effects of options, warrants, and convertible debt outstanding during the
period. Potentially dilutive common shares consist of stock options and warrants
calculated in accordance with the treasury stock method, but are excluded if
their effect is antidilutive. The potential dilutive effect of convertible debt
was calculated using the if-converted method assuming the conversion of the
convertible debt as of the earliest period reported or at the date of issuance,
if later. Because the impact of options, warrants, and other convertible
instruments are antidilutive, there was no difference between basic and diluted
loss per share amounts for the three and nine months ended January 31, 2004 and
January 31, 2003. The Company has excluded the dilutive effect of the following
shares issuable upon the exercise of options, warrants, and convertible debt
outstanding during the period because their effect was antidilutive since the
Company reported a net loss in the periods presented:
9
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------ ------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Common stock equivalent
shares assuming issuance
of shares represented
by outstanding stock
options and warrants
utilizing the treasury
stock method 13,055,032 3,366,990 11,339,824 5,638,358
Common stock equivalent
shares assuming issuance
of shares upon conversion
of convertible debt
utilizing the
if-converted method 337,596 -- 746,658 2,505,413
----------- ----------- ----------- -----------
Total 13,392,628 3,366,990 12,086,482 8,143,771
=========== =========== =========== ===========
Weighted average outstanding options and warrants to purchase up to
5,657,044 and 7,959,998 shares of common stock for the three and nine months
ended January 31, 2004, respectively, were also excluded from the calculation of
diluted earnings per common share because their exercise prices were greater
than the average market price during the period.
Weighted average outstanding options and warrants to purchase up to
18,350,568 and 14,476,323 shares of common stock for the three and nine months
ended January 31, 2003, respectively, were also excluded from the calculation of
diluted earnings per common share because their exercise prices were greater
than the average market price during the period. In addition, diluted earnings
per common share the three months ended January 31, 2003 excludes weighted
shares of 3,488,107, assuming issuance of shares upon conversion of convertible
debt because the conversion price was greater than the average market price
during the period.
From February 1, 2004 through March 12, 2004, the Company received
gross proceeds of $1,650,000 in exchange for the issuance of 750,000 shares of
its common stock (Note 10), which numbers have been excluded from basic and
dilutive net loss per common share for the three and nine months ended January
31, 2004.
STOCK-BASED COMPENSATION - In December 2002, the FASB issued Statement
of Financial Accounting Standards No. 148 ("SFAS No. 148"), ACCOUNTING FOR
STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, which the Company adopted on
February 1, 2003. SFAS No. 148 amends SFAS No. 123 ("SFAS No. 123"), ACCOUNTING
FOR STOCK-BASED COMPENSATION, and provides alternative methods of transition for
a voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, SFAS No. 148 amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
10
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
The Company has not adopted a method under SFAS No. 148 to expense
stock options but rather continues to apply the provisions of SFAS No. 123. As
SFAS No. 123 permits, the Company elected to continue accounting for its
employee stock options in accordance with Accounting Principles Board Opinion
No. 25 ("APB No. 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES AND RELATED
INTERPRETATIONS. APB No. 25 requires compensation expense to be recognized for
stock options when the market price of the underlying stock exceeds the exercise
price of the stock option on the date of the grant.
The Company utilizes the guidelines in APB No. 25 for measurement of
stock-based transactions for employees and, accordingly no compensation expense
has been recognized for the options in the accompanying consolidated financial
statements for the three and nine months ended January 31, 2004 and January 31,
2003 in accordance with APB No. 25. Had the Company used a fair value model for
measurement of stock-based transactions for employees under SFAS No. 123 and
amortized the expense over the vesting period, pro forma information would be as
follows:
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss, as reported $ (4,137,000) $ (2,650,000) $(11,163,000) $ (9,691,000)
Stock-based employee
compensation cost
that would have been
included in the
determination of net
loss if the fair value
based method had been
applied to all awards (996,000) (367,000) (1,450,000) (1,658,000)
------------- ------------- ------------- -------------
Pro forma net loss as if
the fair value based
method had been applied
to all awards $ (5,133,000) $ (3,017,000) $(12,613,000) $(11,349,000)
============= ============= ============= =============
Basic and diluted net loss
per share, as reported $ (0.03) $ (0.02) $ (0.08) $ (0.08)
============= ============= ============= =============
Basic and diluted net loss
per share, pro forma $ (0.04) $ (0.03) $ (0.10) $ (0.10)
============= ============= ============= =============
The Company accounts for equity instruments issued to non-employees
using the fair value method in accordance with the provisions of SFAS No. 123
and Emerging Issues Task Issue No. 96-18, ACCOUNTING FOR EQUITY INSTRUMENTS THAT
ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH
SELLING, GOODS OR SERVICES. Stock-based compensation expense associated with
non-employees recorded during each of the three and nine months ended January
31, 2004 and January 31, 2003 relates to stock option grants made to
non-employees and has been measured utilizing the Black-Scholes option valuation
model and is being amortized over the estimated period of service or related
vesting period. Stock-based compensation expense associated with non-employees
recorded during the three and nine months ended January 31, 2004 amounted to
$109,000 and $229,000, respectively. Stock-based compensation expense associated
with non-employees recorded during the three and nine months ended January 31,
2003 amounted to $135,000 and $418,000, respectively.
11
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
In addition, during August 2003, a member of the Board of Directors of
the Company voluntarily cancelled an option to purchase shares of the Company's
common stock due to an insufficient number of stock options available in the
Company's stock option plans for new employee grants. During October 2003, the
Company received shareholder approval for its 2003 Stock Option Plan ("2003
Plan") and the director was re-granted options to purchase shares under the 2003
Plan. In accordance with FASB Interpretation No. 44 ("FIN No. 44"), ACCOUNTING
FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, the option granted to the
director under the 2003 Plan is subject to variable accounting, which could
result in increases or decreases to compensation expense in subsequent periods
based on movements in the intrinsic value of the option until the date the
option is exercised, forfeited or expires unexercised. During the three and nine
months ended January 31, 2004, the Company recognized $33,000 in compensation
expense with respect to such option in accordance with FIN No. 44.
RECENT ACCOUNTING PRONOUNCEMENTS. In August 2001, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial Accounting
Standards No. 143 ("SFAS No. 143"), ASSET RETIREMENT OBLIGATIONS. SFAS No. 143
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, the entity capitalizes the cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability is
accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or
incurs a gain or loss upon settlement. The standard is effective for fiscal
years beginning after June 15, 2002. The Company adopted SFAS No.143 on May 1,
2003, which had no material impact on its consolidated financial position and
results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN No. 46"),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, an Interpretation of Accounting
Principles Board No. 50. FIN No. 46 requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN No. 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN No. 46 are
required to be adopted in periods ending after December 15, 2003. The Company
adopted FIN No. 46 during the quarter ended January 31, 2004, which had no
material impact on its consolidated financial position and results of
operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, ("SFAS No. 150"), ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND Equity. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company adopted SFAS No. 150 on August
1, 2003, which had no material impact on its consolidated financial position and
results of operations.
12
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
In December 2003, the SEC issued Staff Accounting Bulletin No. 104,
("SAB No. 104"), REVENUE RECOGNITION. SAB No. 104 revises or rescinds portions
of the SAB No. 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS and included in
Topic 13 of the Codification of Staff Accounting Bulletins. SAB No. 104 deletes
interpretative guidance no longer necessary, and conforms the interpretive
material retained, because of pronouncements issued by the FASB's EITF on
various revenue recognition topics, including EITF 00-21, REVENUE ARRANGEMENTS
WITH MULTIPLE DELIVERABLES. SAB No. 104 also rescinds the SEC staff's REVENUE
RECOGNITION IN FINANCIAL STATEMENTS - FREQUENTLY ASKED QUESTIONS AND ANSWERS
(the "FAQ") issued in conjunction with SAB No. 101 and selected portions of the
FAQ have been incorporated into SAB No. 104. The Company adopted SAB No. 104
during December 2003, which had no material impact on its consolidated financial
position and results of operations.
3. SHORT-TERM INVESTMENT
During March 2003, the Company received 61,653 shares of SuperGen, Inc.
common stock under a license agreement with SuperGen, Inc. dated February 13,
2001. The Company accounts for its short-term investment at fair value as
trading securities in accordance with SFAS No. 115. The cost basis of the common
stock was $200,000. During the quarter ended July 31, 2003, the Company sold all
61,653 shares of common stock of SuperGen, Inc. for gross proceeds of $271,000.
The realized gain of $71,000 relating to the short-term investment is included
in interest and other income in the accompanying consolidated financial
statements for the nine months ended January 31, 2004.
4. NOTE RECEIVABLE
During December 1998, the Company completed the sale and subsequent
leaseback of its two facilities and recorded an initial note receivable from the
buyer of $1,925,000. In accordance with the related lease agreement, if the
Company defaults under the lease agreement, including but not limited to, filing
a petition for bankruptcy or failure to pay the basic rent within five (5) days
of being due, the note receivable shall be deemed to be immediately satisfied in
full and the buyer shall have no further obligation to the Company for such note
receivable. Although the Company has made all payments under the lease agreement
and has not filed for protection under the laws of bankruptcy, during the
quarter ended October 31, 1999, the Company did not have sufficient cash on hand
to meet its obligations on a timely basis and was operating at significantly
reduced levels. In addition, at that time, if the Company could not raise
additional cash by December 31, 1999, the Company may have had to file for
protection under the laws of bankruptcy. Due to the uncertainty of the Company's
ability to pay its lease obligations on a timely basis, the Company established
a 100% reserve for the note receivable in the amount of $1,887,000 as of October
31, 1999. The Company reduces the reserve as payments are received and records
the reduction as interest and other income in the accompanying consolidated
statements of operations. Due to the uncertainty of the Company's capital
resources beyond the next twelve months, the carrying value of the note
receivable approximates its fair value at January 31, 2004. The Company has
received all payments through March 2004.
The following represents a rollforward of the allowance of the
Company's note receivable for the nine months ended January 31, 2004:
Allowance balance, April 30, 2003 $ 1,705,000
Principal payments received (44,000)
--------------
Allowance balance, January 31, 2004 $ 1,661,000
==============
13
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
5. CONVERTIBLE DEBT
On August 9, 2002, the Company entered into a private placement with
four investors under a Securities Purchase Agreement ("Debt SPA"), whereby the
Company issued Convertible Debentures ("Convertible Debt") for gross proceeds of
$3,750,000. The Convertible Debt earns interest at a rate of 6% per annum
payable in cash semi-annually each June 30th and December 31st, and mature in
August 2005. Under the terms of the Convertible Debt, the principal amount is
convertible, at the option of the holder, into a number of shares of common
stock of the Company calculated by dividing the unpaid principal amount of the
Convertible Debt by the initial conversion price of $0.85 per share ("Conversion
Price").
In accordance with EITF 00-27, APPLICATION OF ISSUE NO. 98-5 TO CERTAIN
CONVERTIBLE Instruments, the Company initially recorded its Convertible Debt net
of discount of (i) the relative fair value of the warrants issued in the amount
of $1,321,000 and (ii) the intrinsic value of the embedded conversion feature in
the amount of $1,143,000. The relative fair value of the warrants was determined
in accordance with the Black-Scholes valuation model based on the warrant terms.
The debt discount associated with unconverted Convertible Debt and warrants are
amortized as non-cash interest expense on a straight-line basis over the term of
the Convertible Debt, which approximates the effective interest method, and the
amortization is recorded as interest and other expense in the accompanying
consolidated statements of operations. Upon conversion of any Convertible Debt,
the entire unamortized debt discount remaining at the date of conversion that is
associated with the converted Convertible Debt are immediately recognized as
interest and other expense in the accompanying consolidated financial
statements. During the three and nine months ended January 31, 2004, the Company
recognized $367,000 and $1,635,000, respectively, in non-cash interest expense
associated with the conversion of Convertible Debt, which amount was included in
interest and other expense in the accompanying consolidated statements of
operations. During the three and nine months ended January 31, 2003, the Company
recognized $506,000 and $687,000, respectively, in non-cash interest expense
associated with the Convertible Debt, which amount was included in interest and
other expense in the accompanying consolidated statements of operations.
During the nine months ended January 31, 2004, Convertible Debt holders
elected to convert an aggregate principal amount of $2,395,000 of the
outstanding convertible debt in exchange for 2,817,645 shares of common stock at
the conversion price of $0.85 per share. As of January 31, 2004, all outstanding
convertible debt was converted into common stock and the associated discount was
fully amortized as non-cash interest expense in the accompanying financial
statements as follows:
Principal Balance of Convertible Debt
-------------------------------------
Convertible debt, April 30, 2003 $ 2,395,000
Conversions, nine months ended January 31, 2004 (2,395,000)
------------
Convertible debt, January 31, 2004 --
------------
Discount on Convertible Debt
----------------------------
Convertible debt discount, April 30, 2003 1,635,000
Discount amortized, nine months ended January 31, 2004 (1,635,000)
------------
Convertible debt discount, January 31, 2004 --
------------
Convertible debt, net of discount, January 31, 2004 $ --
============
14
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
Under the Debt SPA, each Debenture holder was granted a detachable
warrant equal to 75% of the quotient obtained by dividing the principal amount
of the Convertible Debt by the Conversion Price or an aggregate of 3,308,827
warrants. The detachable warrants have a 4-year term with an exercise price of
$0.75 per share. During the nine months ended January 31, 2004, Debenture
holders exercised 2,244,120 warrants under the Debt SPA for gross proceeds of
$1,683,000 at the exercise price of $0.75 per share. As of January 31, 2004,
1,064,707 warrants were outstanding under the Debt SPA.
In connection with the Convertible Debt issued on August 9, 2002, the
Company incurred approximately $363,000 in debt issuance costs, including
placement agent fees of $318,000, which are being amortized on a straight-line
basis over the life of the Convertible Debt, which approximates the effective
interest method. Upon conversion of any Convertible Debt, the unamortized debt
issuance costs remaining at the date of conversion which were allocated to the
Convertible Debt is immediately recognized as non-cash interest expense. During
the three and nine months ended January 31, 2004, the Company expensed $23,000
and $176,000, respectively, in debt issuance costs included in interest and
other expense in the accompanying consolidated statements of operations. During
the three and nine months ended January 31, 2003, the Company expensed $31,000
and $58,000, respectively, in debt issuance costs included in interest and other
expense in the accompanying consolidated statements of operations. At January
31, 2004, the debt issuance costs were completely amortized.
6. LICENSING, RESEARCH AND DEVELOPMENT AGREEMENTS
During December 2002, the Company granted the exclusive rights for the
development of diagnostic and imaging agents in the field of oncology to
Schering A.G. under its Vascular Targeting Agent ("VTA") technology. Under the
terms of the agreement, the Company received an up-front payment of $300,000, of
which, $219,000 was included in deferred revenue at January 31, 2004, in
accordance with SAB No. 101 and SAB No. 104. Deferred license revenue is
amortized over the estimated term of the remaining obligations as stated in the
agreement. In addition, the Company could also receive future milestone payments
and a royalty on net sales, as defined in the agreement. Under the same
agreement, the Company granted Schering A.G. an option to obtain certain
non-exclusive rights to the VTA technology with predetermined up-front fees and
milestone payments as defined in the agreement.
During December 2003, the Company entered into a research collaboration
agreement with Aeres Biomedical Ltd. ("Aeres") regarding the humanization of one
of the Company's Vascular Targeting Agent antibodies to be used as a potential
clinical candidate. Under the terms of the research collaboration agreement, the
Company is required to pay Aeres a non-refundable up-front payment, future
project milestone payments and royalties on net sales. During January 2004, the
Company issued and sold 243,101 shares of its common stock to Aeres valued at
$648,000, of which, $164,000 was expensed during the quarter ended January 31,
2004 and $484,000 will be amortized as research and development expense in
accordance with the terms of the agreement.
15
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
7. SEGMENT REPORTING
The Company's business is organized into two reportable operating
segments (i) Peregrine, the parent company, is engaged in the research and
development of cancer therapeutics and cancer diagnostics through a series of
proprietary platform technologies using monoclonal antibodies, and (ii) Avid, is
engaged in providing contract manufacturing and development of biologics to
biopharmaceutical and biotechnology businesses.
The Company primarily evaluates the performance of its segments based
on net revenues and gross profit or loss. The Company has no intersegment
revenues and does not segregate assets at the segment level as such information
is not used by management.
Net revenues and gross profit information for the Company's segments
for the three months ended January 31, 2004 and 2003 consisted of the following:
THREE MONTHS ENDED JANUARY 31,
---------------------------
2004 2003
------------ ------------
NET REVENUES:
Contract manufacturing and development of biologics $ 211,000 $ 162,000
Research and development of cancer therapeutics 18,000 350,000
------------ ------------
Total net revenues $ 229,000 $ 512,000
============ ============
GROSS PROFIT (LOSS):
Contract manufacturing and development of biologics $ (12,000) $ (108,000)
Research and development of cancer therapeutics 18,000 350,000
------------ ------------
Total gross profit $ 6,000 $ 242,000
============ ============
For the three months ended January 31, 2004, two customers located in
the U.S. accounted for 32% of reported net revenues and one customer
headquartered in Israel accounted for 68% of reported net revenues.
For the three months ended January 31, 2003, one customer located in
the U.S. accounted for 26% of reported net revenues and one customer located in
Europe accounted for 68% of reported net revenues.
Net revenues and gross profit information for the Company's segments
for the nine months ended January 31, 2004 and 2003 consisted of the following:
NINE MONTHS ENDED JANUARY 31,
---------------------------
2004 2003
------------ ------------
NET REVENUES:
Contract manufacturing and development of biologics $ 1,403,000 $ 1,257,000
Research and development of cancer therapeutics 56,000 350,000
------------ ------------
Total net revenues $ 1,459,000 $ 1,607,000
============ ============
GROSS PROFIT (LOSS):
Contract manufacturing and development of biologics $ 196,000 $ (44,000)
Research and development of cancer therapeutics 56,000 350,000
------------ ------------
Total gross profit $ 252,000 $ 306,000
============ ============
16
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
For the nine months ended January 31, 2004, two customers located in
the U.S. accounted for 54% of reported net revenues and one customer
headquartered in Israel accounted for 38% of reported net revenues.
For the nine months ended January 31, 2003, one customer located in the
U.S. accounted for 40% of reported net revenues and one customer located in
Europe accounted for 57% of reported net revenues.
8. STOCKHOLDERS' EQUITY
FINANCING UNDER SHELF REGISTRATION STATEMENT ON FORM S-3, FILE NUMBER 333-71086
On November 14, 2001, the Company filed a registration statement on
Form S-3, File Number 333-71086 (the "November 2001 Shelf") which was declared
effective by the Securities and Exchange Commission, allowing the Company to
issue, from time to time, in one or more offerings, (i) up to 10,000,000 shares
of its common stock, and (ii) warrants to purchase up to 2,000,000 shares of its
common stock.
On June 6, 2003, the Company received gross proceeds of $355,000 under
a Common Stock Purchase Agreement in exchange for 412,445 shares of its common
stock. In connection with the offering, the Company paid a fee to the placement
agent equal to five percent (5%) of the gross proceeds, or $18,000.
As of January 31, 2004, 87,555 shares of common stock were available
for issuance under the November 2001 Shelf. All warrants were issued under the
November 2001 Shelf as of January 31, 2004.
FINANCING UNDER SHELF REGISTRATION STATEMENT ON FORM S-3, FILE NUMBER 333-103965
On March 21, 2003, the Company filed a registration statement on Form
S-3, File Number 333-103965 which was declared effective by the Securities and
Exchange Commission, allowing the Company to issue, from time to time, in one or
more offerings, up to 10,000,000 shares of its common stock ("March 2003
Shelf"). As of January 31, 2004, 9,999,997 shares of common stock were issued
under the March 2003 Shelf under the following transactions:
On June 6, 2003, the Company received gross proceeds of $1,720,000
under a Common Stock Purchase Agreement in exchange for 2,000,003 shares of its
common stock and warrants to purchase up to 150,000 shares of common stock at an
exercise price of $0.86 per share ("June 6, 2003 Financing"). The warrants have
a four-year term and are exercisable at an exercise price of $0.86 per share.
The fair value of the warrants was recorded as a cost of equity based on a
Black-Scholes valuation model after considering the terms in the related warrant
agreement. The warrants were issued under the November 2001 Shelf. In connection
with the offering, the Company paid a fee to the placement agent equal to five
percent (5%) of the gross proceeds, or $86,000.
On June 26, 2003, the Company received gross proceeds of $1,840,000
under a Common Stock Purchase Agreement in exchange for 1,599,997 shares of its
common stock ("June 26, 2003 Financing"). Under the same arrangement, the
Company granted the investors a six-month option to purchase up to 1,599,997
additional shares of common stock from the Company under the same terms as this
offering. The fair value of the option was recorded as a cost of equity based on
a Black-Scholes valuation model after considering terms in the related
agreement. In connection with the offering, the Company paid a fee to the
placement agent equal to five percent (5%) of the gross proceeds, or $92,000.
During the nine months ended January 31, 2004, investors elected to purchase all
1,599,997 shares of the Company's common stock under the six-month option in
exchange for gross proceeds of $1,840,000.
On July 24, 2003, the Company entered into a Common Stock Purchase
Agreement with one institutional investor whereby the Company agreed to sell
from time to time, at the Company's option, up to an aggregate of 2,000,000
17
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
shares of the Company's common stock at the per share price of $1.45 ("July 24,
2003 Financing"). As of January 31, 2004, the Company had sold and issued all
2,000,000 shares of its common stock under the July 24, 2003 Financing to the
institutional investor for gross proceeds of $2,900,000. The Company paid no
commissions in connection with this offering.
On September 18, 2003, the Company entered into a Common Stock Purchase
Agreement with one institutional investor whereby the Company agreed to sell
from time to time, at the Company's option, up to an aggregate of 2,800,000
shares of the Company's common stock at predetermined per share prices based
upon the average closing price of its common stock for the prior three trading
days ("September 18, 2003 Financing"). As of January 31, 2004, the Company had
sold and issued all 2,800,000 shares of its common stock under the September 18,
2003 Financing to the institutional investor in exchange for gross proceeds of
$5,292,000. The Company paid no commissions in connection with this offering.
FINANCING UNDER SHELF REGISTRATION STATEMENT ON FORM S-3, FILE NUMBER 333-109982
On October 24, 2003, the Company filed a registration statement on Form
S-3, File Number 333-109982 which was declared effective by the Securities and
Exchange Commission on November 5, 2003, allowing the Company to issue, from
time to time, in one or more offerings, up to 12,000,000 shares of its common
stock ("October 2003 Shelf").
On November 17, 2003, the Company entered into a Common Stock Purchase
Agreement with one institutional investor whereby the Company agreed to sell
from time to time, at the Company's option, up to an aggregate of 2,000,000
shares of the Company's common stock at predetermined per share prices based
upon the average closing price of its common stock for the prior three trading
days ("November 17, 2003 Financing"). During the quarter ended January 31, 2004,
the Company received aggregate gross proceeds of $4,257,000 in exchange for the
issuance of 2,000,000 shares of its common stock to the institutional investor.
The Company paid no commissions in connection with this offering.
On January 22, 2004, the Company entered into a Common Stock Purchase
Agreement with one institutional investor whereby the Company agreed to sell
from time to time, at the Company's option, up to an aggregate of 3,000,000
shares of the Company's common stock at a price per share based upon a discount
to the average volume weighted average price of our common stock for the three
trading days prior to the date of the put, which per share prices can be
adjusted upon mutual agreement ("January 22, 2004 Financing"). During the
quarter ended January 31, 2004, the Company received aggregate gross proceeds of
$625,000 in exchange for the issuance of 250,000 shares of its common stock to
the institutional investor. As of January 31, 2004, 2,750,000 shares of common
stock were available for issuance under the January 22, 2004 Financing. The
Company paid no commission in connection with this offering.
During January 2004, the Company issued and sold 243,101 shares of its
common stock to Aeres Biomedical Ltd. as payment for certain amounts due under a
research collaboration agreement dated December 9, 2003 for antibody development
services pertaining to one of the Company's Vascular Targeting Agent antibodies
(Note 6).
As of January 31, 2004, 9,506,899 shares of common stock were available
for issuance under the October 2003 Shelf.
18
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2004 (unaudited) (continued)
- --------------------------------------------------------------------------------
9. OPTIONS AND WARRANTS
During the nine months ended January 31, 2004, the Company received net
proceeds of $615,000 upon the exercise of 947,031 options. As of January 31,
2004, options to purchase 11,652,951 shares of the Company's common stock were
issued and outstanding at an average exercise price of $1.45 per share.
During the nine months ended January 31, 2004, the Company received net
proceeds of $2,786,000 upon the exercise of 4,087,871 warrants on a combined
cash and cashless basis in exchange for the issuance of 4,063,251 shares of the
Company's common stock. As of January 31, 2004, warrants to purchase up to
16,001,848 shares of the Company's common stock were issued and outstanding at
an average exercise price of $1.60 per share.
10. SUBSEQUENT EVENTS
On March 10, 2004, the Company issued and sold 750,000 shares of its
common stock in exchange for aggregate net proceeds of $1,650,000 under the
January 22, 2004 Financing. As of March 12, 2004, 2,000,000 shares of common
stock were available for issuance under the January 22, 2004 Financing.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS BASED ON OUR CURRENT
EXPECTATIONS. IN SOME CASES, YOU CAN IDENTIFY THESE STATEMENTS BY TERMINOLOGY
SUCH AS "MAY", "SHOULD", "PLANS", "BELIEVE", "WILL", "ANTICIPATE", "ESTIMATE",
"EXPECT", OR "INTEND", INCLUDING THEIR OPPOSITES OR SIMILAR PHRASES OR
EXPRESSIONS. YOU SHOULD BE AWARE THAT THESE STATEMENTS ARE PROJECTIONS OR
ESTIMATES AS TO FUTURE EVENTS AND ARE SUBJECT TO A NUMBER OF FACTORS THAT MAY
TEND TO INFLUENCE THE ACCURACY OF THE STATEMENTS. THESE FORWARD-LOOKING
STATEMENTS SHOULD NOT BE REGARDED AS A REPRESENTATION BY THE COMPANY OR ANY
OTHER PERSON THAT THE EVENTS OR PLANS OF THE COMPANY WILL BE ACHIEVED. ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THESE FORWARD LOOKING STATEMENTS.
TO GAIN A BETTER UNDERSTANDING OF THE RISK FACTORS THAT MAY TEND TO
INFLUENCE THE ACCURACY OF OUR FORWARD LOOKING STATEMENTS, WE RECOMMEND THAT YOU
READ THE RISK FACTORS IDENTIFIED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR
THE YEAR ENDED APRIL 30, 2003, WHICH WAS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ON JULY 29, 2003. ALTHOUGH WE BELIEVE THAT THE RISKS DESCRIBED IN THE
10-K REPRESENT ALL MATERIAL RISKS CURRENTLY APPLICABLE TO US, ADDITIONAL RISKS
AND UNCERTAINTIES NOT PRESENTLY KNOWN TO US OR THAT ARE CURRENTLY NOT BELIEVED
TO BE IMPORTANT TO US MAY ALSO AFFECT OUR ACTUAL FUTURE RESULTS AND COULD HARM
OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
To gain a better overall understanding of the Company, you should refer
to the consolidated financial statements and notes thereto contained herein and
our Annual Report on Form 10-K for the year ended April 30, 2003, which was
filed with the Securities and Exchange Commission on July 29, 2003. Results of
operations for the interim periods covered by this quarterly report on Form 10-Q
may not necessarily be indicative of results of operations for the full fiscal
year.
COMPANY OVERVIEW
Peregrine Pharmaceuticals, Inc., ("Peregrine") located in Tustin,
California, is a biotechnology company engaged in the research, development and
manufacturing of biotechnology products. We are organized into two reportable
operating segments: (i) Peregrine, the parent company, is engaged in the
research and development of novel therapeutics and (ii) Avid Bioservices, Inc.,
("Avid") a wholly-owned subsidiary, is engaged in providing contract
manufacturing and development of biologics for biopharmaceutical and
biotechnology companies.
Our research and development efforts focus on discovering and
developing products that effect blood flow to tumors. Our vascular research
programs fall under several different proprietary platforms including
Anti-Phospholipid Therapy (APT), Vascular Targeting Agents (VTAs), anti-
Angiogenesis, and Vasopermeation Enhancement Agents (VEAs). We have research
collaborations with pharmaceutical and biotechnology companies to develop our
VTA platform for therapeutic and diagnostic applications and we expect to enter
our first APT compound into clinical trials for cancer therapy during calendar
year 2004.
Our vascular agents may also have applications in other
angiogenesis-dependent diseases besides cancer such as diabetes, arthritis, skin
disorders and eye diseases. Peregrine currently has exclusive rights to over 190
U.S. and foreign patents and pending patent applications that broadly cover its
vascular programs. In addition, we are currently evaluating our proprietary
targets for use in treating non-angiogenesis dependent diseases such as viral
infection. We believe that our pre-clinical data and the broad nature of our
intellectual property may provide many opportunities for product development,
partnering and licensing.
Our most clinically advanced therapeutic program is based on a
targeting platform outside vascular biology. This technology platform is known
as Tumor Necrosis Therapy (TNT) and targets dead or dying tumor cells that are
common to the majority of different tumor types. Cotara(TM), the most clinically
advanced TNT program, is currently in a phase I clinical trial for the treatment
of colorectal carcinoma at Stanford University Medical Center. In addition, we
have received protocol approval from the U.S. Food and Drug Administration
("FDA") to initiate a registration clinical study for the treatment of brain
cancer. We are currently seeking a development or funding partner to move the
brain cancer program forward. We believe that continuing the clinical
development of Cotara(TM) in tumor types other than brain cancer will add
significant value to the program. We also have a research collaboration to
20
develop immunocytokines based on the TNT platform and a TNT-based agent has been
developed and approved for the treatment of lung cancer in China under a
licensing agreement.
Avid was formed from Peregrine's manufacturing expertise and production
facility in Tustin, California to provide an array of contract services.
Services provided by Avid include manufacturing of antibodies and proteins under
current Good Manufacturing Practices (cGMP), process development, and testing
for biopharmaceutical and biotechnology companies. Avid has produced
biotechnology products to be used in phase I through phase III clinical trials.
Avid continues to provide services for Peregrine including cGMP material for its
Cotara(TM) and Anti-Phospholipid Therapy programs. Due to the anticipated
increased demand for Avid services, we will be more than doubling our production
capacity during calendar 2004 through the addition of a 1,000 liter bioreactor.
We are actively exploring transactions that would allow us to leverage
our various technologies as a means of raising capital to support operations in
addition to equity financing. The transactions we are exploring include
licensing, partnering or the sale of Cotara(TM), Oncolym(R), or various portions
of our VTA and VEA technologies. We are also exploring possible strategic
transactions related to Avid which could include partnering, or a complete sale
of Avid as a means of raising additional capital. Avid is currently an integral
part of Peregrine's product development plans so any transaction involving Avid
would necessarily have to provide Peregrine with adequate resources or
manufacturing credits that would allow it to continue moving its product
pipeline forward.
CRITICAL ACCOUNTING POLICIES
The methods, estimates and judgments we use in applying our most
critical accounting policies have a significant impact on the results we report
in our consolidated financial statements. We evaluate our estimates and
judgments on an on-going basis. We base our estimates on historical experience
and on assumptions that we believe to be reasonable under the circumstances. Our
experience and assumptions form the basis for our judgments about the carrying
value of assets and liabilities that are not readily apparent from other
sources. Actual results may vary from what we anticipate and different
assumptions or estimates about the future could change our reported results. We
believe the following accounting policies are the most critical to us, in that
they are important to the portrayal of our financial statements and they require
our most difficult, subjective or complex judgments in the preparation of our
consolidated financial statements:
REVENUE RECOGNITION. We currently derive revenues primarily from
licensing agreements associated with Peregrine's technologies under development
and from contract manufacturing services provided by Avid. We recognize revenues
pursuant to Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN FINANCIAL
STATEMENTS, as well as the recently issued Staff Accounting Bulletin No. 104,
REVENUE RECOGNITION. These bulletins draw on existing accounting rules and
provides specific guidance on how those accounting rules should be applied.
Revenue is generally realized or realizable and earned when (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred or services have
been rendered, (iii) the seller's price to the buyer is fixed or determinable,
and (iv) collectibility is reasonably assured.
Revenues associated with licensing agreements primarily consist of
nonrefundable up-front license fees and milestones payments. Revenues under
licensing agreements are recognized based on the performance requirements of the
agreement. Nonrefundable up-front license fees received under license
agreements, whereby continued performance or future obligations are considered
inconsequential to the relevant licensed technology, are generally recognized as
revenue upon delivery of the technology. Milestone payments are generally
recognized as revenue upon completion of the milestone assuming there are no
other continuing obligations. Nonrefundable up-front license fees, whereby we
have an ongoing involvement or performance obligation, are generally recorded as
deferred revenue and generally recognized as revenue over the term of the
performance obligation or relevant agreement. Under some license agreements, the
obligation period may not be contractually defined. Under these circumstances,
we must exercise judgment in estimating the period of time over which certain
deliverables will be provided to enable the licensee to practice the license.
21
Contract manufacturing revenues are generally recognized once the
service has been provided and/or upon shipment of the product to the customer.
We also record a provision for estimated contract losses, if any, in the period
in which they are determined.
In July 2000, the Emerging Issues Task Force ("EITF") released Issue
99-19 ("EITF 99-19"), REPORTING REVENUE GROSS AS A PRINCIPAL VERSUS NET AS AN
AGENT. EITF 99-19 summarized the EITF's views on when revenue should be recorded
at the gross amount billed to a customer because it has earned revenue from the
sale of goods or services, or the net amount retained (the amount billed to the
customer less the amount paid to a supplier) because it has earned a fee or
commission. In addition, the EITF released Issue 00-10 ("EITF 00-10"),
ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS, and Issue 01-14 ("EITF
01-14"), INCOME STATEMENT CHARACTERIZATION OF REIMBURSEMENTS RECEIVED FOR
"OUT-OF-POCKET" EXPENSES INCURRED. EITF 00-10 summarized the EITF's views on how
the seller of goods should classify in the income statement amounts billed to a
customer for shipping and handling and the costs associated with shipping and
handling. EITF 01-14 summarized the EITF's views on when the reimbursement of
out-of-pocket expenses should be characterized as revenue or as a reduction of
expenses incurred. Our revenue recognition policies are in compliance with EITF
99-19, EITF 00-10 and EITF 01-14 whereby we record revenue for the gross amount
billed to customers (the cost of raw materials, supplies, and shipping, plus the
related handling mark-up fee) and record the cost of the amounts billed as cost
of sales as we act as a principal in these transactions.
ALLOWANCE FOR DOUBTFUL RECEIVABLES. We continually monitor our
allowance for all receivables. A considerable amount of judgment is required in
assessing the ultimate realization of these receivables and we estimate an
allowance for doubtful accounts based on factors that appear reasonable under
the circumstances.
RESULTS OF OPERATIONS
The following table compares the statement of operations for the three
and nine-month periods ended January 31, 2004 to the same periods in the prior
year. This table provides you with an overview of the changes in the statement
of operations for the comparative periods, which changes are further discussed
below.
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
--------------------------------- ---------------------------------
2004 2003 $ CHANGE 2004 2003 $ CHANGE
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
REVENUES:
Contract manufacturing revenue $ 211 $ 162 $ 49 $ 1,403 $ 1,257 $ 146
License revenue 18 350 (332) 56 350 (294)
--------- --------- --------- --------- --------- ---------
Total revenues 229 512 (283) 1,459 1,607 (148)
COST AND EXPENSES:
Cost of contract manufacturing 223 270 (47) 1,207 1,301 (94)
Research and development 2,723 1,676 1,047 6,570 7,126 (556)
Selling, general and administrative 1,096 681 415 3,224 2,204 1,020
--------- --------- --------- --------- --------- ---------
Total cost and expenses 4,042 2,627 1,415 11,001 10,631 370
--------- --------- --------- --------- --------- ---------
LOSS FROM OPERATIONS (3,813) (2,115) (1,698) (9,542) (9,024) (518)
--------- --------- --------- --------- --------- ---------
22
OTHER INCOME (EXPENSE):
Interest and other income 70 57 13 219 197 22
Interest and other expense (394) (592) 198 (1,840) (864) (976)
--------- --------- --------- --------- --------- ---------
NET LOSS $ (4,137) $ (2,650) $ (1,487) $(11,163) $ (9,691) $ (1,472)
========= ========= ========= ========= ========= =========
TOTAL REVENUES:
- ---------------
Three Months: The decrease in revenues of $283,000 during the three
months ended January 31, 2004 compared to the same period in the prior year was
primarily due to a reduction in license revenues of $332,000. During the prior
three months ended January 2003, we recognized $350,000 in license revenue
associated with certain TNT rights licensed to Merck KGaA while we had no
corresponding revenue recognized during the current quarter. This decrease in
license revenue was offset by an increase in contract manufacturing revenues of
$49,000 due to increased activities. In addition, during the current quarter, we
had two clinical lots of material for one customer in-process which are subject
to certain outside biological testing requirements. After the clinical lots are
tested (which could take up to two months to complete), and all related product
is shipped, we could recognize up to $1.2 million in contract manufacturing
revenues in an upcoming period in addition to future services to be performed on
other current contracts. Although we believe the product will meet customer
testing requirements, there are no assurances or guarantees that all testing and
services will meet customer specifications or that the related revenues will be
recognized on the two in-process clinical lots.
Nine Months: The decrease in total revenues of $148,000 during the nine
months ended January 31, 2004 compared to the same prior year period is
primarily due to a decrease in license revenues of $294,000 for reasons
mentioned directly above. This decrease was offset by an increase in contract
manufacturing revenues of $146,000 due to increase customer activities compared
to the prior year.
We expect contract manufacturing revenue to increase during the
remainder of the current fiscal year based on the anticipated completion of
projects under our current contract manufacturing agreements. In addition to our
current contract manufacturing agreements, Avid currently has numerous
outstanding project proposals with various potential customers, however, we
cannot estimate nor can we determine the likelihood that we will be successful
in converting any of these proposals into definitive agreements during the
remainder of the current fiscal year.
COST OF CONTRACT MANUFACTURING
- ------------------------------
Three Months: The current quarter decrease in cost of contract
manufacturing compared to the same prior year period is primarily due to
Peregrine's increased use of the manufacturing facility for its products under
development and the related costs being allocated to research and development
expenses. During the current quarter, we increased our antibody process
development efforts associated with the Anti-Phospholipid Therapy program and
manufactured the Anti-Phospholipid Therapy antibody for research and toxicology
studies required for the anticipated commencement of Phase I clinical studies
during calendar year 2004.
Nine Months: The current nine month decrease in cost of contract
manufacturing compared to the same prior year period was also primarily due to
Peregrine's increased use of the manufacturing facility for its products under
development and the related costs being allocated to research and development
expenses as mentioned above.
RESEARCH AND DEVELOPMENT EXPENSES:
- ----------------------------------
Three Months: The increase in research and development expenses of
$1,047,000 during the three months ended January 31, 2004 compared to the same
period in the prior year was primarily due to an increase in Anti-Phospholipid
Therapy pre-clinical development expenses. During the current quarter, we
expended an aggregate of $769,000 for antibody license and development fees and
toxicology studies associated with the Anti-Phospholipid Therapy program, which
amount was not incurred in the same prior year quarter. We anticipate initiating
a Phase I clinical study using Anti-Phospholipid Therapy during the current
calendar year. In addition, we incurred a current quarter increase in foreign
patent filing fees of $126,000 primarily related to the Vascular Targeting Agent
technology and the Anti-Phospholipid Therapy. We expect research and development
expenses to increase over the near term primarily under the following ongoing
research and development programs:
1. Cotara(TM) clinical program at Stanford University for the treatment of
colorectal cancer;
23
2. Anti-Phospholipid Therapy pre-clinical and clinical programs for the
anticipated commencement of Phase I clinical trials during calendar
year 2004;
3. 2C3 (anti-VEGF antibody) research and development program;
4. Vascular Targeting Agent research and development program; and
5. Vasopermeation Enhancement Agent research and development program.
Nine Months: The decrease in research and development expenses of
$556,000 during the nine months ended January 31, 2004 compared to the same
period in the prior year was primarily due to a decrease in clinical trial
program expenses associated with a previously planned registration trial using
Cotara(TM) for the treatment of brain cancer. During the first quarter of fiscal
year 2003, we incurred significant expenses associated with seeking protocol
approval for the Cotara(TM) registration trial, including clinical trial
start-up activities such as a European investigator meeting. We received
approval from the U.S. Food and Drug Administration to initiate the Cotara(TM)
registration trial in February 2003 and we are currently seeking a development
or funding partner to initiate the Cotara(TM) brain study. This current nine
month decrease in Cotara(TM) clinical expenses was offset by a current quarter
increase in pre-clinical expenses associated with the Anti-Phospholipid Therapy
program as described above.
The following represents the research and development expenses ("R&D
Expenses") we have incurred by each major platform technology under development:
R&D EXPENSES- R&D EXPENSES-
PLATFORM TECHNOLOGY QUARTER ENDED MAY 1, 1998 TO
UNDER DEVELOPMENT JANUARY 31, 2004 JANUARY 31, 2004
------------------------------ ---------------------- -----------------
TNT development (Cotara(TM)) $ 333,000 $ 25,211,000
VEA development 362,000 4,294,000
VTA development 1,870,000 9,083,000
Oncolym(R)development 158,000 13,407,000
---------------------- -----------------
Total research and development $ 2,723,000 $ 51,995,000
====================== =================
From inception to April 1998, we expensed $20,898,000 on research and
development of our product candidates, with the costs primarily being closely
split between the TNT and Oncolym(R) technologies. In addition to the above
costs, we expensed an aggregate of $32,004,000 for the acquisition of our TNT
and VTA technologies, which were acquired during fiscal years 1995 and 1997,
respectively.
Looking beyond the next twelve months, it is extremely difficult for us
to reasonably estimate all future research and development costs associated with
each of our technologies due to the number of unknowns and uncertainties
associated with pre-clinical and clinical trial development. These unknown
variables and uncertainties include, but are not limited to:
o The uncertainty of our capital resources to fund research,
development and clinical studies beyond the current fiscal year;
o The uncertainty of future costs associated with our pre-clinical
candidates, Anti-Phospholipid Therapy, Vasopermeation Enhancement
Agents and Vascular Targeting Agents, which costs are dependent on
the success of pre-clinical development. We are uncertain whether
or not these product candidates will be successful and we are
uncertain whether or not we will incur any additional costs beyond
pre-clinical development;
o The uncertainty of future clinical trial results;
o The uncertainty of the number of patients to be treated in any
clinical trial;
o The uncertainty of the Food and Drug Administration allowing our
studies to move forward from Phase I clinical studies to Phase II
and Phase III clinical studies;
24
o The uncertainty of the rate at which patients are enrolled into
any current or future study. Any delays in clinical trials could
significantly increase the cost of the study and would extend the
estimated completion dates.
o The uncertainty of terms related to potential future partnering or
licensing arrangements; and
o The uncertainty of protocol changes and modifications in the
design of our clinical trial studies, which may increase or
decrease our future costs.
We or our potential partners 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, exporting 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 or our potential partners may experience
difficulties and delays in obtaining necessary governmental clearances and
approvals to market our products, and we or our potential partners may not be
able to obtain all necessary governmental clearances and approvals to market our
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
- ---------------------------------------------
Three and Nine Months: Selling, general and administrative expenses
consist primarily of compensation, board fees, facility, travel, legal and
accounting fees, insurance, and other expenses relating to our general
management, financial, administrative and business development activities. The
increase in selling, general and administrative expenses of $415,000 (three
months) and $1,020,000 (nine months) is primarily due to an increase in
compensation and related expenses associated with Avid and our efforts to
license our technologies under development. This increase was supplemented by an
increase in director fees associated with increased oversight responsibilities
mandated by the Sarbanes-Oxley Act of 2002. Prior to the current fiscal year,
directors did not receive any cash compensation other than the reimbursement of
expenses.
INTEREST AND OTHER EXPENSE:
- ---------------------------
Three Months: The decrease in interest and other expense of $198,000
during the three months ended January 31, 2004 compared to the same period in
the prior year is primarily due to a decrease in interest expense associated
with the convertible debt issued in August 2002 as a result of a lower average
convertible debt balance during the current quarter compared to the prior year.
During the quarter ended January 31, 2004, the remaining $400,000 in convertible
debt was converted into common stock.
Nine Months: The increase in interest and other expense of $976,000
during the nine months ended January 31, 2004 compared to the same period in the
prior year is primarily due to an increase in non-cash interest expense
associated with the amortization of the convertible debt discount and debt
issuance costs related to the conversions of convertible debt primarily during
the quarter ended July 31, 2003.
The following non-cash interest expense was included in Interest and
other expense in the accompanying consolidated financial statements:
25
THREE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, JANUARY 31,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Interest and other expense, as reported $ 394,000 $ 592,000 $ 1,840,000 $ 864,000
Less interest and other expenses
paid in cash (4,000) (56,000) (29,000) (119,000)
------------ ------------ ------------ ------------
Interest, non-cash expense $ 390,000 $ 536,000 $ 1,811,000 $ 745,000
============ ============ ============ ============
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2004, we had $15,740,000 in cash and cash equivalents.
On March 10, 2004, we issued and sold 750,000 shares of our common stock in
exchange for $1,650,000. Our cash and cash equivalents balance as of March 12,
2004 was $15,802,000 including the amount raised on March 10, 2004. During the
nine months ended January 31, 2004, we raised $21,938,000 in net proceeds under
various equity transactions (as further explained in our notes to the
consolidated financial statements contained herein). Since inception, we have
generally financed our operations primarily through the sale of our common stock
and issuance of convertible debt, which has been supplemented with payments
received from various licensing collaborations and through the revenues
generated by Avid. We plan to raise additional capital through the offer and
sale of shares or our common stock pursuant to our current shelf registration
statement on Form S-3, File No. 333-109982, which as of March 12, 2004, had
8,756,899 shares available for possible future transactions.
During the nine months ended January 31, 2004, cash used in operating
activities decreased $642,000 to $8,866,000 compared to $9,508,000 for the nine
months ended January 31, 2003. Net cash used in investing activities increased
$297,000 to $469,000 for the nine months ended January 31, 2004 compared to
$172,000 for the nine months ended January 31, 2003. The increase in cash used
in investing activities is primarily due to added laboratory equipment combined
with installment payments made on the planned 1,000-liter bioreactor to be
installed during calendar year 2004. Net cash provided by financing activities
increased $14,398,000 to $21,938,000 for the nine months ended January 31, 2004
compared to net cash provided of $7,540,000 for the same prior year period. The
increase in net cash provided by financing activities was due to $21,938,000 in
net proceeds received from the sale of our common stock and the exercise of
options and warrants during the nine months ended January 31, 2004.
We have expended substantial funds on the development of our product
candidates and for clinical trials and we have incurred negative cash flows from
operations for the majority of our years since inception. We expect negative
cash flows from operations to continue until we are able to generate sufficient
revenue from the contract manufacturing services provided by Avid and/or from
the licensing of Peregrine's products under development.
Revenues earned by Avid during the nine months ended January 31, 2004
amounted to $1,403,000. We expect that Avid will continue to generate revenues
which should lower consolidated cash flows used in operations, although we
expect those near term revenues will be insufficient to cover consolidated cash
flows used in operations. As such, we will continue to need to raise additional
capital to provide for our operations, including the anticipated development and
clinical costs of Anti-Phospholipid Therapy and Cotara(TM), the anticipated
development costs associated with Vasopermeation Enhancement Agents ("VEA's")
and Vascular Targeting Agents ("VTA's"), and the potential expansion of Avid's
manufacturing capabilities.
Assuming we do not raise any additional capital from financing
activities or from the sale or licensing of our technologies, and further
assuming that Avid does not generate any additional revenues beyond our current
active contracts, we believe we have sufficient cash on hand to meet our
obligations on a timely basis for at least the next twelve months.
In addition to equity financing, we are actively exploring various
other sources of cash by leveraging our many assets. The transactions being
explored include licensing, partnering or the sale of Cotara(TM) and Oncolym(R),
divesting all radiopharmaceutical based technologies, including Oncolym(R),
Cotara(TM), and radiopharmaceutical uses of our VTA's, and licensing or
partnering our various VEA and VTA based technology uses.
26
In addition to licensing, partnering or the divestiture of some of our
technologies to raise capital, we are also exploring a possible strategic
transaction related to our subsidiary, Avid Bioservices, Inc. In this regard, we
are exploring the possibility to partner or a complete sale of Avid as a means
of raising additional capital.
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.
COMMITMENTS
At January 31, 2004, we had no material capital commitments, other than
the balance owed for the 1,000-liter bioreactor ordered by Avid in the amount of
$303,000. In addition, we have significant obligations under license agreements
that are contingent on clinical trial development milestones.
RISK FACTORS OF OUR COMPANY
The biotechnology industry includes many risks and challenges. Our
challenges may include, but are not limited to: uncertainties associated with
completing pre-clinical and clinical trials for our technologies; the
significant costs to develop our products as all of our products are currently
in development, pre-clinical studies or clinical trials and no revenue has been
generated from commercial product sales; obtaining additional financing to
support our operations and the development of our products; obtaining regulatory
approval for our technologies; complying with governmental regulations
applicable to our business; obtaining the raw materials necessary in the
development of such compounds; consummating collaborative arrangements with
corporate partners for product development; achieving milestones under
collaborative arrangements with corporate partners; developing the capacity to
manufacture, market and sell our products, either directly or indirectly with
collaborative partners; developing market demand for and acceptance of such
products; competing effectively with other pharmaceutical and biotechnological
products; attracting and retaining key personnel; protecting proprietary rights;
accurately forecasting operating and capital expenditures, other capital
commitments, or clinical trial costs and general economic conditions. A more
detailed discussion regarding our industry and business risk factors can be
found in our Annual Report on Form 10-K for the year ended April 30, 2003, as
filed with the Securities and Exchange Commission on July 29, 2003.
ITEM 3. 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 January 31, 2004, 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 4. CONTROLS AND PROCEDURES
- ------- -----------------------
The Company maintains disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are designed to ensure that information
required to be disclosed in its reports filed under the Securities Exchange Act
of 1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
27
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
The Company carried out an evaluation, under the supervision and with
the participation of management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures as of January 31, 2004, the end of the period
covered by this Quarterly Report. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that its disclosure
controls and procedures were effective at the reasonable assurance level as of
January 31, 2004.
There have been no changes in the Company's internal control over
financial reporting, during the quarter ended January 31, 2004, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
PART II OTHER INFORMATION
-------------------------
ITEM 1. LEGAL PROCEEDINGS.
- ------- ------------------
Although the Company is not a party to any legal proceedings, the
Company is currently investigating whether certain technologies discovered and
developed at the University of Southern California ("USC") and subsequently
licensed to a private company, Pivotal BioSciences, Inc., an entity we believe
is partially owned by the principal investigator and others at USC, were
developed using resources under the Company's sponsored research agreement with
USC and/or funding provided from another source for which the Company has
geographic technology rights. The current investigation does not affect the
Company's current rights to its technologies under development nor should it
have any effect, regardless of the outcome of the investigation, on the
development of any of the Company's existing technologies.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ------- ------------------------------------------
The following is a summary of transactions by the Company during the
quarterly period of November 1, 2003 through January 31, 2004 involving issuance
and sales of the Company's securities that were not registered under the
Securities Act of 1933, as amended (the "Securities Act").
On January 6, 2004, a debenture holder elected to convert $400,000 of
the outstanding convertible debt in exchange for 470,588 shares of common stock
at the conversion price of $0.85 per share. The convertible debentures were
issued in conjunction with a Securities Purchase Agreement ("SPA") entered into
during August 2002.
On January 23, 2004, the Company issued 138,462 shares of common stock
to a debenture holder upon the exercise of 138,462 warrants at an exercise price
of $0.71 per share. The warrants were issued in conjunction with the SPA entered
into during August 2002.
The issuances of the securities of the Company in the above
transactions were deemed to be exempt from registration under the Securities Act
by virtue of Section 4(2) thereof or Regulation D promulgated thereunder, as a
transaction by an issuer not involving a public offering. The recipient of such
securities either received adequate information about the Company or had access,
through employment or other relationships with the Company, to such information.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
- ------- --------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
- ------- ----------------------------------------------------
ITEM 5. OTHER INFORMATION. None.
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28
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
- ------- --------------------------------
(a) Exhibits:
10.92 Common Stock Purchase Agreement dated January 22,
2004 between Registrant and one institutional
investor.
31.1 Certification of the Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K: None.
29
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEREGRINE PHARMACEUTICALS, INC.
By: /s/ Steven W. King
-----------------------------------
Steven W. King
President & Chief Executive Officer
/s/ Paul J. Lytle
-----------------------------------
Paul J. Lytle
Chief Financial Officer
(signed both as an officer duly
authorized to sign on behalf of
the Registrant and principal
financial officer and chief
accounting officer)
30