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EX-31.2 - CERTIFICATION - PEREGRINE PHARMACEUTICALS INCperegrine_ex3102.htm
EX-31.1 - CERTIFICATION - PEREGRINE PHARMACEUTICALS INCperegrine_ex3101.htm
EX-32 - CERTIFICATION - PEREGRINE PHARMACEUTICALS INCperegrine_ex3201.htm
EX-10.26 - LICENSE AGREEMENT - PEREGRINE PHARMACEUTICALS INCperegrine_10q-ex1026.htm
EX-10.27 - ASSIGNMENT AGREEMENT - PEREGRINE PHARMACEUTICALS INCperegrine_10q-ex1027.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 
FORM 10-Q
 



ý           QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2010

OR
o           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.)
 

 

14282 Franklin Avenue, Tustin, California
 
92780-7017
(Address of principal executive offices)
 
(Zip Code)

(714) 508-6000
(Registrant’s telephone number, including area code)

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 ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o   No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large Accelerated Filer  o                                                                                            Accelerated Filer  ý

Non- Accelerated Filer   o                                                                                            Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o     No  ý
 
As of August 31, 2010, there were 56,190,285 shares of common stock, $0.001 par value, outstanding.
 
 
 
 

 
PEREGRINE PHARMACEUTICALS, INC.
 
TABLE OF CONTENTS
 
   
Page
   
No.
 
 
PART I - FINANCIAL INFORMATION
 
Item 1.
Consolidated Financial Statements.
1
Item 2.
Management’s Discussion and Analysis of Financial Condition And Results of Operations.
16
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
25
Item 4.
Controls And Procedures.
25
 
 
PART II - OTHER INFORMATION
 
Item 1.
Legal Proceedings.
26
Item 1A.
Risk Factors.
26
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
41
Item 3.
Defaults Upon Senior Securities.
41
Item 4.
[Removed and Reserved]
41
Item 5.
Other Information.
41
Item 6.
Exhibits.
41
SIGNATURES
  42

The terms “we,” “us,” “our,” “the Company,” and “Peregrine,” as used in this Report on Form 10-Q refers to Peregrine Pharmaceuticals, Inc. and its wholly owned subsidiary, Avid Bioservices, Inc.

 
i

 
 
PART I - FINANCIAL INFORMATION
 
 
ITEM 1.  CONSOLIDATED FINANCIAL STATEMENTS.
 
PEREGRINE PHARMACEUTICALS, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS

 

   
JULY 31,
2010
   
APRIL 30,
2010
 
   
Unaudited
       
ASSETS
           
             
CURRENT ASSETS:
           
Cash and cash equivalents
  $ 17,983,000     $ 19,681,000  
Trade and other receivables, net
    1,292,000       1,481,000  
Government contract receivables
    590,000       367,000  
Inventories, net
    4,692,000       3,123,000  
Debt issuance costs, current portion
    94,000       122,000  
Prepaid expenses and other current assets, net
    1,703,000       2,004,000  
                 
Total current assets
    26,354,000       26,778,000  
                 
PROPERTY:
               
Leasehold improvements
    713,000       697,000  
Laboratory equipment
    4,278,000       4,221,000  
Furniture, fixtures, office equipment and software
    1,364,000       917,000  
                 
      6,355,000       5,835,000  
Less accumulated depreciation and amortization
    (4,504,000 )     (4,366,000 )
                 
Property, net
    1,851,000       1,469,000  
                 
OTHER ASSETS:
               
Debt issuance costs, less current portion
    8,000       21,000  
Other assets
    1,088,000       1,067,000  
                 
Total other assets
    1,096,000       1,088,000  
                 
TOTAL ASSETS
  $ 29,301,000     $ 29,335,000  
 
 
 
1

 

 
PEREGRINE PHARMACEUTICALS, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)

 

   
JULY 31,
2010
   
APRIL 30,
2010
 
   
Unaudited
       
LIABILITIES AND STOCKHOLDERS’ EQUITY
           
             
CURRENT LIABILITIES:
           
Accounts payable
  $ 2,681,000     $ 2,259,000  
Accrued clinical trial site fees
    1,762,000       2,666,000  
Accrued payroll and related costs
    1,773,000       1,623,000  
Notes payable, current portion and net of discount
    1,946,000       1,893,000  
Deferred revenue
    3,719,000       2,406,000  
Deferred government contract revenue
    47,000       78,000  
Customer deposits
    2,191,000       2,618,000  
Other current liabilities
    1,039,000       860,000  
                 
Total current liabilities
    15,158,000       14,403,000  
                 
Notes payable, less current portion and net of discount
    712,000       1,315,000  
Deferred revenue
    125,000       -  
Other long-term liabilities
    469,000       210,000  
Commitments and contingencies
               
                 
STOCKHOLDERS' EQUITY:
               
Preferred stock-$0.001 par value; authorized 5,000,000 shares; non-voting; nil shares outstanding
    -       -  
Common stock-$0.001 par value; authorized 325,000,000 shares; outstanding  – 55,784,955 and 53,094,896, respectively
    56,000       53,000  
Additional paid-in capital
    282,330,000       275,208,000  
Accumulated deficit
    (269,549,000 )     (261,854,000 )
                 
Total stockholders’ equity
    12,837,000       13,407,000  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 29,301,000     $ 29,335,000  
 
 
 
See accompanying notes to condensed consolidated financial statements
 
2

 

 
PEREGRINE PHARMACEUTICALS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

   
THREE MONTHS ENDED
 
   
July 31, 2010
   
July 31, 2009
 
   
Unaudited
   
Unaudited
 
REVENUES:
           
Contract manufacturing revenue
  $ 983,000     $ 2,070,000  
Government contract revenue
    2,111,000       4,671,000  
License revenue
    115,000       9,000  
     Total revenues
    3,209,000       6,750,000  
                 
COSTS AND EXPENSES:
               
Cost of contract manufacturing
    1,156,000       1,073,000  
Research and development
    7,067,000       6,074,000  
Selling, general and administrative
    2,498,000       1,793,000  
     Total costs and expenses
    10,721,000       8,940,000  
                 
LOSS FROM OPERATIONS
    (7,512,000 )     (2,190,000 )
                 
OTHER INCOME (EXPENSE):
               
Interest and other income
    18,000       40,000  
Interest and other expense
    (201,000 )     (278,000 )
                 
NET LOSS
  $ (7,695,000 )   $ (2,428,000 )
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
    54,357,574       46,808,791  
                 
BASIC AND DILUTED LOSS  PER COMMON SHARE
  $ (0.14 )   $ (0.05 )
 
 
 

See accompanying notes to condensed consolidated financial statements
 
3

 
PEREGRINE PHARMACEUTICALS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   
THREE MONTHS ENDED JULY 31,
 
   
2010
   
2009
 
   
Unaudited
   
Unaudited
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (7,695,000 )   $ (2,428,000 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    138,000       116,000  
Share-based compensation
    643,000       162,000  
Amortization of discount on notes payable and debt issuance costs
    108,000       126,000  
Amortization of expenses paid in shares of common stock
    239,000       -  
Changes in operating assets and liabilities:
               
Trade and other receivables
    189,000       55,000  
Government contract receivables
    (223,000 )     495,000  
Inventories, net
    (1,569,000 )     (1,470,000 )
Prepaid expenses and other current assets, net
    62,000       475,000  
Other non-current assets
    129,000       (12,000 )
Accounts payable
    416,000       (452,000 )
Accrued clinical trial site fees
    (904,000 )     138,000  
Accrued payroll and related costs
    150,000       155,000  
Deferred revenue
    1,438,000       1,979,000  
Deferred government contract revenue
    (31,000 )     (1,539,000 )
Customer deposits
    (427,000 )     (1,321,000 )
Other accrued expenses and current liabilities
    266,000       (93,000 )
                 
Net cash used in operating activities
    (7,071,000 )     (3,614,000 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Property acquisitions
    (514,000 )     -  
Decrease (increase) in other assets
    30,000       (43,000 )
                 
Net cash used in investing activities
    (484,000 )     (43,000 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from issuance of common stock, net of issuance costs of $162,000 and $305,000, respectively
    6,482,000       6,590,000  
Principal payments on notes payable and capital leases
    (625,000 )     (173,000 )
Net cash provided by financing activities
    5,857,000       6,417,000  
                 
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (1,698,000 )     2,760,000  
                 
CASH AND CASH EQUIVALENTS, beginning of period
    19,681,000       10,018,000  
                 
CASH AND CASH EQUIVALENTS, end of period
  $ 17,983,000     $ 12,778,000  
                 
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
               
Property acquired under capital lease
  $ 180,000     $ -  
Accounts payable for purchase of property
  $ 6,000     $ 9,000  
 
 
 
See accompanying notes to condensed consolidated financial statements
 
4

PEREGRINE PHARMACEUTICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED JULY 31, 2010 (unaudited)


 
1.           ORGANIZATION AND BUSINESS
 
Peregrine Pharmaceuticals, Inc. (“Peregrine” or “Company”) is a clinical-stage biopharmaceutical company developing first-in-class monoclonal antibodies for the treatment of cancer and viral infections.  The Company is advancing three independent Phase II oncology programs as well as a Phase I hepatitis C virus (“HCV”) program with its lead product candidates bavituximab and Cotara®.  Peregrine also has in-house manufacturing capabilities through its wholly owned subsidiary Avid Bioservices, Inc. (“Avid”), which provides integrated biomanufacturing services for both Peregrine and outside customers on a fee-for-service basis.
 
2.           BASIS OF PRESENTATION
 
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to quarterly reports on Form 10-Q.  Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for a complete set of financial statements.  These interim unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2010.  The unaudited financial information for the interim periods presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments.  Results of operations for 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.
 
The interim unaudited condensed consolidated financial statements include the accounts of Peregrine Pharmaceuticals, Inc., and its wholly owned subsidiary, Avid Bioservices, Inc.  All intercompany accounts and transactions have been eliminated in the interim unaudited condensed consolidated financial statements.
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts, as well as disclosures of commitments and contingencies in the financial statements and accompanying notes.  Actual results could differ from those estimates.
 
Reverse Stock Split
 
On October 16, 2009, we filed a Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware to effect a reverse split of our common stock at a ratio of one-for-five.  The reverse stock split was effective at the close of business on October 16, 2009.  All fractional shares created by the reverse stock split were rounded up to the nearest whole share.  All historical share and per share amounts have been adjusted to reflect the reverse stock split.
 
Reclassification
 
Certain comparative amounts in the interim unaudited condensed consolidated financial statements for the quarter ended July 31, 2009 have been reclassified to conform to the current year presentation.  These reclassifications had no effect on previously reported operating expenses or net loss.
 
Going Concern
 
Our interim condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that we are unable to continue as a going concern.
 
 
5

 
PEREGRINE PHARMACEUTICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED JULY 31, 2010 (unaudited) (continued)

 
At July 31, 2010, we had $17,983,000 in cash and cash equivalents.  We have expended substantial funds on the research, development and clinical trials of our product candidates, and funding the operations of Avid.  As a result, we have historically experienced negative cash flows from operations since our inception and we expect the negative cash flows from operations to continue for the foreseeable future.  Our net losses incurred during the past three fiscal years ended April 30, 2010, 2009 and 2008 amounted to $14,494,000, $16,524,000, and $23,176,000, respectively.  Unless and until we are able to generate sufficient revenues from Avid’s contract manufacturing services and/or from the sale and/or licensing of our products under development, we expect such losses to continue for the foreseeable future.
 
Therefore, our ability to continue our clinical trials and development efforts is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity or debt.
 
With respect to financing our operations through the issuance of equity, during the quarter ended July 31, 2010, we raised $6,644,000 in gross proceeds.  As of July 31, 2010, gross proceeds of up to $23,924,000 remained available under an effective shelf registration statement.
 
In addition, we may also raise additional capital through additional equity offerings, licensing our products in development, procuring additional government contracts and grants, or increasing revenue from our wholly owned subsidiary, Avid.  While we will continue to explore these potential opportunities, there can be no assurances that we will be successful in raising sufficient capital on terms acceptable to us, or at all, or that we will be successful in procuring additional government contracts and grants, or that sufficient additional revenues will be generated from Avid or under potential licensing or partnering agreements to complete the research, development, and clinical testing of our product candidates.  Based on our current projections, which include projected revenues under signed contracts with existing customers of Avid, we believe we have sufficient cash on hand combined with amounts expected to be received from Avid customers and from our government contract to meet our obligations as they become due through at least the third quarter ending January 31, 2011 of our current fiscal year based on current assumptions.  There are a number of uncertainties associated with our financial projections, including but not limited to, termination of third party or government contracts, technical challenges, or possible reductions in funding under our government contract, which could reduce or delay our future projected cash-inflows.  In addition, under our Loan Agreement (see Note 7), in the event our government contract with the Transformational Medical Technologies (“TMT”) is terminated or canceled for any reason, including reasons pertaining to budget cuts by the government or reduction in government funding for the program, we would be required to set aside cash and cash equivalents in an amount equal to 80% of the outstanding loan balance (or $2,173,000 as of July 31, 2010) in a restricted collateral account non-accessible by us.  In the event our projected cash-inflows are reduced or delayed or if we default on a loan covenant that limits our access to our available cash on hand, we might not have sufficient capital to operate our business through the third quarter of our current fiscal year unless we raise additional capital.  The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.
 
3.           SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Revenue Recognition
 
We currently derive revenue from the following three sources:  (i) contract manufacturing services provided by Avid, (ii) licensing revenues related to agreements associated with Peregrine’s technologies under development, and (iii) government contract revenues for services provided under a government contract awarded to Peregrine through the Transformational Medical Technologies (“TMT”) of the U.S. Department of Defense’s Defense Threat Reduction Agency.
 
We recognize revenue in accordance with the authoritative guidance for revenue recognition.  We recognize revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery (or passage of title) has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.  We also comply with the authoritative guidance for revenue recognition regarding arrangements with multiple deliverables.
 
 
6

 
PEREGRINE PHARMACEUTICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED JULY 31, 2010 (unaudited) (continued)

 
In addition, we also follow the authoritative guidance when reporting revenue as gross when we act as a principal versus reporting revenue as net when we act as an agent.  For transactions in which we act as a principal, have discretion to choose suppliers, bear credit risk and perform a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services and research and development expense for services provided under our contract with the TMT.
 
Contract Manufacturing Revenue - Revenue associated with contract manufacturing services provided by Avid are recognized once the service has been rendered and/or upon shipment (or passage of title) of the product to the customer.  On occasion, we recognize revenue on a “bill-and-hold” basis in accordance with the authoritative guidance.  Under “bill-and-hold” arrangements, revenue is recognized once the product is complete and ready for shipment, title and risk of loss has passed to the customer, management receives a written request from the customer for “bill-and-hold” treatment, the product is segregated from other inventory, and no further performance obligations exist.  There was no revenue recognized under a “bill-and-hold” arrangement during the quarter ended July 31, 2010.
 
Any amounts received prior to satisfying our revenue recognition criteria are recorded as deferred revenue in the accompanying consolidated financial statements.  We also record a provision for estimated contract losses, if any, in the period in which they are determined.
 
License Revenue - Revenue associated with licensing agreements primarily consist of non-refundable upfront license fees, non-refundable annual license fees and milestone payments.  Non-refundable upfront license fees received under license agreements, whereby continued performance or future obligations are considered inconsequential to the relevant license technology, are recognized as revenue upon delivery of the technology.
 
If a license agreement has multiple element arrangements, we analyze and determine whether the deliverables, which often include performance obligations, can be separated or whether they must be accounted for as a single unit of accounting in accordance with the authoritative guidance.  Under multiple element arrangements, we recognize revenue for delivered elements only when the delivered element has stand-alone value and we have objective and reliable evidence of fair value for each undelivered element.  If the fair value of any undelivered element included in a multiple element arrangement cannot be objectively determined, the arrangement would then be accounted for as a single unit of accounting, and revenue is recognized over the estimated period of when the performance obligation(s) are performed.
 
In addition, under certain circumstances, when there is objective and reliable evidence of the fair value of the undelivered items in an arrangement, but no such evidence for the delivered items, we utilize the residual method to allocate the consideration received under the arrangement.  Under the residual method, the amount of consideration allocated to delivered items equals the total arrangement consideration less the aggregate fair value of the undelivered items, and revenue is recognized upon delivery of the undelivered items based on the relative fair value of the undelivered items.
 
Revenue recognized under licensing agreements is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned as of the period ending date.  Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the accompanying unaudited condensed consolidated financial statements.
 
Non-refundable annual license fees are recognized as revenue on the anniversary date of the agreement in accordance with the authoritative guidance for revenue recognition.  Milestone payments are recognized as revenue upon the achievement of the specified milestone, provided that (i) the milestone event is substantive in nature and the achievement of the milestone is not reasonably assured at the inception of the agreement, (ii) the fees are non-refundable, and (iii) there is no continuing performance obligations associated with the milestone payment.  Any milestone payments received prior to satisfying these revenue recognition criteria are recorded as deferred revenue in the accompanying unaudited condensed consolidated financial statements.
 
Government Contract Revenue - On June 30, 2008, we were awarded up to a five-year government contract (the “Government Contract”) potentially worth up to $44.4 million to test and develop bavituximab and an equivalent fully human antibody as potential broad-spectrum treatments for viral hemorrhagic fever infections.  The contract was awarded through the Transformational Medical Technologies (“TMT”) of the U.S. Department of Defense’s Defense Threat Reduction Agency.  This Government Contract was originally expected to provide us with up to $22.3 million in funding over an initial two-year base period ending June 29, 2010.  However, the Government Contract was subsequently extended for several weeks for no additional funding to complete ongoing pre-clinical studies and to determine potential next steps under the Government Contract. As of the filing date of this Form 10-Q, we have not received notification from the TMT regarding whether or not the base period has been extended or if we will receive additional funding beyond the base period. Subject to the progress of the program and budgetary considerations in future years, the contract can be extended by the TMT beyond the base period to cover up to $44.4 million in funding through the exercise of one-year option periods not to exceed the government’s maximum five-year period for contracts. However, due to the uncertainty regarding the extension of the contract beyond the base period, there is no guarantee we will receive additional funding beyond what was allocated to the base period.
 
 
7

 
PEREGRINE PHARMACEUTICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED JULY 31, 2010 (unaudited) (continued)

 
The Government Contract is classified as a “cost-plus-fixed-fee” contract.  We recognize government contract revenue in accordance with the authoritative guidance for revenue recognition including the authoritative guidance specific to federal government contracts.  Reimbursable costs under the contract primarily include direct labor, subcontract costs, materials, equipment, travel, and indirect costs.  In addition, we receive a fixed fee for our efforts equal to 9.9% of the reimbursable costs incurred under the Government Contract, which is unconditionally earned as allowable costs are billed and is not contingent on success factors.  Reimbursable costs under this Government Contract, including the fixed fee, are generally recognized as revenue in the period the reimbursable costs are incurred and become billable.  However, when amounts billable, including the fixed fee, are not reasonably related to the proportionate performance of the total work or services to be performed, we recognize revenue on a proportional performance basis.  In addition, reimbursable costs, including the fixed fee, associated with manufacturing services are recognized as revenue once delivery (or passage of title) has occurred.  Amounts billable (including the fixed fee) prior to satisfying revenue recognition criteria are classified as deferred government contract revenue in the accompanying unaudited condensed consolidated financial statements.
 
Fair Value of Financial Instruments
 
The carrying amounts of our short-term financial instruments, which include cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate their fair values due to their short maturities.  The fair value of our note payable is estimated based on the quoted prices for the same or similar issues or on the current rates offered to us for debt of the same remaining maturities.
 
Fair Value Measurements
 
We determine fair value measurements in accordance with the authoritative guidance for fair value measurements and disclosures for all assets and liabilities within the scope of this guidance.  This guidance clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.  The guidance also clarifies its application in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active.  The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:
 
·  
Level 1 – Quoted prices in active markets for identical assets or liabilities.
·  
Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets or liabilities whose value are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.
·  
Level 3 – Unobservable inputs that are supported by little or no market activity and significant to the overall fair value measurement.
 
As of July 31, 2010, we do not have any Level 2 or Level 3 financial assets or liabilities and our cash and cash equivalents are carried at fair value based on quoted market prices for identical securities (Level 1 input).
 
 
8

 
PEREGRINE PHARMACEUTICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED JULY 31, 2010 (unaudited) (continued)

 
Share-Based Compensation
 
We account for stock options and restricted stock awards granted under our equity compensation plans in accordance with the authoritative guidance for share-based compensation.  The estimated fair value of share-based payments to employees in exchange for services is measured at the grant date, using a fair value based method, and is recognized as expense on a straight-line basis over the requisite service periods.  Share-based compensation expense recognized during the period is based on the value of the portion of the share-based payment that is ultimately expected to vest during the period.  Share-based compensation expense for a share-based payment with a performance condition is recognized on a straight-line basis over the requisite service period when the achievement of the performance condition is determined to be probable.  If a performance condition is not determined to be probable or is not met, no share-based compensation is recognized and any previously recognized compensation expense is reversed.
 
In addition, we periodically grant stock options and restricted stock awards to non-employee consultants, which we account for in accordance with the authoritative guidance for share-based compensation.  The cost of non-employee services received in exchange for share-based awards are measured based on either the fair value of the consideration received or the fair value of the share-based award issued, whichever is more reliably measurable.  In addition, guidance requires share-based compensation related to unvested options and awards issued to non-employees to be recalculated at the end of each reporting period based upon the fair market value on that date until the share-based award has vested, and any adjustment to share-based compensation resulting from the remeasurement is recognized in the current period.
 
Total share-based compensation expense related to stock options and restricted stock awards for the three-month period ended July 31, 2010 and 2009 are included in the accompanying interim unaudited condensed consolidated statements of operations as follows:
 
   
Three Months Ended
July 31,
 
   
2010
   
2009
 
Research and development
  $ 254,000     $ 84,000  
Selling, general and administrative
    389,000       78,000  
    Total share-based compensation expense
  $ 643,000     $ 162,000  
                 
Share-based compensation from:
               
Stock options
  $ 634,000     $ 162,000  
Restricted stock awards
    9,000       -  
 
  $ 643,000     $ 162,000  

As of July 31, 2010, the total estimated unrecognized compensation cost related to non-vested stock options was $4,230,000.  This cost is expected to be recognized over a weighted average vesting period of 1.74 years based on current assumptions.
 
As of July 31, 2010, there was no unrecognized compensation cost related to non-vested restricted stock awards as we did not deem it probable at July 31, 2010 that any of the predetermined performance conditions underlying the non-vested performance-based restricted stock awards would be achieved by their respective targeted attainment dates, which range from September 30, 2010 through July 15, 2011.
 
Comprehensive Loss
 
Comprehensive loss is equal to net loss for all periods presented.
 
 
9

 
PEREGRINE PHARMACEUTICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED JULY 31, 2010 (unaudited) (continued)

 
Basic and Dilutive Net Loss Per Common Share
 
Basic net loss per common share is computed by dividing our net loss by the weighted average number of common shares outstanding during the period excluding the dilutive effects of options, stock awards and warrants in accordance with the authoritative guidance.  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 stock options, stock awards and warrants outstanding during the period calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive.  Because the impact of options, awards and warrants are anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per share amounts for the three months ended July 31, 2010 and 2009.
 
The calculation of weighted average diluted shares outstanding excludes the dilutive effect of outstanding stock options, stock awards and warrants to purchase up to 275,069 and 639,462 shares of common stock for the three months ended July 31, 2010 and 2009, respectively, since their impact are anti-dilutive during periods of net loss.
 
The calculation of weighted average diluted shares outstanding also excludes weighted average outstanding stock options, stock awards and warrants to purchase up to 4,345,641 and 1,736,693 shares of common stock for the three months ended July 31, 2010 and 2009, respectively, as their exercise prices were greater than the average market price of our common stock during the respective periods, resulting in an anti-dilutive effect.
 
4.           NEW ACCOUNTING STANDARDS NOT YET ADOPTED
 
In October 2009, the Financial Accounting Standards Board ("FASB") issued an accounting standards update that requires an entity to allocate arrangement consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices, eliminates the use of the residual method of allocation, and requires the relative-selling-price method in all circumstances in which an entity recognizes revenue of an arrangement with multiple deliverables.  This guidance will be effective for revenue arrangements entered into or materially modified for fiscal years beginning on or after June 15, 2010, which will be our fiscal year 2012, with earlier application permitted.  We have not yet evaluated the potential impact of adopting this guidance on our consolidated financial statements.
 
In April 2010, the FASB issued an accounting standards update that provides guidance on the milestone method of revenue recognition for research and development arrangements. This guidance allows an entity to make an accounting policy election to recognize a payment that is contingent upon the achievement of a substantive milestone in its entirety in the period in which the milestone is achieved. This guidance will be effective for fiscal years beginning on or after June 15, 2010, which will be our fiscal year 2012, and may be applied prospectively to milestones achieved after the adoption date or retrospectively for all periods presented, with earlier application permitted.  We have not yet evaluated the potential impact of adopting this guidance on our consolidated financial statements.
 
5.           ACCOUNTS RECEIVABLE
 
Accounts receivable is recorded at the invoiced amount net of an allowance for doubtful accounts, if necessary.  Trade and other receivables primarily include amounts billed for contract manufacturing services provided by Avid (“trade” receivables).  Government contract receivables include amounts billed under our contract with the Transformational Medical Technologies (“TMT”) of the U.S. Department of Defense’s Defense Threat Reduction Agency.
 
We continually monitor our allowance for doubtful accounts 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 these factors at that point in time.  With respect to our trade and other receivables, we determined a $20,000 allowance for doubtful accounts was necessary based on our analysis as of July 31, 2010.  With respect to our government contract receivables, we have not recorded an allowance for doubtful accounts as of July 31, 2010 based on our analysis.
 
6.           INVENTORIES
 
Inventories are stated at the lower of cost or market and primarily include raw materials, direct labor and overhead costs associated with our wholly owned subsidiary, Avid.
 
Inventories consist of the following at July 31, 2010 and April 30, 2010:
 
   
July 31,
2010
   
April 30,
2010
 
Raw materials
  $ 1,718,000     $ 1,243,000  
Work-in-process
    2,974,000       1,880,000  
Total inventories, net
  $ 4,692,000     $ 3,123,000  

 
 
10

 
PEREGRINE PHARMACEUTICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED JULY 31, 2010 (unaudited) (continued)

 
  7.           NOTE PAYABLE
 
On December 9, 2008, we entered into a loan and security agreement whereby we borrowed $5,000,000 (“Loan Agreement”) from MidCap Financial LLC and BlueCrest Capital Finance, L.P (collectively, the “Lenders”).
 
Under the Loan Agreement, the outstanding principal balance each month will bear interest at the then current thirty (30) day LIBOR rate (set at a floor of 3%) plus 9% (12% from inception to July 31, 2010).  The Loan Agreement allowed for interest-only payments during the initial six (6) months through July 2009 followed by thirty (30) equal monthly principal payments plus interest.  The Loan Agreement, which is secured by generally all assets of the Company, contains customary covenants that, among other things, generally restrict our ability to incur additional indebtedness.  In addition, the Loan Agreement contains a covenant, whereby if our contract with the TMT is terminated while the loan is outstanding, we would be required to set aside cash and cash equivalents in an amount equal to at least 80% of the outstanding loan balance (or $2,173,000 as of July 31, 2010) in a secured account over which we will not be permitted to make withdrawals or otherwise exercise control.  Moreover, the Loan Agreement includes a Material Adverse Change clause whereby if there is a material impairment in the priority of Lenders’ lien in the collateral or in the value of such collateral, or if we encounter a material adverse change in our business, operations, or condition (financial or otherwise), or a material impairment of the prospect of repayment of any portion of the loan, then an event of default can be invoked by the Lenders.  As of July 31, 2010, we are in compliance with all Loan Agreement covenants.
 
In connection with the Loan Agreement, we issued warrants to purchase an aggregate of 338,410 shares of our common stock at an exercise price of $1.48 per share.  The fair value of the warrants was $414,000, and this amount was credited to additional paid-in capital and reduced the carrying value of the debt, reflected as a debt discount in the accompanying unaudited condensed consolidated financial statements.  The debt discount is being amortized as a non-cash interest expense over the term of the outstanding loan using the effective interest method.  The fair value of the warrants was determined using the Black-Scholes model with the following assumptions:  estimated volatility of 70.72%; risk free interest rate of 2.00%; an expected life of five years; and no dividend yield.
 
In connection with the Loan Agreement, we also incurred $469,000 in financing fees and legal costs related to closing the Loan Agreement.  These fees and costs are classified as debt issuance costs, and the short-term and long-term portions of these costs are included in current assets and other long-term assets, respectively, in the accompanying unaudited condensed consolidated balance sheets and are being amortized as a non-cash interest expense over the term of the outstanding loan using the effective interest method.  Included in debt issuance costs is a final payment fee of $150,000, which is due and payable on the maturity date of the outstanding loan balance, and is equal to 3% of the total amount funded under the Loan Agreement.  The final payment fee payable of $150,000 is classified as other long-term liabilities in the accompanying unaudited condensed consolidated balance sheets.
 
As of July 31, 2010, we will make the following principal payments under the Loan Agreement in the years ending April 30,
 
2011
    $ 1,383,000  
2012
      1,333,000  
Total
    $ 2,716,000  

 
 
11

 
PEREGRINE PHARMACEUTICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED JULY 31, 2010 (unaudited) (continued)

 
8.           STOCKHOLDERS’ EQUITY
 
Our ability to continue our clinical trials and development efforts is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity.
 
On July 14, 2009, we filed a shelf registration statement on Form S-3, File number 333-160572 (“July 2009 Shelf”), under which we may issue, from time to time, in one or more offerings, shares of our common stock for gross proceeds of up to $50,000,000.  As of July 31, 2010, gross proceeds of up to $23,924,000 remained available under the July 2009 Shelf.
 
Also on July 14, 2009, we entered into a separate At Market Issuance Sales Agreement (“July 2009 AMI Agreement”) with Wm Smith & Co., pursuant to which we may sell shares of our common stock through Wm Smith & Co., as agent, in registered transactions from our July 2009 Shelf, for aggregate gross proceeds of up to $25,000,000.  Shares of common stock sold under this arrangement were sold at market prices.  During the quarter ended July 31, 2010, we had sold 1,925,565 shares of common stock at market prices under the July 2009 AMI Agreement for aggregate gross proceeds of $5,568,000 before deducting commissions and other issuance costs of $133,000.  As of July 31, 2010, we had raised the entire $25,000,000 available under the July 2009 AMI Agreement.
 
On June 22, 2010, we entered into an At Market Issuance Agreement (“June 2010 AMI Agreement”) with McNicoll, Lewis & Valk LLC (“MLV”), pursuant to which we may sell shares of our common stock through MLV, as agent, in registered transactions from our July 2009 Shelf, for aggregate gross proceeds of up to $15,000,000.  Shares of common stock sold under this arrangement were (or will be) sold at market prices.  During the quarter ended July 31, 2010, we had sold 615,442 shares of common stock at market prices under the June 2010 AMI Agreement for aggregate gross proceeds of $1,076,000 before deducting commissions and other issuance costs of $29,000.
 
Subsequent to July 31, 2010 and through August 31, 2010, we had sold 395,413 shares of common stock at market prices under the June 2010 AMI Agreement for aggregate gross proceeds of $634,000.  As of August 31, 2010, gross proceeds of $13,290,000 remained available under the June 2010 AMI Agreement.
 
As of July 31, 2010, we have reserved 5,803,675 additional shares of our common stock which may be issued under our equity compensation plans and outstanding warrant agreements, excluding shares of common stock that could potentially be issued under the July 2009 Shelf, as further described in the following table:
 
   
Number of Shares Reserved
 
Common shares reserved for issuance under outstanding option and restricted stock award grants and available for issuance under our equity compensation plans
    5,583,708  
Common shares issuable upon exercise of outstanding warrants
    219,967  
Total shares of common stock reserved for issuance
    5,803,675  

9.           STOCK OPTIONS, RESTRICTED STOCK AWARDS, AND WARRANTS
 
Stock Options
 
The following summarizes our stock option transaction activity for the three months ended July 31, 2010:
 
Stock Options
 
Shares
   
Weighted
Average
Exercisable
Price
 
Outstanding, May 1, 2010
    5,013,692     $ 4.49  
Granted
    76,076     $ 1.96  
Exercised
    -     $ -  
Canceled or expired
    (65,204 )   $ 5.07  
Outstanding, July 31, 2010
    5,024,564     $ 4.44  
 

 
 
12

 
PEREGRINE PHARMACEUTICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED JULY 31, 2010 (unaudited) (continued)

 
Restricted Stock Awards
 
The following summarizes our performance-based restricted stock awards transaction activity for the quarter ended July 31, 2010:
 
Restricted Stock
 
Shares
   
Weighted
Average
Exercisable
Price
 
Unvested, May 1, 2010
    371,250     $ 2.97  
Granted
    -       -  
Vested
    (74,250 )   $ 2.97  
Canceled or expired
    -       -  
Unvested, July 31, 2010
    297,000     $ 2.97  

Warrants
 
During the quarter ended July 31, 2010, 118,443 warrants were exercised on a cashless basis in exchange for 74,802 shares of our common stock.  As of July 31, 2010, we had warrants outstanding to purchase up to 219,967 shares of our common stock at an exercise price of $1.48 per share with an expiration date of December 19, 2013.  The aforementioned warrants were issued during fiscal year 2009 in connection with the loan and security agreement we entered into on December 9, 2008, as further discussed in Note 8.  There were no warrants granted during the quarter ended July 31, 2010.
 
10.           SEGMENT REPORTING
 
Our business is organized into two reportable operating segments and both operate in the U.S.  Peregrine is engaged in the research and development of monoclonal antibodies for the treatment of cancer and viral infections.  Avid is engaged in providing contract manufacturing services for Peregrine and outside customers on a fee-for-service basis.
 
The accounting policies of the operating segments are the same as those described in Note 3.  We evaluate the performance of our contract manufacturing services segment based on gross profit or loss from third-party customers.  However, our products in the research and development segment are not evaluated based on gross profit or loss, but rather based on scientific progress of the technologies.  As such, gross profit or loss is only provided for our contract manufacturing services segment in the below table.  All revenues shown below are derived from transactions with external customers.
 
Segment information is summarized as follows:
 
   
Three Months Ended July 31,
 
   
2010
   
2009
 
             
Contract manufacturing services revenue
  $ 983,000     $ 2,070,000  
Cost of contract manufacturing services
    1,156,000       1,073,000  
Gross (loss) profit
    (173,000 )     997,000  
                 
Revenue from products in research and development
    2,226,000       4,680,000  
Research and development expense
    (7,067,000 )     (6,074,000 )
Selling, general and administrative expense
    (2,498,000 )     (1,793,000 )
Other income (expense), net
    (183,000 )     (238,000 )
Net loss
  $ (7,695,000 )   $ (2,428,000 )
 
 
 
13

 
PEREGRINE PHARMACEUTICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED JULY 31, 2010 (unaudited) (continued)


 
Revenues generated from our contract manufacturing services segment were from the following customers:
 
   
Three Months Ended July 31,
 
   
2010
   
2009
 
United States (one customer)
    98%       34%  
Canada (one customer)
    0%       50%  
Other customers
    2%       16%  
Total customer revenues as a percentage of revenue
    100%       100%  

Revenue generated from our products in our research and development segment was from the following sources:
 
   
Three Months Ended July 31,
 
   
2010
   
2009
 
Government contract revenue (Note 3)
  $ 2,111,000     $ 4,671,000  
License revenue
    115,000       9,000  
    $ 2,226,000     $ 4,680,000  

Our long-lived assets consist of leasehold improvements, laboratory equipment, and furniture, fixtures and computer equipment and are net of accumulated depreciation.  Long-lived assets by segment consist of the following:
 
   
July 31,
2010
   
April 30,
2010
 
Long-lived Assets, net:
           
Contract manufacturing services
  $ 1,309,000     $ 1,311,000  
Products in research and development
    542,000       158,000  
Total long-lived assets, net
  $ 1,851,000     $ 1,469,000  

 
11.           LICENSING AGREEMENTS
 
During May 2010, we entered into an assignment agreement and a license agreement (collectively, the “Agreements”) with an unrelated entity to develop our Tumor Necrosis Therapy (“TNT”) technologies in certain Asia-Pacific Economic Cooperation (APEC) countries.  Under the terms of the Agreements, we have agreed to sub-license certain non-exclusive licenses rights and agreed to assign certain exclusive development and commercialization rights under our TNT program in certain APEC countries.  We have retained exclusive rights to our TNT program in the U.S., European Union countries, and other select countries internationally.  Under the terms of the Agreements, we will receive aggregate fees in the amount of $500,000 to be paid over a period of two years and annual maintenance fees ranging from $100,000 to $250,000, as defined in the Agreements beginning May 2011 through 15 years following the date of the first commercial sale.  In addition, we could also receive low double digit royalties on net sales, as defined in the Agreements.  In accordance with the terms of the Agreements, we are obligated to deliver certain purchased patents, know-how and materials (the “Purchased Assets”), and we are obligated to supply certain quantities of research materials as defined in the Agreements.  In addition, we have also agreed to provide certain manufacturing services, provided such manufacturing services are requested by the unrelated entity within a certain period of time and for certain agreed upon fees as defined in the Agreements.  We have determined that, pursuant to the authoritative guidance for revenue recognition for multiple element arrangements, there was objective and reliable evidence of fair value of the undelivered elements (manufacturing commitment services) in the arrangement, but no such evidence of fair value for any other element in the arrangement.  Therefore, we utilize the residual method to allocate the consideration received under the arrangement.  Under the residual method, the amount of consideration allocated to all other elements in the arrangement (delivered and undelivered) equals the total arrangement consideration less the aggregate fair value of the undelivered elements with stand alone fair value (manufacturing commitment services ).  To date, we have allocated the total arrangement consideration to the undelivered elements with stand alone fair value (manufacturing commitment services) since the fair value of these undelivered elements exceeded the total consideration received to date under the arrangement.  As such, we will recognize revenue under the Agreements upon delivery of these manufacturing services based on the relative fair value of the services.  To date, we have not recognized any revenue under these Agreements.  Amounts received prior to satisfying our revenue recognition criteria are recorded as deferred revenue in the accompanying unaudited condensed consolidated financial statements.
 
 
 
14

 
PEREGRINE PHARMACEUTICALS, INC.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
FOR THE THREE MONTHS ENDED JULY 31, 2010 (unaudited) (continued)

 
12.           COMMITMENTS AND CONTINGENCIES
 
From time to time, we are involved in legal disputes arising in the normal course of our business.  We are not presently subject to any material litigation or other dispute nor, to management’s knowledge, is any litigation or other proceeding threatened against us that collectively is expected to have a material adverse effect on our consolidated cash flows, financial condition or results of operations.
 
 
 
 
 
 

 
 
15

 
 
 
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our projections, estimates, expectations or beliefs concerning among other things, financial items that relate to management’s future plans or objectives or to our future economic and financial performance.  In some cases, you can identify these statements by terminology such as “may”, “should”, “plans”, “believe”, “will”, “anticipate”, “estimate”, “expect” “project”, 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.  You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report.  We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission (“SEC”) after the date of this Quarterly Report. Actual results may differ materially from any forward looking statement.
 
Overview
 
We are a clinical-stage biopharmaceutical company developing first-in-class monoclonal antibodies for the treatment of cancer and viral infections.  We are advancing three independent Phase II oncology programs as well as our Phase I hepatitis C virus (“HCV”) program with our first-in-class compounds bavituximab and Cotara.
 
Bavituximab is a first-in-class phosphatidylserine (“PS”)-targeting monoclonal antibody that represents a new approach to treating cancer and has demonstrated broad-spectrum potential in multiple solid tumors.  PS is a highly immunosuppressive molecule usually located inside the membrane of healthy cells, but “flips” and becomes exposed on the outside of cells that line tumor blood vessels, creating a specific target for anti-cancer treatments.  PS-targeting antibodies target and bind to PS and block this immunosuppressive signal, thereby enabling the immune system to recognize and fight the tumor.  Our Phase II single-arm trial in lung cancer demonstrated promising results compared to data from separate historical control trials, leading us to initiate two new randomized Phase IIb trials in non-small cell lung cancer (“NSCLC”).
 
In June 2010, we announced that we initiated a randomized Phase IIb trial evaluating bavituximab in combination with standard chemotherapy in patients with refractory NSCLC, which represents a significant unmet medical need.  In July 2010, we initiated a second randomized Phase IIb trial evaluating bavituximab in combination with chemotherapy in patients with front-line NSCLC.  By the end of 2010, we plan to initiate additional company and investigator-sponsored clinical trials.  Our investigator-sponsored trials (“IST”) program is a cost-effective way to generate insight into bavituximab’s mechanism of action, augment our safety database, and evaluate new combination therapy approaches to treating cancer patients.
 
Our novel brain cancer therapy Cotara is a targeted monoclonal antibody linked to a radioisotope that is administered directly into the tumor, destroying the tumor from the inside out, with minimal exposure to healthy tissue.  Cotara is currently in a Phase II safety and efficacy study designed to treat up to 40 patients at first relapse and enrollment is expected to be completed by year-end.  Cotara has been granted orphan drug status and fast track designation for the treatment of GBM and anaplastic astrocytoma by the U.S. Food and Drug Administration.
 
In addition to our clinical programs, on June 30, 2008, we were awarded up to a five-year government contract (the “Government Contract”) potentially worth up to $44.4 million to test and develop bavituximab and an equivalent fully human antibody as potential broad-spectrum treatments for viral hemorrhagic fever infections.  The contract was awarded through the Transformational Medical Technologies (“TMT”) of the U.S. Department of Defense’s Defense Threat Reduction Agency.  This Government Contract was originally expected to provide us with up to $22.3 million in funding over an initial two-year base period ending June 29, 2010.  However, the Government Contract was subsequently extended for several weeks for no additional funding to complete ongoing pre-clinical studies and to determine potential next steps under the Government Contract.  As of the filing date of this Form 10-Q, we have not received notification from the TMT regarding whether or not the base period has been extended or if we will receive additional funding beyond the base period. Subject to the progress of the program and budgetary considerations in future years, the contract can be extended by the TMT beyond the base period to cover up to $44.4 million in funding through the exercise of one-year option periods not to exceed the government’s maximum five-year period for contracts.  However, due to the uncertainty regarding the extension of the contract beyond the base period, there is no guarantee we will receive additional funding beyond what was allocated to the base period.
 
 
16

 
 
In addition to our research and development efforts, we operate a wholly owned cGMP (current Good Manufacturing Practices) contract manufacturing subsidiary, Avid Bioservices (“Avid”).  Avid provides integrated manufacturing services for biotechnology and biopharmaceutical companies on a fee-for-service basis, from pre-clinical drug supplies up through commercial-scale drug manufacturing.  In addition to generating revenue from providing a broad range of biomanufacturing services to third-party clients, Avid is strategically integrated with Peregrine to manufacture clinical products for our clinical trials.
 
Going Concern
 
Our interim condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.  The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that we are unable to continue as a going concern.
 
At July 31, 2010, we had $17,983,000 in cash and cash equivalents.  We have expended substantial funds on the research, development and clinical trials of our product candidates, and funding the operations of Avid.  As a result, we have historically experienced negative cash flows from operations since our inception and we expect the negative cash flows from operations to continue for the foreseeable future.  Our net losses incurred during the past three fiscal years ended April 30, 2010, 2009 and 2008 amounted to $14,494,000, $16,524,000, and $23,176,000, respectively.  Unless and until we are able to generate sufficient revenues from Avid’s contract manufacturing services and/or from the sale and/or licensing of our products under development, we expect such losses to continue for the foreseeable future.
 
Therefore, our ability to continue our clinical trials and development efforts is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity or debt.
 
With respect to financing our operations through the issuance of equity, during the quarter ended July 31, 2010, we raised $6,644,000 in gross proceeds.  As of July 31, 2010, gross proceeds of up to $23,924,000 remained available under an effective shelf registration statement.
 
In addition, we may also raise additional capital through additional equity offerings, licensing our products in development, procuring additional government contracts and grants, or increasing revenue from our wholly owned subsidiary, Avid.  While we will continue to explore these potential opportunities, there can be no assurances that we will be successful in raising sufficient capital on terms acceptable to us, or at all, or that we will be successful in procuring additional government contracts and grants, or that sufficient additional revenues will be generated from Avid or under potential licensing or partnering agreements to complete the research, development, and clinical testing of our product candidates.  Based on our current projections, which include projected revenues under signed contracts with existing customers of Avid, we believe we have sufficient cash on hand combined with amounts expected to be received from Avid customers and from our government contract to meet our obligations as they become due through at least the third quarter ending January 31, 2011 of our current fiscal year based on current assumptions.  There are a number of uncertainties associated with our financial projections, including but not limited to, termination of third party or government contracts, technical challenges, or possible reductions in funding under our government contract, which could reduce or delay our future projected cash-inflows.  In addition, under our Loan Agreement (see Note 7), in the event our government contract with the Transformational Medical Technologies is terminated or canceled for any reason, including reasons pertaining to budget cuts by the government or reduction in government funding for the program, we would be required to set aside cash and cash equivalents in an amount equal to 80% of the outstanding loan balance (or $2,173,000 as of July 31, 2010) in a restricted collateral account non-accessible by us.  In the event our projected cash-inflows are reduced or delayed or if we default on a loan covenant that limits our access to our available cash on hand, we might not have sufficient capital to operate our business through the third quarter of our current fiscal year unless we raise additional capital.  The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.
 
 
17

 
 
Results of Operations
 
The following table compares the unaudited condensed consolidated statements of operations for the three-month periods ended July 31, 2010 and 2009.  This table provides you with an overview of the changes in the condensed consolidated statements of operations for the comparative periods, which are further discussed below.
 
   
Three Months Ended July 31,
 
   
2010
   
2009
   
$ Change
 
REVENUES:
                 
Contract manufacturing revenue
  $ 983,000     $ 2,070,000     $ (1,087,000 )
Government contract revenue
    2,111,000       4,671,000       (2,560,000 )
License revenue
    115,000       9,000       106,000  
     Total revenues
    3,209,000       6,750,000       (3,541,000 )
                         
COSTS AND EXPENSES:
                       
Cost of contract manufacturing
    1,156,000       1,073,000       83,000  
Research and development
    7,067,000       6,074,000       993,000  
Selling, general & administrative
    2,498,000       1,793,000       705,000  
                         
Total costs and expenses
    10,721,000       8,940,000       1,781,000  
                         
LOSS FROM OPERATIONS
    (7,512,000 )     (2,190,000 )     (5,322,000 )
                         
OTHER INCOME (EXPENSE):
                       
Interest and other income
    18,000       40,000       (22,000 )
Interest and other expense
    (201,000 )     (278,000 )     77,000  
                         
NET LOSS
  $ (7,695,000 )   $ (2,428,000 )   $ (5,267,000 )

Results of operations for 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.
 
Contract Manufacturing Revenue.
 
The decrease in contract manufacturing revenue of $1,087,000 (or 53%) during the three months ended July 31, 2010, compared to the same period in the prior year was primarily due to a decrease in the level of services provided to third-party customers compared to the same period of the prior year.
 
We expect to continue to generate contract manufacturing revenue during the remainder of the current fiscal year based on the anticipated completion of in-process customer related projects and the anticipated demand for Avid’s services under signed and outstanding proposals.
 
Government Contract Revenue.
 
Government contract revenue stems from our contract with the TMT of the U.S. Department of Defense's Defense Threat Reduction Agency.  The purpose of the contract is to test and develop bavituximab and an equivalent fully human antibody as potential broad-spectrum treatments for viral hemorrhagic fever infections.  The decrease in government contract manufacturing revenue of $2,560,000 (or 55%) during the three months ended July 31, 2010 compared to the same period in the prior year was due to a decrease in research and development services performed under the contract as manufacturing activities have decreased compared to the prior year period in accordance with the project plan.
 
 
 
18

 
 
As of July 31, 2010, we have recognized $21,620,000 in total government contract revenue under this contract, of which we recognized $2,111,000 during the three months ended July 31, 2010.  The contract was expected to provide us with up to $22.3 million in funding over an initial 24-month base period ending June 29, 2010.  However, the Government Contract was subsequently extended for several weeks for no additional funding to complete ongoing pre-clinical studies and to determine potential next steps under the Government Contract.  As of the filing date of this Form 10-Q, we have not received any written notification from the TMT regarding any additional funding beyond the base period.  Subject to the progress of the program and budgetary considerations in future years, the contract can be extended by the TMT beyond the base period to cover up to $44.4 million in funding through the exercise of one-year option periods not to exceed the government’s maximum five-year period for contracts.  In addition, subject to the progress of the program and budgetary considerations, the contract can be canceled by the TMT at any time.  Due to the uncertainty regarding the extension of the contract beyond the base period, it is difficult for us to estimate if we are going to continue to recognize revenue under this contract beyond the extended base period.
 
In addition to our current government contract with the TMT, we are also actively applying for additional government contracts and grants to support our oncology and anti-viral programs.  However, due to the uncertainty of government funding and our ability to successfully secure additional government contracts or grants, we cannot estimate with any certainty future government contract revenue in addition to our current government contract during the remainder of fiscal year 2011.
 
License Revenue.
 
The increase in license revenue of $106,000 during the three months ended July 31, 2010 compared to the same period in the prior year was directly related to revenue recognized  under a license agreement we entered into with an unrelated entity during July 2009 associated with our anti-VEGF antibody program.  In addition, since the license agreement was signed during July 2009, there was no corresponding revenue generated during the first two months of the prior year quarter ended July 31, 2009.
 
Although we expect to continue to recognize license revenue under our license agreements with unrelated entities during the remainder of the current fiscal year, we do not expect such revenue to be significant.
 
Cost of Contract Manufacturing.
 
The increase in cost of contract manufacturing of $83,000 (or 8%) during the three months ended July 31, 2010 compared to the same period in the prior year was primarily due to the write-off of unusable work-in-process inventory.  We expect to continue to incur contract manufacturing costs during the remainder of the current fiscal year based on the anticipated completion of customer projects under our current contract manufacturing agreements.
 
Research and Development Expenses.
 
The increase in research and development (“R&D”) expenses of $993,000 (or 16%) during the three months ended July 31, 2010 compared to the same period in the prior year is due to the following changes associated with each of our following platform technologies under development:
 
 
 
Technology Platform
 
R&D Expenses-Quarter Ended
July 31, 2010
   
R&D Expenses-Quarter Ended
July 31, 2009
   
$ Change
 
PS-Targeting (bavituximab)
  $ 6,281,000     $ 5,173,000     $ 1,108,000  
TNT (Cotara)
    746,000       696,000       50,000  
Other
    40,000       205,000       (165,000 )
Total R&D Expenses
  $ 7,067,000     $ 6,074,000     $ 993,000  
 
 
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o  
PS-Targeting Technology Platform (bavituximab) – The increase in PS-Targeting program expenses of $1,108,000 during the three months ended July 31, 2010 compared to the same period in the prior year was primarily due to increases in clinical trial and related expenses, payroll and related expenses, and consulting fees to support the advancement of our bavituximab clinical program.  During the current quarter, we initiated two separate randomized multi-center Phase IIb clinical trials using bavituximab in combination with chemotherapy for the treatment of patients with refractory and front-line non-small cell lung cancer (NSCLC).  The increase in PS-targeting program expenses associated with the advancement of our bavituximab clinical program was offset with a decrease in R&D expenses directly associated with our fully funded contract with TMT to develop bavituximab and a fully human antibody as potential broad-spectrum treatments for viral hemorrhagic fever infections as manufacturing related activities performed under the contract have decreased compared to the same prior year period in accordance with the project plan.
 
o  
Tumor Necrosis Therapy (“TNT”)Technology Platform(Cotara) – TNT program expenses for the three months ended July 31, 2010 remained in line with the same period in the prior year and increased slightly by $50,000 as we continued our efforts to support the advancement of our Cotara clinical program, including continued efforts to complete patient enrollment of our Phase II safety and efficacy trial using Cotara for the treatment of brain cancer by the end of calendar year 2010.
 
o  
Other R&D programs – The decrease in our other R&D program expenses of $165,000 during the three months ended July 31, 2010 compared to the same period in the prior year was primarily due to curtailing our efforts in developing earlier-stage technologies associated with our anti-angiogenesis agents and vascular targeting agents in order to focus our efforts and resources on our current clinical programs.  However, we are actively seeking partners to further develop these technologies.  This decrease in other R&D programs expenses was further supplemented by a decrease in R&D expenses associated with development efforts incurred in the prior year associated with our R84 antibody that was licensed to an unaffiliated entity in July 2009.
 
During the remainder of the current fiscal year, we expect to continue to direct the majority of our research and development expenses towards our PS-targeting technology platform although 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:
 
·    
the uncertainty of the extension of the government contract with the TMT;
·    
the uncertainty of future clinical trial results;
·    
the uncertainty of the ultimate number of patients to be treated in any current or future clinical trial;
·    
the uncertainty of the U.S. Food and Drug Administration allowing our studies to move forward from Phase I clinical studies to Phase II and Phase III clinical studies;
·    
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;
·    
the uncertainty of terms related to potential future partnering or licensing arrangements;
·    
the uncertainty of protocol changes and modifications in the design of our clinical trial studies, which may increase or decrease our future costs; and
·    
The uncertainty of our ability to raise additional capital to support our future research and development efforts beyond the third quarter ending January 31, 2011 of our current fiscal year.
 
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 discovery, pre-clinical or 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.
 
 
20

 
 
Selling, General and Administrative Expenses.
 
Selling, general and administrative expenses consist primarily of payroll and related expenses, director fees, legal and accounting fees, share-based compensation expense, investor and public relation fees, insurance, and other expenses relating to the general management, administration, and business development activities of the Company.
 
The increase in selling, general and administrative (“SG&A”) expenses of $705,000 (or 39%) during the three months ended July 31, 2010 compared to the same period in the prior year was primarily due to increases in share-based compensation expense (non-cash) and payroll and related expenses of $311,000 and $210,000, respectively.   The increase in share-based compensation expense was primarily associated with the amortization of the fair value of options granted to employees and directors during the fourth quarter of fiscal year 2010.  The increase in payroll and related expenses was primarily the result of increased headcount and related compensation combined with an increase in consulting fees associated with the increase in SG&A activities.  These increases in SG&A expenses were further supplemented with current quarter increases in other general corporate related expenses.
 
Interest and Other Income.
 
The decrease in interest and other income of $22,000 during the three months ended July 31, 2010 compared to the same period in the prior year is primarily due to a decrease in interest income as a result of lower prevailing interest rates during the current year compared to the prior year.
 
Interest and Other Expense.
 
The decrease in interest and other expense of $77,000 during the three months ended July 31, 2010 compared to the same period in the prior year was due to a $59,000 decrease in interest expense associated with the $5,000,000 term loan we entered into in December 2008 due to lower outstanding principal balance during the current period.
 
Critical Accounting Policies
 
The preparation and presentation of financial statements in conformity with accounting principles generally accepted in the United States, or GAAP, requires us to establish policies and to make estimates and assumptions that affect the amounts reported in our interim unaudited condensed consolidated financial statements. In our judgment, our critical accounting policies, estimates and assumptions have the greatest potential impact on our consolidated financial statements. We evaluate our estimates and judgments on an ongoing 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 critical accounting policy below updates, and should be considered in addition to, the critical accounting policies previously disclosed by us in Part II, Item 7 of our Annual Report for the fiscal year ended April 30, 2010.
 
Revenue Recognition.
 
We currently derive revenue from the following three sources:  (i) contract manufacturing services provided by Avid, (ii) licensing revenues related to agreements associated with Peregrine’s technologies under development, and (iii) government contract revenues for services provided under a government contract awarded to Peregrine through the Transformational Medical Technologies (“TMT”) of the U.S. Department of Defense’s Defense Threat Reduction Agency.
 
We recognize revenue in accordance with the authoritative guidance for revenue recognition.  We recognize revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery (or passage of title) has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.  We also comply with the authoritative guidance for revenue recognition regarding arrangements with multiple deliverables.
 
 
21

 
 
In addition, we also follow the authoritative guidance when reporting revenue as gross when we act as a principal versus reporting revenue as net when we act as an agent.  For transactions in which we act as a principal, have discretion to choose suppliers, bear credit risk and perform a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services and research and development expense for services provided under our contract with the TMT.
 
Contract Manufacturing Revenue - Revenue associated with contract manufacturing services provided by Avid are recognized once the service has been rendered and/or upon shipment (or passage of title) of the product to the customer.  On occasion, we recognize revenue on a “bill-and-hold” basis in accordance with the authoritative guidance.  Under “bill-and-hold” arrangements, revenue is recognized once the product is complete and ready for shipment, title and risk of loss has passed to the customer, management receives a written request from the customer for “bill-and-hold” treatment, the product is segregated from other inventory, and no further performance obligations exist.  There was  no revenue recognized under a “bill-and-hold” during the quarter ended  July 31, 2010.
 
Any amounts received prior to satisfying our revenue recognition criteria are recorded as deferred revenue in the accompanying consolidated financial statements.  We also record a provision for estimated contract losses, if any, in the period in which they are determined.
 
License Revenue - Revenue associated with licensing agreements primarily consist of non-refundable upfront license fees, non-refundable annual license fees and milestone payments. Non-refundable upfront license fees received under license agreements, whereby continued performance or future obligations are considered inconsequential to the relevant license technology, are recognized as revenue upon delivery of the technology.
 
If a license agreement has multiple element arrangements, we analyze and determine whether the deliverables, which often include performance obligations, can be separated or whether they must be accounted for as a single unit of accounting in accordance with the authoritative guidance.  Under multiple element arrangements, we recognize revenue for delivered elements only when the delivered element has stand-alone value and we have objective and reliable evidence of fair value for each undelivered element.  If the fair value of any undelivered element included in a multiple element arrangement cannot be objectively determined, the arrangement would then be accounted for as a single unit of accounting, and revenue is recognized over the estimated period of when the performance obligation(s) are performed.
 
In addition, under certain circumstances, when there is objective and reliable evidence of the fair value of the undelivered items in an arrangement, but no such evidence for the delivered items, we utilize the residual method to allocate the consideration received under the arrangement.  Under the residual method, the amount of consideration allocated to delivered items equals the total arrangement consideration less the aggregate fair value of the undelivered items, and revenue is recognized upon delivery of the undelivered items based on the relative fair value of the undelivered items.
 
Revenue recognized under licensing agreements is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned as of the period ending date.  Amounts received prior to satisfying the above revenue recognition criteria are recorded as deferred revenue in the accompanying unaudited condensed consolidated financial statements.
 
Non-refundable annual license fees are recognized as revenue on the anniversary date of the agreement in accordance with the authoritative guidance for revenue recognition.  Milestone payments are recognized as revenue upon the achievement of the specified milestone, provided that (i) the milestone event is substantive in nature and the achievement of the milestone is not reasonably assured at the inception of the agreement, (ii) the fees are non-refundable, and (iii) there is no continuing performance obligations associated with the milestone payment.  Any milestone payments received prior to satisfying these revenue recognition criteria are recorded as deferred revenue in the accompanying unaudited condensed consolidated financial statements.
 
Government Contract Revenue - On June 30, 2008, we were awarded up to a five-year government contract (the “Government Contract”) potentially worth up to $44.4 million to test and develop bavituximab and an equivalent fully human antibody as potential broad-spectrum treatments for viral hemorrhagic fever infections.  The contract was awarded through the Transformational Medical Technologies (“TMT”) of the U.S. Department of Defense’s Defense Threat Reduction Agency.  This Government Contract was originally expected to provide us with up to $22.3 million in funding over an initial two-year base period ending June 29, 2010.  However, the Government Contract was subsequently extended for several weeks for no additional funding to complete ongoing pre-clinical studies and to determine potential next steps under the Government Contract. As of the filing date of this Form 10-Q, we have not received notification from the TMT regarding whether or not the base period has been extended or if we will receive additional funding beyond the base period. Subject to the progress of the program and budgetary considerations in future years, the contract can be extended by the TMT beyond the base period to cover up to $44.4 million in funding through the exercise of one-year option periods not to exceed the government’s maximum five-year period for contracts. However, due to the uncertainty regarding the extension of the contract beyond the base period, there is no guarantee we will receive additional funding beyond what was allocated to the base period.
 
 
22

 
 
The Government Contract is classified as a “cost-plus-fixed-fee” contract.  We recognize government contract revenue in accordance with the authoritative guidance for revenue recognition including the authoritative guidance specific to federal government contracts.  Reimbursable costs under the contract primarily include direct labor, subcontract costs, materials, equipment, travel, and indirect costs.  In addition, we receive a fixed fee for our efforts equal to 9.9% of the reimbursable costs incurred under the Government Contract, which is unconditionally earned as allowable costs are billed and is not contingent on success factors.  Reimbursable costs under this Government Contract, including the fixed fee, are generally recognized as revenue in the period the reimbursable costs are incurred and become billable.  However, when amounts billable, including the fixed fee, are not reasonably related to the proportionate performance of the total work or services to be performed, we recognize revenue on a proportional performance basis.  In addition, reimbursable costs, including the fixed fee, associated with manufacturing services are recognized as revenue once delivery (or passage of title) has occurred.  Amounts billable (including the fixed fee) prior to satisfying revenue recognition criteria are classified as deferred government contract revenue in the accompanying unaudited condensed consolidated financial statements.
 
Liquidity and Capital Resources
 
At July 31, 2010, we had $17,983,000 in cash and cash equivalents.  We have expended substantial funds on the research, development and clinical trials of our product candidates, and funding the operations of Avid.  As a result, we have historically experienced negative cash flows from operations since our inception and we expect the negative cash flows from operations to continue for the foreseeable future.  Our net losses incurred during the past three fiscal years ended April 30, 2010, 2009 and 2008 amounted to $14,494,000, $16,524,000, and $23,176,000, respectively.  Unless and until we are able to generate sufficient revenues from Avid’s contract manufacturing services and/or from the sale and/or licensing of our products under development, we expect such losses to continue for the foreseeable future.
 
Therefore, our ability to continue our clinical trials and development efforts is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity or debt.
 
With respect to financing our operations through the issuance of equity, during the quarter ended July 31, 2010, we raised $6,644,000 in gross proceeds.  As of July 31, 2010, gross proceeds of up to $23,924,000 remained available under an effective shelf registration statement.
 
In addition, we may also raise additional capital through additional equity offerings, licensing our products in development, procuring additional government contracts and grants, or increasing revenue from our wholly owned subsidiary, Avid.  While we will continue to explore these potential opportunities, there can be no assurances that we will be successful in raising sufficient capital on terms acceptable to us, or at all, or that we will be successful in procuring additional government contracts and grants, or that sufficient additional revenues will be generated from Avid or under potential licensing or partnering agreements to complete the research, development, and clinical testing of our product candidates.  Based on our current projections, which include projected revenues under signed contracts with existing customers of Avid, we believe we have sufficient cash on hand combined with amounts expected to be received from Avid customers and from our government contract to meet our obligations as they become due through at least the third quarter ending January 31, 2011 of our current fiscal year based on current assumptions.  There are a number of uncertainties associated with our financial projections, including but not limited to, termination of third party or government contracts, technical challenges, or possible reductions in funding under our government contract, which could reduce or delay our future projected cash-inflows.  In addition, under our Loan Agreement (see Note 7), in the event our government contract with the Transformational Medical Technologies (“TMT”) is terminated or canceled for any reason, including reasons pertaining to budget cuts by the government or reduction in government funding for the program, we would be required to set aside cash and cash equivalents in an amount equal to 80% of the outstanding loan balance (or $2,173,000 as of July 31, 2010) in a restricted collateral account non-accessible by us.  In the event our projected cash-inflows are reduced or delayed or if we default on a loan covenant that limits our access to our available cash on hand, we might not have sufficient capital to operate our business through the third quarter of our current fiscal year unless we raise additional capital.  The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.
 
 
23

 
 
Significant components of the changes in cash flows from operating, investing, and financing activities for the three months ended July 31, 2010 compared to the same prior year period are as follows:
 
Cash Used In Operating Activities.  Cash used in operating activities is primarily driven by changes in our net loss.  However, cash used in operating activities generally differs from our reported net loss as a result of non-cash operating expenses or differences in the timing of cash flows as reflected in the changes in operating assets and liabilities.  During the three months ended July 31, 2010, cash used in operating activities increased $3,457,000 to $7,071,000 compared to $3,614,000 for the three months ended July 31, 2009.  This increase in net cash used in operating activities was primarily due to an increase of $4,543,000 in net loss reported during the current three-month period after taking into consideration non-cash operating expenses offset by a net change in operating assets and payment or reduction of liabilities in the aggregate amount of $1,086,000 .  The decrease in the net change in operating assets and payment or reduction of liabilities was primarily due to net changes associated with receivables, prepaid expenses and other current assets, customer deposits, accrued liabilities, deferred revenue and deferred government contract revenue.  The increase in our current three-month period net loss was primarily due to current period decreases in contract manufacturing revenue and government contract revenue combined with increases in research and development expenses and selling, general and administrative expenses.
 
The changes in operating activities as a result of non-cash operating expenses or differences in the timing of cash flows as reflected by the changes in operating assets and liabilities are as follows:
 
   
THREE MONTHS ENDED
 
   
July 31,
2010
   
July 31,
2009
 
Net loss, as reported
  $ (7,695,000 )   $ (2,428,000 )
Less non-cash expenses and adjustments to net loss:
               
Depreciation and amortization
    138,000       116,000  
Share-based compensation
    643,000       162,000  
Amortization of discount on notes payable and debt issuance costs
    108,000       126,000  
Amortization of expenses paid in shares of common stock
    239,000       -  
Net cash used in operating activities before changes in operating assets and liabilities
  $ (6,567,000 )   $ (2,024,000 )
Net change in operating assets and liabilities
  $ (504,000 )   $ (1,590,000 )
Net cash used in operating activities
  $ (7,071,000 )   $ (3,614,000 )

Cash Used In Investing Activities.  Net cash used in investing activities increased $441,000 to $484,000 for the three months ended July 31, 2010 compared to net cash used of $43,000 for the three months ended July 31, 2009.  This increase was due to an increase in cash outflows associated with property acquisitions of $514,000 primarily related to the current quarter purchases of certain computer software and laboratory equipment combined with a $73,000 decrease in other assets.
 
Cash Provided By Financing Activities. Net cash provided by financing activities decreased $560,000 to $5,857,000 for the quarter ended July 31, 2010 compared to net cash provided of $6,417,000 for the quarter ended July 31, 2009.  During the quarter ended July 31, 2010, we received net proceeds under two separate At Market Issuance Sales Agreements, whereby we sold 2,541,007 shares of our common stock for net proceeds of $6,482,000.  These current year net proceeds were offset with aggregate principal payments on notes payable and capital leases of $625,000.
 
 
24

 
 
During the quarter ended July 31, 2009, we received net proceeds under an At Market Issuance Sales Agreement, whereby we sold 1,855,172 shares of our common stock for net proceeds of $6,588,000.  In addition, we received net proceeds of $2,000 from the exercise of stock options.  These prior year proceeds were offset with aggregate principal payments on notes payable and capital leases of $173,000.
 
Commitments
 
At July 31, 2010, we had no material capital commitments.
 
 
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Changes in United States interest rates would affect the interest earned on our cash and cash equivalents and interest expense on our outstanding notes payable, however, they would not have an effect on our capital leases, which have fixed interest rates and terms.
 
Based on our overall cash and cash equivalents interest rate exposure at July 31, 2010, a near-term change in interest rates, based on historical movements, would not have a material adverse effect on our financial position or results of operations.
 
At July 31, 2010, we had an outstanding notes payable balance of $2,716,000 under a loan and security agreement, which bear interest at a monthly variable rate equal to the then current thirty (30) day LIBOR rate (set at a floor of 3%) plus 9%, which may expose us to market risk due to changes in interest rates.  However, based on current LIBOR interest rates, which are currently under the minimum floor set at 3% under our loan and security agreement and based on historical movements in LIBOR rates, we believe a near-term change in interest rates would not have a material adverse effect on our 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 Exchange Act 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 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 July 31, 2010, 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 July 31, 2010.
 
There were no significant changes in the Company’s internal controls over financial reporting, during the quarter ended July 31, 2010, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
 

 
25

 
 
PART II - OTHER INFORMATION
 
 
ITEM 1.    LEGAL PROCEEDINGS.
 
In the ordinary course of business, we are at times subject to various legal proceedings and disputes.  We currently are not aware of any such legal proceedings or claim that we believe will have, individually or in the aggregate, a material adverse effect on our business, operating results or cash flows.
 
 
ITEM 1A.    RISK FACTORS.
 
The following risk factors below update, and should be considered in addition to, the risk factors previously disclosed by us in Part 1, Item 1A of our Annual Report for the fiscal year ended April 30, 2010.
 
If we cannot obtain additional funding, our product development and commercialization efforts may be reduced or discontinued and we may not be able to continue operations.
 
At July 31, 2010, we had $17,983,000 in cash and cash equivalents.  We have expended substantial funds on the research, development and clinical trials of our product candidates, and funding the operations of Avid.  As a result, we have historically experienced negative cash flows from operations since our inception and we expect the negative cash flows from operations to continue for the foreseeable future.  Our net losses incurred during the past three fiscal years ended April 30, 2010, 2009 and 2008 amounted to $14,494,000, $16,524,000, and $23,176,000, respectively.  Unless and until we are able to generate sufficient revenues from Avid’s contract manufacturing services and/or from the sale and/or licensing of our products under development, we expect such losses to continue for the foreseeable future.
 
Therefore, our ability to continue our clinical trials and development efforts is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity or debt.
 
With respect to financing our operations through the issuance of equity, during the quarter ended July 31, 2010, we raised $6,644,000 in gross proceeds.  As of July 31, 2010, gross proceeds of up to $23,924,000 remained available under an effective shelf registration statement.
 
In addition, we may also raise additional capital through additional equity offerings, licensing our products in development, procuring additional government contracts and grants, or increasing revenue from our wholly owned subsidiary, Avid.  While we will continue to explore these potential opportunities, there can be no assurances that we will be successful in raising sufficient capital on terms acceptable to us, or at all, or that we will be successful in procuring additional government contracts and grants, or that sufficient additional revenues will be generated from Avid or under potential licensing or partnering agreements to complete the research, development, and clinical testing of our product candidates.  Based on our current projections, which include projected revenues under signed contracts with existing customers of Avid, we believe we have sufficient cash on hand combined with amounts expected to be received from Avid customers and from our government contract to meet our obligations as they become due through at least the third quarter ending January 31, 2011 of our current fiscal year based on current assumptions.  There are a number of uncertainties associated with our financial projections, including but not limited to, termination of third party or government contracts, technical challenges, or possible reductions in funding under our government contract, which could reduce or delay our future projected cash-inflows.  In addition, under our Loan Agreement (see Note 7), in the event our government contract with the Transformational Medical Technologies is terminated or canceled for any reason, including reasons pertaining to budget cuts by the government or reduction in government funding for the program, we would be required to set aside cash and cash equivalents in an amount equal to 80% of the outstanding loan balance (or $2,173,000 as of July 31, 2010) in a restricted collateral account non-accessible by us.  In the event our projected cash-inflows are reduced or delayed or if we default on a loan covenant that limits our access to our available cash on hand, we might not have sufficient capital to operate our business through the third quarter of our current fiscal year unless we raise additional capital.  The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.
 
 
26

 
 
Our outstanding indebtedness to MidCap Financial LLC and BlueCrest Capital Finance, L.P. imposes certain restrictions on how we conduct our business.  in addition, all of our assets, including our intellectual property, are pledged to secure this indebtedness.  if we fail to meet our obligations to the lenders, our payment obligations may be accelerated and the collateral securing the debt may be sold to satisfy these obligations.
 
Pursuant to a Loan and Security Agreement dated December 9, 2008 (the “Loan Agreement”), MidCap Financial LLC and BlueCrest Capital Finance, L.P. (the “Lenders”) have provided us a three-year, $5,000,000 working capital loan, which funded on December 19, 2008.  At July 31, 2010, we had an outstanding principal balance of $2,716,000 under the Loan Agreement.  As collateral to secure our repayment obligations to the Lenders, we and our wholly-owned subsidiary, Avid Bioservices, Inc., have granted the Lenders a first priority security interest in generally all of our respective assets, including our intellectual property.
 
The Loan Agreement also contains various covenants that restrict our operating flexibility.  Pursuant to the Loan Agreement, without the prior written consent of the Lenders we may not, among other things:
 
·    
incur additional indebtedness, except for certain permitted indebtedness. Permitted indebtedness is defined to include accounts payable incurred in the ordinary course of business and leases of equipment or property incurred in the ordinary course of business not to exceed in the aggregate $500,000 outstanding at any one time;
·    
incur additional liens on any of our assets except for certain permitted liens including but not limited to non-exclusive licenses of our intellectual property in the ordinary course of business and exclusive licenses of intellectual property provided they are approved by our board of directors and do not involve bavituximab or Cotara;
·    
make any payment of subordinated debt, except as permitted under the applicable subordination or intercreditor agreement;
·    
merge with or acquire any other entity, or sell all or substantially all of our assets, except as permitted under the Loan Agreement;
·    
pay dividends (other than stock dividends) to our shareholders;
·    
redeem any outstanding shares of our common stock or any outstanding options or warrants to purchase shares of our common stock except in connection with the repurchase of stock from former employees and consultants pursuant to share repurchase agreements provided such repurchases do not exceed $50,000 in the aggregate during any twelve-month period;
·    
enter into transactions with affiliates other than on arms-length terms; and
·    
make any change in any of our business objectives, purposes and operations which has or could be reasonably expected to have a material adverse effect on our business.
 
These provisions could have important consequences for us, including (i) making it more difficult for us to obtain additional debt financing from another lender, or obtain new debt financing on terms favorable to us, because a new lender will have to be willing to be subordinate to the lenders, (ii) causing us to use a portion of our available cash for debt repayment and service rather than other perceived needs and/or (iii) impacting our ability to take advantage of significant, perceived business opportunities.  Our failure to timely repay our obligations under the Loan Agreement or meet the covenants set forth in the Loan Agreement could give rise to a default under the agreement.  In the event of an uncured default, the Loan Agreement provides that all amounts owed to the Lender may be declared immediately due and payable and the Lenders have the right to enforce their security interest in the assets securing the Loan Agreement.  In such event, the Lenders could take possession of any or all of our assets in which they hold a security interest, and dispose of those assets to the extent necessary to pay off our debts, which would materially harm our business.
 
In the event our contract with the TMT is terminated, our loan requires us to place a significant amount of our cash in a restricted bank account.
 
Under the terms of the Loan Agreement, if our contract with the TMT of the U.S. Department of Defense’s Defense Threat Reduction Agency is terminated while any principal balance of the loan is outstanding, we will be required to at all times thereafter maintain cash and cash equivalents in an amount of at least eighty percent (80%) of the then outstanding principal balance of the loan (or $2,173,000 as of July 31, 2010) in a restricted account over which we will not be permitted to make withdrawals or otherwise exercise control.
 
 
27

 
 
We have had significant losses and we anticipate future losses.
 
We have incurred net losses in most fiscal years since we began operations in 1981.  The following table represents net losses incurred for the three months ended July 31, 2010 and for each of the past three fiscal years:
 
   
Net Loss
 
Three months ended July 31, 2010 (unaudited)
  $ 7,695,000  
Fiscal Year 2010
  $ 14,494,000  
Fiscal Year 2009
  $ 16,524,000  
Fiscal Year 2008
  $ 23,176,000  
 
As of July 31, 2010, we had an accumulated deficit of $269,549,000.  While we expect to continue to generate revenues from Avid’s contract manufacturing services, in order to achieve and sustain profitable operations, we must successfully develop and obtain regulatory approval for our products, either alone or with others, and must also manufacture, introduce, market and sell our products.  The costs associated with clinical trials and product manufacturing is very expensive and the time frame necessary to achieve market success for our products is long and uncertain.  We do not expect to generate product or royalty revenues for at least the next two years, and we may never generate product and/or royalty revenues sufficient to become profitable or to sustain profitability.
 
The sale of substantial shares of our common stock may depress our stock price.
 
As of July 31, 2010, there were 55,784,955 shares of our common stock outstanding.  Substantially all of these shares are eligible for trading in the public market, subject in some cases to volume and other limitations.  The market price of our common stock may decline if our common stockholders sell a large number of shares of our common stock in the public market, or the market perceives that such sales may occur.
 
We could also issue up to 5,803,675 additional shares of our common stock that are reserved for future issuance under our stock option plans and for outstanding warrants, as further described in the following table:
 
   
Number of Shares
of Common Stock Reserved For Issuance
 
Common shares reserved for issuance under outstanding option and restricted stock award grants and available for issuance under our equity compensation plans
      5,583,708  
Common shares issuable upon exercise of outstanding warrants
    219,967  
Total shares reserved for issuance
    5,803,675  

In addition, the above table does not include shares of common stock that we have available to issue under an effective shelf registration statement, under which we may issue, from time to time, in one or more offerings, shares of our common stock for remaining gross proceeds of up to $23,924,000 as of July 31, 2010.
 
Of the total options, restricted stock awards and warrants outstanding as of July 31, 2010, 233,039 would be considered dilutive to stockholders because we would receive an amount per share which is less than the market price of our common stock at July 31, 2010.
 
In addition, we will need to raise substantial additional capital in the future to fund our operations.  If we raise additional funds by issuing equity securities, the market price of our securities may decline and our existing stockholders may experience significant dilution.
 
Current economic conditions and capital markets are in a period of disruption and instability which could adversely affect our ability to access the capital markets, and thus adversely affect our business and liquidity.
 
The current economic conditions and financial crisis have had, and will continue to have, a negative impact on our ability to access the capital markets, and thus have a negative impact on our business and liquidity.  The shortage of liquidity and credit combined with the substantial losses in worldwide equity markets could lead to an extended worldwide recession.  We may face significant challenges if conditions in the capital markets do not improve.  Our ability to access the capital markets has been and continues to be severely restricted at a time when we need to access such markets, which could have a negative impact on our business plans, including our clinical trial programs and other research and development activities.  Even if we are able to raise capital, it may not be at a price or on terms that are favorable to us.  We cannot predict the occurrence of future disruptions or how long the current conditions may continue.
 
 
28

 
 
Our highly volatile stock price and trading volume may adversely affect the liquidity of our common stock.
 
The market price of our common stock and the market prices of securities of companies in the biotechnology sector have generally been highly volatile and are likely to continue to be highly volatile.
 
The following table shows the high and low sales price and trading volume of our common stock for each quarter in the last twelve (12) fiscal quarters ended July 31, 2010:
 
   
Common Stock
Sales Price
 
Common Stock Daily Trading Volume
(000’s omitted)
   
High
 
Low
 
High
 
Low
Quarter Ended July 31, 2010
 
$4.14
 
$1.51
 
 9,520
   
 140
 
Quarter Ended April 30, 2010
 
$4.30
 
$2.86
 
 1,278
   
 66
 
Quarter Ended January 31, 2010
 
$3.46
 
$2.51
 
 1,384
   
 49
 
Quarter Ended October 31, 2009
 
$4.74
 
$2.74
 
 2,243
   
 64
 
Quarter Ended July 31, 2009
 
$5.65
 
$1.85
 
 7,345
   
 39
 
Quarter Ended April 30, 2009
 
$2.60
 
$1.52
 
 702
   
 14
 
Quarter Ended January 31, 2009
 
$2.35
 
$1.10
 
 260
   
 19
 
Quarter Ended October 31, 2008
 
$2.00
 
$1.15
 
 263
   
 15
 
Quarter Ended July 31, 2008
 
$2.65
 
$1.54
 
 599
   
 21
 
Quarter Ended April 30, 2008
 
$3.63
 
$1.75
 
 769
   
 26
 
Quarter Ended January 31, 2008
 
$3.25
 
$1.75
 
 622
   
 28
 
Quarter Ended October 31, 2007
 
$3.95
 
$2.70
 
 526
   
 34
 
Quarter Ended July 31, 2007
 
$7.00
 
$3.60
 
 4,331
    47  

The market price of our common stock may be significantly impacted by many factors, including, but not limited to:
 
·    
announcements of technological innovations or new commercial products by us or our competitors;
·    
publicity regarding actual or potential clinical trial results relating to products under development by us or our competitors;
·    
our financial results or that of our competitors, including our abilities to continue as a going concern;
·    
the offering and sale of shares of our common stock at a discount under an equity transaction;
·    
changes in our capital structure;
·    
published reports by securities analysts;
·    
announcements of licensing agreements, joint ventures, strategic alliances, and any other transaction that involves the sale or use of our technologies or competitive technologies;
·    
developments and/or disputes concerning our patent or proprietary rights;
·    
regulatory developments and product safety concerns;
·    
general stock trends in the biotechnology and pharmaceutical industry sectors;
·    
public concerns as to the safety and effectiveness of our products;
·    
economic trends and other external factors, including but not limited to, interest rate fluctuations, economic recession, inflation, foreign market trends, national crisis, and disasters; and
·    
healthcare reimbursement reform and cost-containment measures implemented by government agencies.
 
These and other external factors have caused and may continue to cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock, and may otherwise negatively affect the liquidity of our common stock.
 
 
 
29

 
The liquidity of our common stock will be adversely affected if our common stock is delisted from the NASDAQ Capital Market.
 
Our common stock is traded on The NASDAQ Capital Market.  To maintain inclusion on The NASDAQ Capital Market, we must continue to meet the following six listing requirements:
 
 
1.
Net tangible assets of at least $2,500,000 or market capitalization of at least $35,000,000 or net income of at least $500,000 in either our latest fiscal year or in two of our last three fiscal years;
 
2.
Public float of at least 500,000 shares;
 
3.
Market value of our public float of at least $1,000,000;
 
4.
A minimum closing bid price of $1.00 per share of common stock, without falling below this minimum bid price for a period of thirty consecutive trading days;
 
5.
At least two market makers; and
 
6.
At least 300 stockholders, each holding at least 100 shares of common stock.
 
Although we currently meet all NASDAQ listing requirements, the market price of our common stock has generally been highly volatile and we cannot guarantee that we will continue to maintain compliance with The NASDAQ Capital Market listing requirements.
 
If our common stock is ever delisted, we would apply to have our common stock quoted on the over-the-counter electronic bulletin board.  Upon any such delisting, our common stock would become subject to the regulations of the Securities and Exchange Commission relating to the market for penny stocks.  A penny stock, as defined by the Penny Stock Reform Act, is any equity security not traded on a national securities exchange that has a market price of less than $5.00 per share.  The penny stock regulations generally require that a disclosure schedule explaining the penny stock market and the risks associated therewith be delivered to purchasers of penny stocks and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors.  The broker-dealer must make a suitability determination for each purchaser and receive the purchaser’s written agreement prior to the sale.  In addition, the broker-dealer must make certain mandated disclosures, including the actual sale or purchase price and actual bid offer quotations, as well as the compensation to be received by the broker-dealer and certain associated persons.  The regulations applicable to penny stocks may severely affect the market liquidity for our common stock and could limit your ability to sell your securities in the secondary market.
 
Successful development of our products is uncertain.  To date, no revenues have been generated from the commercial sale of our products and our products may not generate revenues in the future.
 
Our development of current and future product candidates is subject to the risks of failure inherent in the development of new pharmaceutical products and products based on new technologies.  These risks include:
 
·  
delays in product development, clinical testing or manufacturing;
·  
unplanned expenditures in product development, clinical testing or manufacturing;
·  
failure in clinical trials or failure to receive regulatory approvals;
·  
emergence of superior or equivalent products;
·  
inability to manufacture on our own, or through others, product candidates on a commercial scale;
·  
inability to market products due to third party proprietary rights; and
·  
failure to achieve market acceptance.
 
Because of these risks, our research and development efforts or those of our partners may not result in any commercially viable products.  If significant portions of these development efforts are not successfully completed, required regulatory approvals are not obtained, or any approved products are not commercially successful, our business, financial condition and results of operations may be materially harmed.
 
Because we have not begun the commercial sale of any of our products, our revenue and profit potential is unproven and our limited operating history makes it difficult for an investor to evaluate our business and prospects.  Our technology may not result in any meaningful benefits to our current or potential partners.  No revenues have been generated from the commercial sale of our products, and our products may not generate revenues in the future.  Our business and prospects should be considered in light of the heightened risks and unexpected expenses and problems we may face as a company in an early stage of development in a new and rapidly evolving industry.
 
 
30

 
 
We are primarily focusing our activities and resources on the development of Bavituximab and depend on its success.
 
We are focusing most of our near-term research and development activities and resources on bavituximab, and we believe a significant portion of the value of our Company relates to our ability to develop this drug candidate.  The development of bavituximab is subject to many risks, including the risks discussed in other risk factors.  If the results of clinical trials of bavituximab, the regulatory decisions affecting bavituximab, the anticipated or actual timing and plan for commercializing bavituximab, or, ultimately, the market acceptance of bavituximab do not meet our, your, analysts’ or others’ expectations, the market price of our common stock could be adversely affected.
 
Our product development efforts may not be successful.
 
Our product candidates have not received regulatory approval and are generally in research, pre-clinical and various clinical stages of development.  If the results from any of the clinical trials are poor, those results may adversely affect our ability to raise additional capital or obtain regulatory approval to conduct additional clinical trials, which will affect our ability to continue full-scale research and development for our antibody technologies.  In addition, our product candidates may take longer than anticipated to progress through clinical trials, or patient enrollment in the clinical trials may be delayed or prolonged significantly, thus delaying the clinical trials.  Patient enrollment is a function of many factors, including the size of the patient population, the nature of the protocol, the proximity of patients to the clinical sites, and the eligibility criteria for the study.  In addition, because our Cotara product currently in clinical trials represents a departure from more commonly used methods for cancer treatment, potential patients and their doctors may be inclined to use conventional therapies, such as chemotherapy, rather than enroll patients in our clinical study.
 
Clinical Trials required for our product candidates are expensive and time consuming, and their outcome is uncertain.
 
In order to obtain FDA approval to market a new drug product, we or our potential partners must demonstrate proof of safety and efficacy in humans.  To meet these requirements, we or our potential partners will have to conduct extensive pre-clinical testing and “adequate and well-controlled” clinical trials.  Conducting clinical trials is a lengthy, time-consuming and expensive process.  The length of time may vary substantially according to the type, complexity, novelty and intended use of the product candidate, and often can be several years or more per trial.  Delays associated with products for which we are directly conducting pre-clinical or clinical trials may cause us to incur additional operating expenses.  Moreover, we may continue to be affected by delays associated with the pre-clinical testing and clinical trials of certain product candidates conducted by our partners over which we have no control.  The commencement and rate of completion of clinical trials may be delayed by many factors, including, for example:
 
·  
obtaining regulatory approval to commence a clinical trial;
·  
reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among different CROs and trial sites;
·  
slower than expected rates of patient recruitment due to narrow screening requirements;
·  
the inability of patients to meet FDA or other regulatory authorities imposed protocol requirements;
·  
the inability to retain patients who have initiated a clinical trial but may be prone to withdraw due to various clinical or personal reasons, or who are lost to further follow-up;
·  
the inability to manufacture sufficient quantities of qualified materials under current good manufacturing practices, or cGMPs, for use in clinical trials;
·  
the need or desire to modify our manufacturing processes;
·  
the inability to adequately observe patients after treatment;
·  
changes in regulatory requirements for clinical trials;
·  
the lack of effectiveness during the clinical trials;
·  
unforeseen safety issues;
·  
delays, suspension, or termination of the clinical trials due to the institutional review board responsible for overseeing the study at a particular study site; and
·  
government or regulatory delays or “clinical holds” requiring suspension or termination of the trials.
 
 
 
31

 
 
Even if we obtain positive results from pre-clinical or initial clinical trials, we may not achieve the same success in future trials.  Clinical trials may not demonstrate statistically sufficient safety and effectiveness to obtain the requisite regulatory approvals for product candidates employing our technology.
 
Clinical trials that we conduct or that third-parties conduct on our behalf may not demonstrate sufficient safety and efficacy to obtain the requisite regulatory approvals for any of our product candidates.  We expect to commence new clinical trials from time to time in the course of our business as our product development work continues.  The failure of clinical trials to demonstrate safety and effectiveness for our desired indications could harm the development of that product candidate as well as other product candidates.  Any change in, or termination of, our clinical trials could materially harm our business, financial condition and results of operations.
 
We rely on third parties to conduct our clinical trials and many of our preclinical studies.  If those parties do not successfully carry out their contractual duties or meet expected deadlines, our drug candidates may not advance in a timely manner or at all.
 
In the course of our discovery, preclinical testing and clinical trials, we rely on third parties, including universities, investigators and clinical research organizations, to perform critical services for us. For example, we rely on third parties to conduct our clinical trials and many of our preclinical studies. Clinical research organizations and investigators are responsible for many aspects of the trials, including finding and enrolling patients for testing and administering the trials.  Although we rely on these third parties to conduct our clinical trials, we are responsible for ensuring that each of our clinical trials is conducted in accordance with its investigational plan and protocol.  Moreover, the FDA and foreign regulatory authorities require us to comply with regulations and standards, commonly referred to as good clinical practices, or GCPs, for conducting, monitoring, recording and reporting the results of clinical trials to ensure that the data and results are scientifically credible and accurate and that the trial subjects are adequately informed of the potential risks of participating in clinical trials.  Our reliance on third parties does not relieve us of these responsibilities and requirements.  These third parties may not be available when we need them or, if they are available, may not comply with all regulatory and contractual requirements or may not otherwise perform their services in a timely or acceptable manner, and we may need to enter into new arrangements with alternative third parties and our clinical trials may be extended, delayed or terminated.  These independent third parties may also have relationships with other commercial entities, some of which may compete with us.  In addition, if such third parties fail to perform their obligations in compliance with our clinical trial protocols, our clinical trials may not meet regulatory requirements or may need to be repeated.  As a result of our dependence on third parties, we may face delays or failures outside of our direct control.  These risks also apply to the development activities of our collaborators, and we do not control our collaborators’ research and development, clinical trials or regulatory activities.  We do not expect any drugs resulting from our collaborators’ research and development efforts to be commercially available for many years, if ever.
 
In addition, we have prepaid research and development expenses to third parties that have been deferred and capitalized as pre-payments to secure the receipt of future preclinical and clinical research and development services.  These pre-payments are recognized as an expense in the period that the services are performed.  We assess our prepaid research and development expenses for impairment when events or changes in circumstances indicate that the carrying amount of the prepaid expense may not be recoverable or provide a future economic benefit, including the risk of third party nonperformance.  If there are indicators that the third parties are unable to perform the research and development services, we may be required to take an impairment charge.
 
We do not have experience as a company conducting large-scale clinical trials, or in other areas required for the successful commercialization and marketing of our product candidates.
 
Preliminary results from clinical trials of bavituximab may not be indicative of successful outcomes in later stage trials.  Negative or limited results from any current or future clinical trial could delay or prevent further development of our product candidates which would adversely affect our business.
 
We have no experience as a Company in conducting large-scale, late-stage clinical trials, and our experience with early-stage clinical trials with small numbers of patients is limited.  In part because of this limited experience, we cannot be certain that planned clinical trials will begin or be completed on time, if at all.  Large-scale trials would require either additional financial and management resources, or reliance on third-party clinical investigators, clinical research organizations (“CROs”) or consultants.  Relying on third-party clinical investigators or CROs may force us to encounter delays that are outside of our control.  Any such delays could have a material adverse effect on our business.
 
 
 
32

 
We also do not currently have marketing and distribution capabilities for our product candidates. Developing an internal sales and distribution capability would be an expensive and time-consuming process.  We may enter into agreements with third parties that would be responsible for marketing and distribution.  However, these third parties may not be capable of successfully selling any of our product candidates.  The inability to commercialize and market our product candidates could materially affect our business.
 
Failure to recruit, enroll, and retain patients for clinical trials may cause the development of our product candidates to be delayed or development costs to increase substantially.
 
We have experienced, and expect to experience in the future, delays in patient enrollment in our clinical trials for a variety of reasons. The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the study until its conclusion. The enrollment of subjects depends on many factors, including:
 
·  
the patient eligibility criteria defined in the protocol;
·  
the size of the patient population required for analysis of the trial’s primary endpoints;
·  
the proximity of patients to study sites;
·  
the design of the trial;
·  
our ability to recruit clinical trial investigators with the appropriate competencies and experience;
·  
our ability to obtain and maintain patient consents;
·  
the risk that patients enrolled in clinical trials will drop out of the trials before completion; and
·  
competition for patients by clinical trial programs for other treatments.
 
Our clinical trials compete with other clinical trials for product candidates that are in the same therapeutic areas as our product candidates, and this competition reduces the number and types of subjects available to us, because some patients who might have opted to enroll in our trials opt to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators is limited, we conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which reduces the number of subjects who are available for our clinical trials in such clinical trial site. Delays in patient enrollment in the future as a result of these and other factors may result in increased costs or may affect the timing or outcome of our clinical trials, which could prevent us from completing these trials and adversely affect our ability to advance the development of our product candidates.
 
Our International Clinical Trials may be delayed or otherwise adversely impacted by social, political and economic factors affecting the particular foreign country.
 
We have in the past conducted, and intend in the future to conduct, clinical trials in India and other countries.  Our ability to successfully initiate, enroll and complete a clinical trial in either country, or in any future foreign country in which we may initiate a clinical trial, are subject to numerous risks unique to conducting business in foreign countries, including:
 
·  
difficulty in establishing or managing relationships with clinical research organizations and physicians;
·  
different standards for the conduct of clinical trials and/or health care reimbursement;
·  
our inability to locate qualified local consultants, physicians, and partners;
·  
the potential burden of complying with a variety of foreign laws, medical standards and regulatory requirements, including the regulation of pharmaceutical products and treatment; and
·  
general geopolitical risks, such as political and economic instability, and changes in diplomatic and trade relations.
 
Because some of the trial sites for our recently announced Phase IIb clinical trials will be in India and potentially other foreign countries, any disruption to our international clinical trial sites could significantly delay our product development efforts.
 
 
 
33

 
Success in early Clinical Trials may not be indicative of results obtained in later trials.
 
A number of new drugs and biologics have shown promising results in initial clinical trials, but subsequently failed to establish sufficient safety and effectiveness data to obtain necessary regulatory approvals.  Data obtained from pre-clinical and clinical activities are subject to varying interpretations, which may delay, limit or prevent regulatory approval.
 
Data from our pre-clinical studies and Phase I and initial Phase II clinical trials should not be relied upon as evidence that later or larger-scale clinical trials will succeed.  The Phase I studies we have completed to date have been designed to primarily assess safety in a small number of patients.  In addition, the limited results we have obtained in the Phase II trials may not predict results for any future studies and also may not predict future therapeutic benefit of our drug candidates.  We will be required to demonstrate through larger-scale clinical trials that bavituximab and Cotara are safe and effective for use in a diverse population before we can seek regulatory approval for their commercial sale.  There is typically an extremely high rate of attrition from the failure of drug candidates proceeding through clinical trials.
 
In addition, regulatory delays or rejections may be encountered as a result of many factors, including changes in regulatory policy during the period of product development.
 
If we successfully develop products but those products do not achieve and maintain market acceptance, our business will not be profitable.
 
Even if bavituximab, Cotara, or any future product candidate is approved for commercial sale by the FDA or other regulatory authorities, the degree of market acceptance of any approved product candidate by physicians, healthcare professionals and third-party payors and our profitability and growth will depend on a number of factors, including:
 
·  
our ability to provide acceptable evidence of safety and efficacy;
·  
relative convenience and ease of administration;
·  
the prevalence and severity of any adverse side effects;
·  
availability of alternative treatments;
·  
pricing and cost effectiveness;
·  
effectiveness of our or our collaborators’ sales and marketing strategy; and
·  
our ability to obtain sufficient third-party insurance coverage or reimbursement.
 
In addition, if bavituximab, Cotara, or any future product candidate that we discover and develop does not provide a treatment regimen that is more beneficial than the current standard of care or otherwise provide patient benefit, that product likely will not be accepted favorably by the market.  If any products we may develop do not achieve market acceptance, then we may not generate sufficient revenue to achieve or maintain profitability.
 
In addition, even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or technologies are introduced that are more favorably received than our products, are more cost effective or render our products obsolete.
 
If we cannot license or sell Cotara, it may be delayed or never be further developed in the U.S.
 
We have completed initial Phase I and Phase I/II studies with Cotara for the treatment of brain cancer.  In addition, we previously announced the completion of patient enrollment in a dose confirmation and dosimetry clinical trial in patients with recurrent GBM.  We are also currently conducting a Phase II safety and efficacy study using a single administration of the drug through an optimized delivery method.  Taken together, the dose confirmation and dosimetry clinical trial along with data collected from the Phase II safety and efficacy study may provide the safety, dosimetry and efficacy data that will support the final design of the registrational study.  Once we complete enrollment and collect data from the two Cotara studies for the treatment of GBM, substantial financial resources will be needed to complete any additional supportive clinical studies necessary for potential product approval.  We do not presently have the financial resources internally to complete the larger registrational study.  We therefore intend to continue to seek a licensing or funding partner for Cotara, and hope that the data from our clinical studies will enhance our opportunities of finding such partner.  If a partner is not found for this technology in the U.S., we may not be able to advance the project past its current state of development.  Because there are a limited number of companies which have the financial resources, the internal infrastructure, the technical capability and the marketing infrastructure to develop and market a radiopharmaceutical-based oncology drug, we may not find a suitable partnering candidate for Cotara.  We also cannot ensure that we will be able to find a suitable licensing partner for this technology in the U.S.  Furthermore, we cannot ensure that if we do find a suitable licensing partner, the financial terms that they propose will be acceptable to us.
 
 
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Our dependency on our radiolabeling suppliers may negatively impact our ability to complete clinical trials and market our products.
 
We have procured our antibody radioactive isotope combination services (“radiolabeling”) for our Cotara Phase II study with Iso-tex Diagnostics, Inc. (for patients enrolled in the U.S.) and with the Board of Radiation & Isotope Technology (“BRIT”) (for patients enrolled in India).  Although we order radiolabeling services on an as needed basis through an agreed upon purchase order, we do not have any arrangements with either Iso-tex Diagnostics, Inc. or BRIT that would require either supplier to radiolabel our product.  In the event that either supplier was unable to provide the radiolabeling services, we would have to temporarily shift patient enrollment to the country (U.S. or India) able to continue providing the radiolabeling services which could significantly delay patient enrollment.  If both of these suppliers is unable to continue to qualify its respective facility or radiolabel and supply our antibody in a timely manner, our current clinical trials using radiolabeling technology could be adversely affected and significantly delayed.  While there are other suppliers for radioactive isotope combination services in the U.S. and India, our clinical trial would be delayed for up to twelve to eighteen months because it may take that amount of time to certify a new facility under current Good Manufacturing Practices and qualify the product, plus we would incur significant costs to transfer our technology to another vendor.  In addition, the number of facilities that can perform these radiolabeling services is very limited.  Prior to commercial distribution of any of our products, if approved, we will be required to identify and contract with a company for commercial antibody manufacturing and radioactive isotope combination services.  An antibody that has been combined with a radioactive isotope, such as Iodine-131, cannot be stored for long periods of time, as it must be used within one week of being radiolabeled to be effective.  Accordingly, any change in our existing or future contractual relationships with, or an interruption in supply from, any such third-party service provider or antibody supplier could negatively impact our ability to complete ongoing clinical trials conducted by us or a potential licensing partner.
 
Our manufacturing facilities may not continue to meet regulatory requirements and have limited capacity.
 
Before approving a new drug or biologic product, the FDA requires that the facilities at which the product will be manufactured be in compliance with current Good Manufacturing Practices, or cGMP, requirements.  To be successful, our therapeutic products must be manufactured for development and, following approval, in commercial quantities, in compliance with regulatory requirements and at acceptable costs.  Currently, we manufacture all pre-clinical and clinical material through Avid Bioservices, Inc., our wholly owned subsidiary.  While we believe our current facilities are adequate for the manufacturing of product candidates for clinical trials, our facilities may not be adequate to produce sufficient quantities of any products for commercial sale.
 
If we are unable to establish and maintain a manufacturing facility or secure third-party manufacturing capacity within our planned time frame and cost parameters, the development and sales of our products, if approved, may be materially harmed.
 
We may also encounter problems with the following:
 
·  
production yields;
·  
quality control and quality assurance;
·  
shortages of qualified personnel;
·  
compliance with FDA or other regulatory authorities regulations, including the demonstration of purity and potency;
·  
changes in FDA or other regulatory authorities requirements;
·  
production costs; and/or
·  
development of advanced manufacturing techniques and process controls.
 
In addition, we or any third-party manufacturer will be required to register the manufacturing facilities with the FDA and other regulatory authorities, provided it had not already registered.  The facilities will be subject to inspections confirming compliance with cGMP or other regulations.  If any of our third-party manufacturers or we fail to maintain regulatory compliance, the FDA can impose regulatory sanctions including, among other things, refusal to approve a pending application for a new drug product or biologic product, or revocation of a pre-existing approval.  As a result, our business, financial condition and results of operations may be materially harmed.
 
 
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We currently depend on a government contract to partially fund our research and development efforts.  if our current government funding is reduced or delayed, our drug development efforts may be negatively affected.
 
On June 30, 2008, we were awarded up to a five-year contract potentially worth up to $44.4 million to test and develop bavituximab and an equivalent fully human antibody as potential broad-spectrum treatments for viral hemorrhagic fever infections.  The initial contract was awarded through the TMT of the U.S. Department of Defense’s Defense Threat Reduction Agency.  This government contract was expected to provide us with up to $22.3 million in funding over an initial two-year base period ending June 29, 2010.  However, the Government Contract was subsequently extended for several weeks for no additional funding to complete ongoing pre-clinical studies and to determine potential next steps under the Government Contract.  As of the filing date of this Form 10-Q, we have not received notification from the TMT regarding whether or not the base period has been extended or if we will receive additional funding beyond the base period.  Subject to the progress of the program and budgetary considerations in future years, the contract can be extended by the TMT beyond the base period to cover up to $44.4 million in funding through the exercise of one-year option periods not to exceed the government’s maximum five-year period for contracts.   However, due to the uncertainty regarding the extension of the contract beyond the base period, there is no guarantee we will receive additional funding beyond what was allocated to the base period. If we do not receive the expected funding under this contract, we may not be able to develop therapeutics to treat hemorrhagic fever virus infection nor otherwise receive the other indirect benefits that may be derived from receipt of the full funding under this contract.
 
Federal Government Contracts contain provisions giving government customers a variety of rights that are unfavorable to us, including the ability to terminate a contract at any time for convenience.
 
Federal government contracts, such as our contract with the TMT, contain provisions, and are subject to laws and regulations, that give the government rights and remedies not typically found in commercial contracts. These provisions may allow the government to:
 
·  
Reduce, cancel,  or otherwise modify our contracts or related subcontract agreements;
·  
Decline to exercise an option to renew a multi-year contract;
·  
Claim rights in products and systems produced by us;
·  
Prohibit future procurement awards with a particular agency as a result of a finding of an organizational conflict of interest based upon prior related work performed for the agency that would give a contractor an unfair advantage over competing contractors;
·  
Subject the award of contracts to protest by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest;
·  
Suspend or debar us from doing business with the federal government or with a governmental agency; and
·  
Control or prohibit the export of our products and services.
 
 
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If the government terminates our contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates our contract for default, we may not recover even those amounts, and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. If the TMT were to unexpectedly terminate or cancel, or decline to exercise the option to extend our contract beyond the base period, our revenues, product development efforts and operating results would be materially harmed. As of the filing date of this Form 10-Q, we have not received notification from the TMT regarding whether or not the base period under our government contract with the TMT has been extended or if we will receive additional funding beyond the base period.
 
We may have significant product liability exposure because we maintain only limited product liability insurance.
 
We face an inherent business risk of exposure to product liability claims in the event that the administration of one of our drugs during a clinical trial adversely affects or causes the death of a patient.  Although we maintain product liability insurance for clinical studies in the amount of $3,000,000 per occurrence or $3,000,000 in the aggregate on a claims-made basis, this coverage may not be adequate.  Product liability insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all.  Our inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims in excess of our insurance coverage, if any, or a product recall, could negatively impact our financial position and results of operations.
 
In addition, the contract manufacturing services that we offer through Avid expose us to an inherent risk of liability as the antibodies or other substances manufactured by Avid, at the request and to the specifications of our customers, could possibly cause adverse effects or have product defects.  We obtain agreements from our customers indemnifying and defending us from any potential liability arising from such risk.  There can be no assurance that such indemnification agreements will adequately protect us against potential claims relating to such contract manufacturing services or protect us from being named in a possible lawsuit.  Although Avid has procured insurance coverage, there is no guarantee that we will be able to maintain our existing coverage or obtain additional coverage on commercially reasonable terms, or at all, or that such insurance will provide adequate coverage against all potential claims to which we might be exposed.  A partially successful or completely uninsured claim against Avid would have a material adverse effect on our consolidated operations.
 
If we are unable to obtain, protect and enforce our patent rights, we may be unable to effectively protect or exploit our proprietary technology, inventions and improvements.
 
Our success depends in part on our ability to obtain, protect and enforce commercially valuable patents.  We try to protect our proprietary positions by filing U.S. and foreign patent applications related to our proprietary technology, inventions and improvements that are important to developing our business.  However, if we fail to obtain and maintain patent protection for our proprietary technology, inventions and improvements, our competitors could develop and commercialize products that would otherwise infringe upon our patents.
 
Our patent position is generally uncertain and involves complex legal and factual questions.  Legal standards relating to the validity and scope of claims in the biotechnology and biopharmaceutical fields are still evolving.  Accordingly, the degree of future protection for our patent rights is uncertain.  The risks and uncertainties that we face with respect to our patents include the following:
 
·  
the pending patent applications we have filed or to which we have exclusive rights may not result in issued patents or may take longer than we expect to result in issued patents;
·  
the claims of any patents that issue may not provide meaningful protection;
·  
we may be unable to develop additional proprietary technologies that are patentable;
·  
the patents licensed or issued to us may not provide a competitive advantage;
·  
other parties may challenge patents licensed or issued to us;
·  
disputes may arise regarding the invention and corresponding ownership rights in inventions and know-how resulting from the joint creation or use of intellectual property by us, our licensors, corporate partners and other scientific collaborators; and
·  
other parties may design around our patented technologies.
 
 
 
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We may become involved in lawsuits to protect or enforce our patents that would be expensive and time consuming.
 
In order to protect or enforce our patent rights, we may initiate patent litigation against third parties.  In addition, we may become subject to interference or opposition proceedings conducted in patent and trademark offices to determine the priority and patentability of inventions.  The defense of intellectual property rights, including patent rights through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings, would be costly and divert our technical and management personnel from their normal responsibilities.  An adverse determination of any litigation or defense proceedings could put our pending patent applications at risk of not being issued.
 
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation.  For example, during the course of this kind of litigation, confidential information may be inadvertently disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony.  This disclosure could have a material adverse effect on our business and our financial results.
 
We may not be able to compete with our competitors in the Biotechnology Industry because many of them have greater resources than we do and they are further along in their development efforts.
 
The pharmaceutical and biotechnology industry is intensely competitive and subject to rapid and significant technological change.  Many of the drugs that we are attempting to discover or develop will be competing with existing therapies.  In addition, we are aware of several pharmaceutical and biotechnology companies actively engaged in research and development of antibody-based products that have commenced clinical trials with, or have successfully commercialized, antibody products.  Some or all of these companies may have greater financial resources, larger technical staffs, and larger research budgets than we have, as well as greater experience in developing products and running clinical trials.  We expect to continue to experience significant and increasing levels of competition in the future.  In addition, there may be other companies which are currently developing competitive technologies and products or which may in the future develop technologies and products that are comparable or superior to our technologies and products.
 
Bavituximab is currently in clinical trials for the treatment of advanced solid tumors.  Although we are not aware of any other products in development targeting PS as a potential therapy for advanced solid tumors, there are a number of possible competitors with approved or developmental targeted agents used in combination with standard chemotherapy for the treatment of cancer, including but not limited to, Avastin by Roche/Genentech, Inc., Gleevec by Novartis, Tarceva by OSI Pharmaceuticals, Inc. and Roche/Genentech, Inc., Erbitux by ImClone Systems Incorporated and Bristol-Myers Squibb Company, Rituxan and Herceptin by Roche/Genentech, Inc., and Vectibix by Amgen.  There are a significant number of companies developing cancer therapeutics using a variety of targeted and non-targeted approaches.  A direct comparison of these potential competitors will not be possible until bavituximab advances to later-stage clinical trials.
 
In addition, we are evaluating bavituximab for the treatment of HCV.  Bavituximab is a first-in-class approach for the treatment of HCV.  We are aware of no other products in development targeting PS as a potential therapy for HCV.  There are a number of companies that have products approved and on the market for the treatment of HCV, including but not limited to:  Peg-Intron (pegylated interferon-alpha-2b), Rebetol (ribavirin), and Intron-A (interferon-alpha-2a), which are marketed by Schering-Plough Corporation, and Pegasys (pegylated interferon-alpha-2a), Copegus (ribavirin USP) and Roferon-A (interferon-alpha-2a), which are marketed by Roche Pharmaceuticals, and Infergen (interferon alfacon-1) now marketed by Three Rivers Pharmaceuticals, LLC.  First line treatment for HCV has changed little since alpha interferon was first introduced in 1991.  The current standard of care for HCV includes a combination of an alpha interferon (pegylated or non-pegylated) with ribavirin.  This combination therapy is generally associated with considerable toxicity including flu-like symptoms, hematologic changes and central nervous system side effects including depression.  It is not uncommon for patients to discontinue alpha interferon therapy because they are unable to tolerate the side effects of the treatment.
 
Future treatments for HCV are likely to include a combination of these existing products used as adjuncts with products now in development.  Later-stage developmental treatments include improvements to existing therapies, such as ZALBIN (albumin interferon alpha-2b) from Human Genome Sciences, Inc.  Other developmental approaches include, but are not limited to, protease inhibitors such as telaprevir from Vertex Pharmaceuticals Incorporated and boceprevir from Schering-Plough Corporation.
 
 
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We are currently enrolling patients in a Cotara Phase II clinical trial for the treatment of recurrent GBM, the most aggressive form of brain cancer.  Approved treatments for brain cancer include the Gliadel Wafer (polifeprosan 20 with carmustine implant) from Eisai, Inc., Temodar (temozolomide) from Schering-Plough Corporation and Avastin (bevacizumab) from Roche/Genentech, Inc.  Gliadel is inserted in the tumor cavity following surgery and releases a chemotherapeutic agent over time.  Temodar is administered orally to patients with brain cancer.  Avastin is a monoclonal antibody that targets VEGF to prevent the formation of new tumor blood vessels.
 
Because Cotara targets brain tumors from the inside out, it is a novel treatment dissimilar from other drugs in development for this disease.  Some products in development may compete with Cotara should they become approved for marketing.  These products include, but are not limited to:  131I-TM601, a radiolabeled chlorotoxin peptide being developed by TransMolecular, Inc., CDX-110, a peptide vaccine under development by Celldex, cilengitide, an integrin-targeting peptide being evaluated by Merck KGaA, and cediranib, a VEGFR tyrosine kinase inhibitor being developed by AstraZeneca.  In addition, oncology products marketed for other indications such as Gleevec (Novartis), Tarceva (Roche/Genentech/OSI), and Nexavar (Bayer/Onyx), are being tested in clinical trials for the treatment of brain cancer.
 
Avid Bioservices, Inc., our subsidiary, is exposed to risks resulting from its small customer base.
 
A significant portion of Avid Bioservices’ revenues have historically been derived from a small customer base.  These customers typically do not enter into long-term contracts because their need for drug supply depends on a variety of factors, including the drug’s stage of development, their financial resources, and, with respect to commercial drugs, demand for the drug in the market.  Our results of operations could be adversely affected if revenue from any one of our primary customers is significantly reduced or eliminated.
 
If we lose qualified management and scientific personnel or are unable to attract and retain such personnel, we may be unable to successfully develop our products or we may be significantly delayed in developing our products.
 
Our success is dependent, in part, upon a limited number of key executive officers, each of whom is an at-will employee, and also upon our scientific researchers.  For example, because of his extensive understanding of our technologies and product development programs, the loss of Mr. Steven W. King, our President & Chief Executive Officer and Director, would adversely affect our development efforts and clinical trial programs during the six to twelve month period that we estimate it would take to find and train a qualified replacement.
 
We also believe that our future success will depend largely upon our ability to attract and retain highly-skilled research and development and technical personnel.  We face intense competition in our recruiting activities, including competition from larger companies with greater resources.  We do not know if we will be successful in attracting or retaining skilled personnel.  The loss of certain key employees or our inability to attract and retain other qualified employees could negatively affect our operations and financial performance.
 
Our Governance Documents and State Law provide certain anti-takeover measures which will discourage a third party from seeking to acquire us unless approved by the Board of Directors.
 
We adopted a shareholder rights plan, commonly referred to as a “poison pill,” on March 16, 2006.  The purpose of the shareholder rights plan is to protect stockholders against unsolicited attempts to acquire control of us that do not offer a fair price to our stockholders as determined by our Board of Directors.  Under the plan, the acquisition of 15% or more of our outstanding common stock by any person or group, unless approved by our board of directors, will trigger the right of our stockholders (other than the acquiror of 15% or more of our common stock) to acquire additional shares of our common stock, and, in certain cases, the stock of the potential acquiror, at a 50% discount to market price, thus significantly increasing the acquisition cost to a potential acquiror.  In addition, our certificate of incorporation and by-laws contain certain additional anti-takeover protective devices.  For example,
 
·  
no stockholder action may be taken without a meeting, without prior notice and without a vote; solicitations by consent are thus prohibited;
·  
special meetings of stockholders may be called only by our Board of Directors; and
·  
our Board of Directors has the authority, without further action by the stockholders, to fix the rights and preferences, and issue shares, of preferred stock. An issuance of preferred stock with dividend and liquidation rights senior to the common stock and convertible into a large number of shares of common stock could prevent a potential acquiror from gaining effective economic or voting control.
 
 
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Further, we are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, restricts certain transactions and business combinations between a corporation and a stockholder owning 15% or more of the corporation’s outstanding voting stock for a period of three years from the date the stockholder becomes a 15% stockholder.
 
Although we believe these provisions and our rights plan collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our Board of Directors, they would apply even if the offer may be considered beneficial by some stockholders.  In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management.
 
 
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ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
None
 
 
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.
 
None
 
 
ITEM 4.    [REMOVED AND RESERVED]
 
 
ITEM 5.    OTHER INFORMATION.
 
None
 
 
 ITEM 6.    EXHIBITS.
 
(a)  
Exhibits:
 
 
10.26
License Agreement between Stason Pharmaceuticals, Inc. and Peregrine Pharmaceuticals, Inc., dated May 3, 2010.**
 
 
10.27
Assignment Agreement between Stason Pharmaceuticals, Inc. and Peregrine Pharmaceuticals, Inc., dated May 3, 2010.**
 
 
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.*
 

 
*
Filed herewith
 
**
Portions omitted pursuant to a request of confidential trestment filed separately with the Commission.
 
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
  PEREGRINE PHARMACEUTICALS, INC.  
       
Date: September 9, 2010
By:
/s/ STEVEN W. KING  
    Steven W. King  
    President, Chief Executive Officer, and Director  
       

 
 
     
       
Date: September 9, 2010
By:
/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)  


 
 
 
 
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