UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended April 30, 20062008
PEREGRINE PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
Delaware | | 95-3698422 |
(State of incorporation) | | (I.R.S. Employer Identification No.) |
| | | |
1427214282 Franklin Avenue, Tustin, California
| | 92780 |
(Address of principal executive offices) | | (Zip Code) |
Registrant's telephone number, including area code:(714) 508-6000
Securities registered pursuant to Section 12(b) of the Act:None
| Title of Class | | Name of Each Exchange on Which Registered |
Common Stock ($0.001 par value) Preferred Stock Purchase Rights | | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act:
Title of Class None
| | Name of Each Exchange on Which Registered
|
Common Stock ($0.001 par value) | | The Nasdaq Stock Market, Inc. under
symbol “PPHM”
|
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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. Yesx No Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ox
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definitiondefinitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer o | | Accelerated filer x | | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The approximate aggregate market value of voting stock held by non-affiliates of the registrant was $168,445,000$136,173,000 as of October 31, 2005.2007. (1) (1)
188,852,218226,210,617
(Number of shares of common stock outstanding as of July 7, 2006)10, 2008)
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates certain information by reference from the registrant’s proxy statement for the annual meeting of stockholders, which proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended April 30, 2006.2008.
(1) Excludes 2,493,505 shares of common stock held by directors and officers, and any stockholder whose ownership exceeds five percent of the shares outstanding as of October 31, 2005.| (1) Excludes 2,976,758 shares of common stock held by directors and officers, and any stockholder whose ownership exceeds five percent of the shares outstanding as of October 31, 2007. |
PEREGRINE PHARMACEUTICALS, INC.
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED APRIL 30, 20062008
TABLE OF CONTENTS
PART I |
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| | 2634 |
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PART II |
| | 2735 |
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PART III |
| and Corporate Governance | 4554 |
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| | 4554 |
| and Director Independence | 4554 |
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PART IV |
| | 4655 |
| | | 53 |
| Signatures | 62 |
PART I
In this Annual Report, the terms “we”, “us”, “our”, “Company” and “Peregrine” refersrefer to Peregrine Pharmaceuticals, Inc., and our wholly owned subsidiary, Avid Bioservices, Inc. This Annual Report contains forward-looking statements that involve risks and uncertainties. The inclusion of forward-looking statements should not be regarded as a representation by us or any other person that the objectives or plans will be achieved because our actual results may differ materially from any forward-looking statement. The words “may,” “should,” “plans,” “believe,” “anticipate,” “estimate,” “expect,” their opposites and similar expressions are intended to identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. We caution readers that such statements are not guarantees of future performance or events and are subject to a number of factors that may tend to influence the accuracy of the statements, including but not limited to, those risk factors outlined in the section titled “Risk Factors and Forward-Looking Statements”Factors” as well as those discussed elsewhere in this Annual Report. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Annual Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports that we file from time to time with the Securities and Exchange Commission (“SEC”) after the date of this Annual Report.
Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports filed with or furnished to the SEC are available, free of charge, through our website at www.peregrineinc.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The information on, or that can be accessed through, our website is not part of this Annual Report.
Certain technical terms used in the following description of our business are defined in the “Glossary of Terms”.
In addition, we own or have rights to the registered trademark Cotara®. and Avid Bioservices, Inc. All other company names, registered trademarks, trademarks and service marks included in this Annual Report are trademarks, registered trademarks, service marks or trade names of their respective owners.
Company Overview
We are a clinical stage biopharmaceutical company with a portfolio of clinical and pre-clinical stagedeveloping monoclonal antibody-based targeted therapeuticsantibodies for the treatment of solid cancerscancer and viral infections.hepatitis C virus (HCV) infection. We are currently advancing three separate clinical programs with our first-in-class compounds bavituximab and Cotara® that employ our two platform technologies: Anti-Phosphatidylserine (“Anti-PS”) therapeutics and Tumor Necrosis Therapy (“TNT”).
Our lead Anti-PS product, bavituximab, is being studied in two separate clinical trial programs for the treatment of various solid tumors and HCV infection. We have completed a Phase Ib cancer trial assessing the safety and chronic hepatitis C virus (HCV) infection. Under our Anti-Phosphatidylserine ("Anti-PS") Immunotherapeutic technology platform, our lead candidateanti-tumor activity of bavituximab (formerly known as Tarvacin), is currentlyadministered in a multi-centercombination with chemotherapy in patients with solid cancers and announced top-line results in May 2007. Data gathered from that Phase I clinical trialIb study was utilized in the design of three separate Phase II trials of bavituximab in combination with chemotherapy for the treatment of solid tumors. Two of the trials are designed to evaluate the combination of bavituximab and chemotherapy in patients with advanced breast cancer and the third trial is designed to evaluate bavituximab in combination with chemotherapy in patients with non-small cell lung cancer (NSCLC). In addition, a Phase I safety trial evaluating bavituximab as monotherapy in patients with advanced solid cancers is continuing in the U.S. For the anti-viral program, we have completed two Phase I studies of bavituximab as well as a multi-center phase Ib clinical trial for the treatment ofmonotherapy in patients with chronic HCV infection. infection, and we are currently dosing patients in a third Phase I clinical study to evaluate the safety, pharmacokinetics and anti-viral activity of bavituximab over a longer dosing period in patients co-infected with HCV and the human immunodeficiency virus (“HIV”).
Our third clinical programlead TNT technology product candidate, Cotara®, is a dose confirmation and dosimetrymonoclonal antibody conjugated to a radioisotope that is being assessed in clinical trial using our lead Tumor Necrosis Therapy ("TNT") agent, Cotara®,trials for the treatment of glioblastoma multiforme (GBM), a deadly form of brain cancer. We have completed a number of clinical trials of Cotara having treated in excess of 85 patients with advanced solid cancers. Positive data from these prior trials provided the foundation for the two Cotara brain cancer studies currently underway: A Phase II clinical trial is enrolling patients to assess the safety and anti-tumor activity of Cotara in GBM patients at first relapse. In addition, we are continuing to enroll patients in a dose confirmation and dosimetry trial in patients with recurrent GBM to further characterize the distribution characteristics of Cotara and to assess safety and anti-tumor activity.
The following table summarizes our current clinical trial programs:
| Product | Indication | Trial Design | Trial Status |
| Bavituximab | Solid tumor cancers | Phase I monotherapy repeat dose safety study designed to treat up to 28 patients. | Patient enrollment is continuing in this study. |
| Bavituximab plus docetaxel | Advanced breast cancer | Phase II study designed to treat up to 15 patients initially. Study may be expanded to treat up to a total of 46 patients if six or more objective tumor responses are observed in the initial 15 patients. | Patient enrollment for the first 15 patients is complete and the pre-defined primary endpoint of six or more objective tumor responses was achieved with seven of fourteen evaluable patients achieving objective tumor response at the first eight week evaluation point. The design of the clinical trial now allows for an additional 31 study patients to be enrolled. Patients are continuing to be monitored for secondary endpoints. |
Bavituximab plus carboplatin and paclitaxel | Advanced breast cancer | Phase II study designed to treat up to 15 patients initially. Study may be expanded to treat up to a total of 46 patients if promising results are observed in the initial 15 patients. | Patient enrollment is expected to begin shortly in this trial. |
Bavituximab plus carboplatin and paclitaxel | Non-small cell lung cancer (NSCLC) | Phase II study designed to treat 21 patients initially. Study may be expanded to treat up to a total of 49 patients if promising results are observed in the initial 21 patients. | Patient enrollment was initiated in June 2008 and enrollment is continuing. |
| Cotara | Glioblastoma multiforme (GBM) | Dosimetry and dose confirmation study designed to treat up to 12 patients with recurrent GBM. | Study enrollment is continuing in this study. |
| Cotara | Glioblastoma multiforme (GBM) | Phase II safety and efficacy study to treat up to 40 patients at first relapse. | Study enrollment is continuing in this study. |
| Bavituximab | Chronic hepatitis C virus (“HCV”) infection co-infected with HIV | Phase Ib repeat dose safety study designed to treat up to 24 patients. | Study enrollment is continuing in this study. |
In addition to our clinical programs, we have a number of earlier-stage technologies that are conducting internal research and collaborating with researchers at top academic institutions to extend our product pipeline topotential candidates for partnering. These programs include potential new therapeutics, and therapeuticvaccine adjuvants and to expand the potential of bavituximab anti-viral indications beyond the treatment of HCV infection. diagnostic agents.
In addition to our research and development efforts, we also operate a wholly owned cGMP (current Good Manufacturing Practices) contract manufacturing subsidiary, Avid Bioservices,Bioservices®, Inc. (“Avid”). Avid provides several critical functions for Peregrine including the manufacturing of all clinical supplies, commercial scale-up of products in clinical trials, and assisting with the advancement of new clinical candidates.
In addition to Peregrine related activities, Avid provides contract manufacturing services for outside biotechnology and biopharmaceutical companies on a fee-for-service basis. We believe thebasis, from pre-clinical drug supplies up through commercial-scale drug manufacture. In addition to these activities, Avid provides critical services in support of Avid create significant value for the Company allowing us to aggressively move ourPeregrine’s product pipeline including manufacture and scale-up of pre-clinical and clinical and research programs forward while bringing in revenues through outside contracts which partially offsets our overall cash used in operations.drug supplies.
We were originally incorporated in California in June 1981 and reincorporated in the State of Delaware on September 25, 1996. Our principal executive offices are located at 1427214282 Franklin Avenue, Tustin, California, 92780 and our telephone number is (714) 508-6000. Our internet website address is www.peregrineinc.com.www.peregrineinc.com. Information contained on our website does not constitute any part of this Annual Report.
Our Technology Platforms
Our three products in clinical trials fall under two technology platforms: Anti-Phosphatidylserine (“Anti-PS”) Immunotherapeuticstechnology and Tumor Necrosis Therapy (“TNT”). technology.
Anti-PS ImmunotherapeuticsTechnology Platform
Peregrine’s new class of Anti-Phosphatidylserineanti-phosphatidylserine (“Anti-PS”anti-PS”) Immunotherapeuticstherapeutics are monoclonal antibodies that target and bind to components of cells normally found only found on the inner surface of the cell membrane. The mainThis target is a specific phospholipid known as phosphatidylserine (“PS”) which is normally not available for binding but. PS becomes exposed on the outside of cells under stress conditions, including on the surface of tumor microenvironmentblood vessels and during certain viral infections. Our first-in-class Anti-PS Immunotherapeuticsanti-PS therapeutic agent, bavituximab, helpsis believed to help stimulate the body's immune defenses to destroy disease associateddisease-associated cells that have exposed PS exposed on their surface. It has shown promise in pre-clinical studies in multiple typesIn addition to this direct effect, researchers believe that anti-PS therapies also have a secondary mechanism of canceraction that occurs under certain stressful conditions at the cellular level. This secondary mechanism involves the immunosuppressive effects of PS molecules expressed on the surface of the cell, which act to dampen the body’s normal immune response. By binding to the PS molecule and viral diseases, bothblocking its effects, agents such as bavituximab may have the potential to turn-off this immunosuppressive signal, allowing the immune system to generate a monotherapy and in combination with other therapies, and has demonstrated a good safety profile and promising signs of activity in pre-clinical and clinical studies completed to date.robust immune response.
Tumor Necrosis Therapy (“TNT”) Technology Platform
Our TNT technology uses monoclonal antibodies that target and bind to Deoxyribonucleic Acid (“DNA”)DNA and associated histone proteins accessible inreleased by the dead and dying (“necrotic”) cells found at the core of solid tumors. Most solid tumors develop this core of necrotic cells due to the lack of oxygen and nutrients at their center. This makes the necrotic center of tumors an abundant but selective target for TNT-based monoclonal antibodies. Similar to a guided missile, TNT antibodies are potentiallyalso capable of carrying a variety of therapeutic agents into the interior of solidthese tumors, including radioisotopes and chemotherapeutic agents, in order towhich then kill the neighboring tumor cells from the inside out.out, while sparing healthy tissue. Our most advanced TNT product, Cotara®,Cotara, is an antibody conjugatedattached to the radioactive isotope, Iodine 131, a therapeutic radioisotope that kills adjacent cells. A product similar to Cotara® has been developed in China under a license from Peregrine and is currently awaiting marketing approval for the treatment of advanced lung cancer.131.
Our Products in Clinical Trials
Bavituximab for the Treatment of HCV Infection
Bavituximab, a monoclonal antibody with unique anti-viral properties, has completed a Phase Ia single dose clinical trial for the treatment of chronic HCV infections and is currently in a Phase Ib repeat dose clinical trial. Bavituximab attaches to its target which is specifically found on the surface of a broad class of viruses known as enveloped viruses, which are responsible for about half of all human viral diseases, including hepatitis C virus, influenza, human immunodeficiency virus ("HIV"), cytomegalovirus ("CMV") and other virus strains that cause serious and life-threatening diseases. Scientists studying bavituximab believe the drug’s mechanism of action helps stimulate the body's natural immune defenses to destroy both the virus particles and the cells they infect. Since the target for bavituximab is only exposed on diseased cells, healthy cells should not be directly affected by bavituximab.
We filed our first Investigational New Drug (“IND”) application using bavituximab for the treatment of chronic hepatitis C virus (“HCV”) infection in April 2005. During fiscal year 2006, we initiated and completed patient enrollment in a Phase Ia single dose escalation study in twenty-four (24) patients chronically infected with HCV and who have failed prior therapies. In this study, approximately 90% of the subjects were infected with the genotype 1 form of HCV, which is the most common and difficult to treat strain of the virus. At all four single dose levels, bavituximab appeared to be safe and well tolerated with no dose limiting toxicities or serious adverse events. Based on the safety data, we added an additional six patients at a higher single dose level. No dose limiting toxicities have been observed to date with respect to these patients, who are currently in a 12-week follow up period. In June 2006, we announced the initiation of a Phase Ib open-label, repeat-dose escalation clinical trial of bavituximab in patients with chronic HCV infection. This study will examine the safety and tolerability of bavituximab when administered 4 times over a two week period to patients with chronic HCV infection with a 12 week follow-up. The Phase Ib study will enroll up to 24 patients at up to three clinical centers. Patient screening and enrollment are currently ongoing. In addition to the single agent clinical trials, a Phase I clinical study testing bavituximab in combination with other HCV therapies is being planned.
We are also working with top academic researchers and research organizations to study the potential use of bavituximab to treat other viral infections. These pre-clinical programs are primarily focused on evaluating bavituximab's potential in virus infections with significant economic impact including HIV, influenza, CMV, as well as biodefense applications. We anticipate that these pre-clinical studies may help support additional clinical indications.
Bavituximab for the Treatment of Solid CancersTumors
Scientists working with usPeregrine have also determined that the Anti-PS target for bavituximab becomes exposed on the cells that line blood vessels inside solid cancers. Since the target is not exposed in normal tissues and is abundantlyspecifically exposed on tumor blood vessels, it represents a unique and specific target for cancer therapy, while minimizing effects on healthy cells.vessels. In pre-clinical solid cancer therapy studies includinga bavituximab equivalent (a mouse version of the human antibody) has demonstrated promising anti-tumor activity as a stand-alone treatment for the treatment of breast, prostate and pancreatic tumors, a bavituximab equivalent (mouse versions of the antibody usedtumors. Researchers have shown in the mouse studies) had promising anti-tumor activity as a stand-alone treatment. Commonpre-clinical studies that common cancer treatments such as chemochemotherapy and radiation therapy stress the cells that line the tumor blood vessels and thereby increase the exposure of the PS target on tumor blood vessels and have been shown in pre-clinical studies to enhancesignificantly enhanced the anti-tumor effects of bavituximab equivalents.either agent alone.
BavituximabOn May 31, 2007, we reported positive top-line results from the Phase Ib open label trial. This trial, which was conducted in India, was designed to assess the safety and tolerability of up to eight weekly doses of bavituximab given in combination with standard chemotherapy regimens including docetaxel, gemcitabine and carboplatin/paclitaxel in 12 patients with late stage cancer who had failed prior therapy. Patients in the trial were also assessed for tumor response, although efficacy assessments were not formal endpoints of the study. Patients were evaluated for tumor response according to Response Evaluation Criteria in Solid Tumors (RECIST) parameters, receiving CT or MRI scans prior to therapy and at the end of the combination treatment course. In these patients, the safety profile of bavituximab in combination with chemotherapy appeared similar to that seen in advanced cancer patients undergoing chemotherapy alone. The combination of bavituximab and chemotherapy showed positive signs of clinical activity, achieving objective tumor response or stable disease in 50% of the patients who were evaluable for tumor response. Patients receiving bavituximab in combination with gemcitabine had positive signs of clinical activity, with 75% achieving an objective tumor response or stable disease, while 50% of patients receiving bavituximab with carboplatin/paclitaxel also achieved an objective tumor response. Tumor types in the trial included cancers of the breast, lung and ovary, among others.
Clinical data gathered from the Phase Ib study was utilized in the design of three separate Phase II bavituximab studies. These trials all have a two-stage design. An initial cohort of patients is currentlyfirst enrolled, dosed and evaluated and then the study may be expanded if a sufficient number of patients in the initial cohort meet the primary endpoint and the safety profile is positive. The primary endpoint of the Phase II studies is to assess overall response rate to the combination of bavituximab and chemotherapy. Secondary objectives include measuring time to tumor progression, duration of response, overall patient survival and safety parameters. Tumor responses in all of the studies are being evaluated using Response Evaluation Criteria in Solid Tumors (RECIST) parameters. The trials are being conducted according to International Conference on Harmonization (ICH) and Good Clinical Practices (GCP) standards.
The first bavituximab Phase II trial was initiated in January 2008 in advanced breast cancer patients. Patients in this trial are being treated with the combination of bavituximab and the chemotherapeutic agent docetaxel, a chemotherapy drug commonly used in the treatment of breast cancer. We have completed enrollment in the initial cohort of 15 patients in the Republic of Georgia. On July 2, 2008, we announced that we met the pre-specified primary endpoint of six or more objective tumor responses in the initial 15 patients. Fourteen of the 15 patients enrolled in Stage 1 were deemed evaluable for tumor response, with seven achieving partial tumor responses and seven having stable disease at week eight according to Response Evaluation Criteria in Solid Tumors (RECIST) criteria. Patients may continue to receive bavituximab as long as the cancer does not progress and side effects are acceptable. The design of the clinical trial now allows for an additional 31 study patients to be enrolled.
Patient enrollment in a second bavituximab Phase II trial was initiated in June 2008 in India using bavituximab in combination with the chemotherapeutic agents carboplatin and paclitaxel in patients with non-small cell lung cancer (NSCLC). The study is designed to assess the combination therapy in 21 patients initially, and could be expanded to include up to an additional 28 patients if promising results are seen in the first cohort. Patients may continue to receive bavituximab as long as the cancer does not progress and side effects are acceptable.
A third bavituximab Phase II trial for advanced breast cancer patients is expected to begin shortly in India. Patients will be treated with the combination of bavituximab and chemotherapeutic agents carboplatin and paclitaxel. Fifteen patients will be enrolled in the first cohort and the study can then be expanded to include up to an additional 31 patients if promising results are observed. Patients may continue to receive bavituximab as long as the cancer does not progress and side effects are acceptable.
In addition to our three Phase II bavituximab cancer trials, we are currently enrolling patients in a multi-center Phase I clinicalmonotherapy trial in the U.S. for which allmost solid cancer types are eligible for enrollment. The clinical trial is designed to enroll up to 28 patients with advanced solid tumors that no longer respond to standard cancer treatments. The objectives of this open-label, single and repeat dose escalation study are to (i) determine the safety and tolerability of bavituximab administered intravenously to patients with advanced cancer; (ii) characterize the pharmacokinetic profile of bavituximab and; (iii)and define the dose-limiting toxicities, maximum tolerated dose and/or maximum effective dose of bavituximab. Patients who demonstrate an objective response to therapy may be offered continued treatment onwith an extension protocol. Patient screening and enrollment are currently ongoing.
We originally experienced delays in enrolling patients for this study, initially due to certain FDA mandated requirements in the study’s protocol which limited the number of cancer patients eligible for the study and the number of patients willing to participate in the study due to the length of time between treatments. We subsequently presented the FDA with data sufficient to allow us to amend the protocol and lessen such requirements as well as make other changes to the protocol in an effort to make it more appealing to both physicians and patients. While we are hopeful that such changes will enable us to increase the rate of patient enrollment, due to the competition with other cancer trials being conducted in the United States, we continue to face enrollment challenges in the United States. Cotara® for the Treatment of Brain Cancer
Cotara®, our first Tumor Necrosis Therapy (“TNT”) based agent, is a targeted cancer therapy that uses monoclonal antibodiesantibody targeting agent conjugated to Iodine 131, a therapeutic agents such as radioisotopes. TNT agents carry and anchorradioisotope that kills tumor cells near the attached anti-cancer agent into the interiorsite of tumors to kill them from the inside out. Cotara® is a TNT agent thatlocalization. Cotara binds to DNA and associated histone proteins that become accessible in dead and dying cells found at the core of tumors. Cotara® isIn prior clinical studies, Cotara has demonstrated encouraging results in patients with advanced brain cancer. One study demonstrated a monoclonal antibody targeting agent conjugated to Iodine 131,58% increase in expected median survival time in a group of patients suffering from recurrent glioblastoma multiforme (“GBM”) who were treated with Cotara at the anticipated therapeutic radioisotope that kills tumor cells near the site of localization.dose being used in current studies. This was considered a promising development in this serious and deadly disease.
Cotara®Cotara is currently in a dose confirmation and dosimetry clinical trial for the treatment of recurrent glioblastoma multiforme (“GBM”)GBM at several clinical sites in collaboration with New Approaches to Brain Tumor Therapy (“NABTT”), a brain tumor treatment consortium. Thisthe U.S. The multi-center open label study is partially funded by the National Cancer Institute ("NCI”) and allows usdesigned to treat up to 2812 GBM patients although we expect thiswho have recurrent disease. Patients are receiving Cotara by convection-enhanced delivery (CED), a National Institute of Health (NIH)-developed technique that delivers the agent to the tumor with great precision. The study’s main objectives are to confirm the dose limiting toxicities and maximum tolerated dose and to characterize the biodistribution and radiation dosimetry of Cotara.
On August 2, 2007, Peregrine announced first patient dosing in a Phase II trial in India to enroll 9-12assess Cotara in up to 40 GBM patients in orderwho have experienced a first relapse. This study, which is ongoing, is expected to meet the primary objectivesbe an integral part of the study. The next step in theoverall Cotara brain cancer development of Cotara® will be to treat a group of approximately 40 patients usingprogram. Patients receive a single administrationinfusion of the drug with an optimizedusing the CED delivery using two catheters. method, and the study’s primary objective is to confirm the maximum tolerated dose of Cotara in these patients. Secondary objectives include estimates of overall patient survival, progression-free survival and the proportion of patients alive at six months post-treatment. The study is being conducted according to internationally accepted ICH (International Conference on Harmonization) and GCP (Good Clinical Practices) guidelines at multiple clinical centers. Patient enrollment and dosing are ongoing.
Taken together, the NABTT study along with data collectedresults from the treatment of the approximate 40 additional patientsPeregrine’s two ongoing Cotara trials should provide the safety, dosimetry and initial efficacy data that willneeded to support the final design of the larger Phase III study. Cotara has been granted FDA orphan drug status and fast track designation for the treatment of two lethal brain cancers.GBM.
We have experienced delays in both these studies for reasons outside our control. The dose confirmation and dosimetry trial was originally co-sponsored and primarily managed by the NCI-funded New Approaches to Brain Tumor Therapy (NABTT) consortium. Due to funding reductions at NABTT, within the last year, we have assumed full sponsorship and control of the trial and initiated several additional clinical trial centers. The phase II India study initially experienced regulatory delays due to the serial nature of manufacturing and clinical trial approvals as well as changes in key personnel at the Drug Controller General office. Additionally, we have had to invest in institutional infrastructure and coordination at the clinical site level in order to enroll patients. While we are hopeful that such changes will enable us to increase the rate of patient enrollment in both of these studies, we expect to continue facing enrollment challenges.
Bavituximab for the Treatment of HCV Infection
Earlier-Stage TechnologiesBavituximab is a monoclonal antibody that targets and binds to PS. Our researchers and collaborators have discovered that PS, the target for bavituximab, becomes exposed on the surface of a broad class of viruses known as enveloped viruses, as well as on the cells they infect. These pathogens are responsible for about half of all human viral diseases, including hepatitis C virus (HCV), influenza, human immunodeficiency virus (HIV), cytomegalovirus (CMV) and other virus strains that cause serious and life-threatening conditions. Scientists studying bavituximab believe the drug’s mechanism of action may help stimulate the body's natural immune defenses to destroy both the virus particles and the cells they infect. Since the target for bavituximab is only exposed on diseased cells, healthy cells should not be affected by bavituximab.
We filed the first Investigational New Drug (“IND”) application for bavituximab for the treatment of chronic hepatitis C virus (“HCV”) infection in April 2005. Peregrine initiated and completed a Phase Ia single dose escalation study in thirty (30) patients chronically infected with HCV who had failed prior therapies. The primary goal of the Phase Ia study was to assess the safety and pharmacologic profile of bavituximab in patients with chronic HCV infection. Changes in viral load, measured as serum HCV RNA levels, were also monitored. In the study, 30 patients with chronic HCV infection were administered one of five doses of bavituximab including 0.1, 0.3, 1, 3 and 6 milligrams per kilogram (mg/kg) of body weight. After a single dose of bavituximab, among the patients administered 1, 3 and 6 mg/kg doses, 50% achieved a maximum peak reduction in serum HCV levels of greater than 75% (0.6 log), with one patient having a maximum peak 97% (1.5 log) reduction. In this study, approximately 90% of the subjects were infected with the genotype 1 form of HCV, which is the most common and difficult-to-treat strain of the virus. At all five dose levels, bavituximab appeared to be safe and well tolerated with no dose-limiting toxicities or serious adverse events. Reported adverse events were mostly mild, infrequent, transient and likely not drug-related. We reported initial results of this study on June 7, 2006 and final results were presented at the annual meeting of the American Association for the Study of Liver Diseases in Boston, MA on October 30, 2006.
These results supported the initiation and completion of a Phase Ib repeat dose HCV trial during fiscal year 2007. In November 2007, at the 58th Annual Meeting of the American Association for the Study of Liver Disease (AASLD), we presented results from the Phase Ib repeat dose HCV trial. The primary objective of the Phase Ib study was to determine the safety, distribution and pharmacokinetic properties of multiple doses of single agent bavituximab in patients with chronic HCV infection. Changes in viral load, measured as serum HCV RNA levels, were also monitored. Twenty-four patients (four cohorts of six patients each) were enrolled in the study, with each cohort scheduled to receive four doses of bavituximab over a 14-day period. Patients received twice-weekly doses of bavituximab at escalating dose levels of 0.3, 1, 3 or 6 mg/kg of body weight. Patients in all cohorts were followed for 12 weeks. The results indicate that bavituximab was generally safe and well-tolerated, with no dose-limiting toxicities or serious adverse events reported. Anti-viral activity (decline of greater than or equal to 0.5 log10 reduction in HCV RNA) was observed at all dose levels. In the study, 83% of patients at the 3 mg/kg dose level demonstrated a maximum peak reduction in HCV RNA levels of at least a 75% (0.6 log), with an average of an 84% (0.8 log) peak reduction for those patients.
Based on the data from these earlier HCV clinical studies and on pre-clinical data indicating the potential of bavituximab to bind to HIV and HIV-infected cells, Peregrine advanced bavituximab into a trial in HCV patients co-infected with HIV. On October 10, 2007, Peregrine announced the dosing of the first patient in this trial. Patient enrollment and dosing is currently ongoing. The study is an open-label, dose escalation study designed to assess the safety and pharmacokinetics of bavituximab in up to 24 patients chronically infected with HCV and HIV. Patient cohorts are pursuingreceiving ascending dose levels of bavituximab weekly for up to 8 weeks. HCV and HIV viral titers and other biomarkers are being tracked, although they are not formal study endpoints. In the U.S. alone, an estimated 300,000 individuals are co-infected with HIV and HCV, representing up to 30% of all HIV-infected patients. Co-infected patients have been shown to have a lower response to current HCV regimens and the adverse effects of these regimens can be especially problematic for some HIV patients.
We also have worked with top academic researchers and research organizations to study the potential use of bavituximab to treat other viral infections. These pre-clinical programs have primarily focused on evaluating the potential of bavituximab and other anti-PS antibodies in viral infections with significant economic impact including HIV, influenza and CMV, as well as biodefense applications. The promising results of these pre-clinical studies have contributed to Peregrine’s understanding of the mechanism of action of bavituximab and its broad potential in viral indications.
Government Contract With The Defense Threat Reduction Agency
On June 30, 2008, we were awarded a five-year contract 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 Transformational Medical Technologies Initiative (TMTI) of the U.S. Department of Defense's Defense Threat Reduction Agency (DTRA). In pre-clinical animal models, bavituximab has demonstrated encouraging anti-viral activity as a potential treatment for viral hemorrhagic fevers. This federal contract is expected to provide us with up to $22.3 million in funding over a 24-month base period, with $5 million appropriated immediately for the current federal fiscal year ending September 30, 2008. The remainder of the $22.3 million in funding is expected to be appropriated over the remainder of the two-year base period ending June 29, 2010. Subject to the progress of the program and budgetary considerations in future years, the contract can be extended beyond the base period to cover up to $44.4 million in funding over the five-year contract period. Work under this contract commenced on June 30, 2008.
Earlier-Stage Technologies / Pre-Clinical Studies
We have historically developed several earlier stage technologies including Vasopermeation Enhancement Agents (“VEAs”) that are intended to be used as an adjuvant to improve the performance of standard cancer drugs, as an adjuvant. We are also evaluating several anti-angiogenesisAnti-Angiogenesis Agents, and Vascular Targeting Agents (“VTAs”), that complement our other anti-cancer platforms, asplatforms. In order to focus our efforts and resources on our current clinical programs, we have curtailed our efforts in developing these pre-clinical programs and we are actively seeking partners to further described below.develop these technologies.
In addition, we also conduct pre-clinical studies relevant to bavituximab and our anti-PS technology platform. Positive scientific results were reported on a number of these programs in fiscal year 2008.
Vasopermeation Enhancement Agents (“VEAs”) utilize monoclonal antibodies which are designed to increaseIn September 2007, a study published in Clinical Cancer Research confirmed the uptakepotential of bavituximab combined with radiation in lung cancer, therapeutics and imaging agents into theshowing that a bavituximab equivalent combined with radiation reduced tumor at the tumor site, potentially resulting in greater efficacy. VEAs workgrowth by using monoclonal antibodies to deliver known vasoactive compounds (molecules that cause tissues to become more permeable) selectively to solid tumors. VEAs currently use the same targeting agent as TNT to deliver an agent that makes the blood vessels inside the tumor more permeable (leaky). Once localized at the tumor site, VEAs alter the physiology and the permeability of the vessels and capillaries that supply the tumor. In pre-clinical studies, drug uptake has been increased up to almost 400% in solid tumors when VEAs were administered several hours prior to the chemotherapeutic treatment. VEAs are intended to be used as a pre-treatment for most existing cancer therapies and imaging agents.
Anti-Angiogenesis agents work by inhibiting blood vessel growth. Peregrine has an antibody, termed 2C3, which inhibits a key tumor blood vessel growth factor known as Vascular Endothelial Growth Factor (“VEGF”), thereby inhibiting the formation of blood vessels in solid tumors. The 2C3 antibody is part of our anti-angiogenesis compound family under development for the treatment of cancer and other diseases dependent on aberrant blood vessel formation.
Vascular Targeting Agent (“VTA”) technology utilizes monoclonal antibodies and other targeting agents that recognize markers found on tumor blood vessels but not on normal blood vessels. VTAs act80% in a two-step process: the VTA first binds to the tumor blood vessels and then induces a blood clotmouse lung cancer model. The study also confirmed key aspects of bavituximab's mechanism of action in the tumor blood vessels. The formation of the blood clot stops the flow of oxygen and nutrients to the tumor cells, ultimately resulting in tumor cell death.combination with radiation therapy.
On April 15, 2008 at the 2008 Annual Meeting of the American Association for Cancer Research (AACR), Peregrine reported that pre-clinical study results confirmed a unique mechanism by which bavituximab is thought to affect the tumor microenvironment and contribute to its anti-tumor efficacy. The research showed similar effects for bavituximab and for PGN635, a fully human version of the bavituximab antibody. In the in vitro and in vivo studies, Peregrine researchers showed that both bavituximab and PGN635 cause the destruction of targeted cells. They demonstrated that by blocking the anti-inflammatory signals of the phosphatidylserine found on the surface of targeted cells, these anti-PS antibodies could create a unique tumor microenvironment, by enhancing production of pro-inflammatory cytokines and decreasing production of anti-inflammatory cytokines. In addition, the studies showed that similar to bavituximab, PGN635 localizes to tumors but not to healthy tissue.
At the 2008 AACR meeting, Peregrine also reported pre-clinical study results demonstrating the vaccine-like ability of immunocytokine proteins combining its anti-PS antibodies and cytokines, such as IL-2, to generate robust and protective immune responses in a highly aggressive mouse brain cancer model. Eighty percent of the mice receiving prophylactic pre-treatment with irradiated breast cancer and immunocytokine cells did not develop any tumors and remained tumor-free through 270 days post-treatment, while all of the control animals receiving irradiated breast tumor cells alone developed lethal tumors.
LicensingPeregrine also reported pre-clinical study results at the 2008 AACR meeting demonstrating that a mouse equivalent of Peregrine's bavituximab, administered in combination with the chemotherapeutic agent docetaxel, demonstrated excellent signs of efficacy in a model of hormone-refractory prostate cancer. This data confirmed and extended the results of previous studies of Peregrine's anti-PS antibodies in models of prostate cancer. Researchers reported that in a mouse model of hormone-refractory prostate cancer, the combination of the bavituximab equivalent antibody and docetaxel significantly decreased the growth of tumors, eliminated detectable metastases and prevented tumor re-growth. Survival time was more than doubled in animals receiving combination therapy compared to controls, and was substantially longer than the survival of animals treated with either therapy alone. This increase in anti-tumor efficacy and anti-metastatic activity was achieved with no apparent increase in toxicity compared to docetaxel alone.
In-Licensing Collaborations
The following discussions cover our collaborations and licensingin-licensing obligations related to our products in clinical trials:
Anti-Phosphatidylserine ImmunotherapeuticsTumor Necrosis Therapy (“TNT”)
We acquired the rights to the TNT technology in July 1994 after the merger between Peregrine and Cancer Biologics, Inc. was approved by our stockholders. The assets acquired from Cancer Biologics, Inc. primarily consisted of patent rights to the TNT technology. To date, no product revenues have been generated from our TNT technology.
In October 2004, we entered into a worldwide non-exclusive license agreement with Lonza Biologics (“Lonza”) for intellectual property and materials relating to the expression of recombinant monoclonal antibodies for use in the manufacture of Cotara®. Under the terms of the agreement, we will pay a royalty on net sales of any products we market that utilize the underlying technology. In the event a product is approved and we or Lonza do not manufacture Cotara®, we would owe Lonza 300,000 pounds sterling per year in addition to an increased royalty on net sales.
Anti-PhosphatidylSerine (“Anti-PS”) Immunotherapeutics
In August 2001, we exclusively in-licensed the worldwide rights to this technology platform from the University of Texas Southwestern Medical Center at Dallas.During November 2003 and October 2004, we entered into two non-exclusive license agreements with Genentech, Inc. to license certain intellectual property rights covering the methods and processes for producing antibodies used in connection with the development of our Anti-Phosphatidylserine (“Anti-PS”)Anti-PS Immunotherapeutics program. During December 2003, we entered into an exclusive commercial license agreement with an unrelated entity covering the generation of the chimeric monoclonal antibody, bavituximab. In March 2005, we entered into a worldwide non-exclusive license agreement with Lonza Biologics for intellectual property and materials relating to the expression of recombinant monoclonal antibodies for use in the manufacture of Anti-Phosphatidylserine Immunotherapeutics. During December 2003, we entered into an exclusive commercial license agreement with an unrelated entity covering the generation of the chimeric monoclonal antibody, bavituximab.
Under our licensingin-licensing agreements relating to the Anti-PhosphatidylserineAnti-PS Immunotherapeutics technology, we typically pay an up-front license fee, annual maintenance fees, and are obligated to pay future milestone payments based on development progress, plus a royalty on net sales and/or a percentage of sublicense income. Our aggregate future milestone payments under the above in-licensing agreements are $7,100,000$6,850,000 assuming the achievement of all development milestones under the agreements through commercialization of products, of which, we expect to pay up to $100,000 during fiscal year 2007 and $6,600,000$6,400,000 is due upon approval of the first Anti-PhosphatidylserineAnti-PS Immunotherapeutics product. In addition, under one of the agreements, we are required to pay future milestone payments upon the completion of Phase II clinical trial enrollment in the amount of 75,000 pounds sterling, the amount of which will continue as an annual license fee thereafter, plus a royalty on net sales of any products that we market that utilize the underlying technology. In the event we utilize an outside contract manufacturer other than Lonza Biologics to manufacture bavituximab we would owe Lonza Biologics 300,000 pounds sterling per year in addition to an increased royalty on net sales.
Tumor Necrosis Therapy (“TNT”)
We acquired the rights to the TNT technology in July 1994 after the merger between Peregrine and Cancer Biologics, Inc. was approved by our stockholders. The assets acquired from Cancer Biologics, Inc. primarily consisted of patent rights to the TNT technology.
In October 2004, we entered into a worldwide non-exclusive license agreement with Lonza Biologics (“Lonza”) for intellectual property and materials relating to the expression of recombinant monoclonal antibodies for use in the manufacture of Cotara®. Under the terms of the agreement, we will pay a royalty on net sales of any products that we market that utilize the underlying technology. In the event we or Lonza do not manufacture Cotara®,commercial purposes, we would owe Lonza 300,000 pounds sterling per year in addition to an increased royalty on net sales.
During fiscal years 2008 and 2006, we expensed $50,000 and $450,000, respectively under in-licensing agreements covering our Anti-PS Immunotherapeutics technology platform, which is included in research and development expense. We did not incur any milestone related expenses during fiscal year 2007.
Out-Licensing Collaborations
In addition to internal product development efforts and related licensing collaborations, we remain committed to our existing out-licensing collaborations and the pursuit of select partnerships with pharmaceutical, biopharmaceutical and diagnostic companies based on our broad intellectual property position. The following represents a summary of our key out-licensing collaborations.collaborations:
During September 1995, we entered into an agreement with Cancer Therapeutics, Inc., a California corporation, whereby we granted to Cancer Therapeutics Laboratories, Inc. (“CTL”) the exclusive right to sublicense TNT to a major pharmaceutical company solely in the People’s Republic of China. In addition, we are entitled to receive 50% of the distributed profits received by Cancer Therapeutics, Inc. from the Chinese pharmaceutical company. Cancer Therapeutics, Inc. has the right to 20% of the distributed profits under the agreement with the Chinese pharmaceutical company. During March 2001, we extended the exclusive licensing period granted to Cancer Therapeutics, which now expires on December 31, 2016. In exchange for this extension, Cancer Therapeutics, Inc. agreed to pay us ten percent (10%) of all other consideration received by Cancer Therapeutics, Inc., from the Chinese pharmaceutical company, excluding research funding. During January 2007, we filed a lawsuit against CTL alleging various breaches of contract under the agreement. The lawsuit is currently in the discovery phase as further discussed in Part I, Item 3 under “Legal Proceedings” of this Annual Report. Through fiscal year ended April 30, 2006,2008, we have not received any amounts under the agreement.
During October 2000, we entered into a licensing agreement with Merck KGaA to out-license a segment of our TNT technology for use in the application of cytokine fusion proteins. During January 2003, we entered into an amendment to the license agreement, whereby we received an extension to the royalty period from six years to ten years from the date of the first commercial sale. Under the terms of the agreement, we willwould receive a royalty on net sales if a product is approved under the agreement. Merck KGaA has not publicly disclosed the development status of its program.
During February 2001,2007, we completed a licensing dealentered into an amended and restated license agreement with SuperGen, Inc. (“SuperGen”) revising the original licensing deal completed with SuperGen in February 2001, to license a segment of our VTA technology, specifically related to Vascular Endothelial Growth Factorcertain conjugates of vascular endothelial growth factor (“VEGF”). Under the terms of the licensingamended and restated license agreement, we are entitled towill receive an annual license feefees of up to $200,000 per year payable in cash or SuperGen common stock until SuperGen files an Investigational New Drug Application in the United States utilizing the VEGF conjugate technology. In addition, we could receive additional milestoneup to $8.25 million in future payments based on SuperGen’s development success, plus receivethe achievement of all clinical and regulatory milestones combined with a royalty on net sales, of all drugs commercialized by SuperGen utilizingas defined in the VEGF technology.agreement, as amended. We could also receive additional consideration for each clinical candidate that enters a Phase III clinical trial by SuperGen. As of April 30, 2006,2008, SuperGen has not filed an Investigational New Drug Application in the United States utilizing the VEGF conjugate technology.
During December 2002, we granted the exclusive rights for the development of diagnostic and imaging agents in the field of oncology to Schering A.G. under our VTA technology. Under the terms of the agreement, we received an up-front payment of $300,000, which we amortized as license revenue over an estimated period of 48 months through December 2006 in accordance with SAB No. 104. Under this license agreement, the obligation period was not contractually defined and we exercised judgment in estimating the period of time over which certain deliverables will be provided to enable the licensee to practice the license. The estimated period of 48 months was primarily determined based on the historical experience with Schering A.G. under a separate license agreement. In addition, under the terms of the agreement, we could also receive up to $1.2 million in future milestone payments for each product based on the achievement of all clinical and regulatory milestones combined with a royalty on net sales, as defined in the agreement. Under the same agreement, we granted Schering A.G. an option to obtain certain non-exclusive rights to the VTA technology with predetermined up-front fees and milestone payments as defined in the agreement. Schering A.G. has not publicly disclosed the development status of its program.
During August 2005, we licensed certain intellectual property rights under our VTA technology to Medarex, Inc., which allows Medarex, Inc. to develop and commercialize certain monoclonal antibodies for the treatment of a wide range of solid tumors. Under the terms of the agreement we could receive up to $5.95 million in future payments based on the achievement of all clinical and regulatory milestones combined with a royalty on net sales, as defined in the agreement. Medarex, Inc. has not publicly disclosed the development status of its program.
During January 2002, we commenced the operations of our wholly owned subsidiary, Avid Bioservices, Inc. (“Avid”), which was formed from the facilities and expertise of Peregrine. Avid provides an array of contract manufacturing services, including contract manufacturing of antibodies and proteins, cell culture development, process development, and testing of biologics for biopharmaceutical and biotechnology companies under current Good Manufacturing Practices (“cGMP”). Avid’s current manufacturing capacity includes the following four bioreactors: 1,000 liter, 300 liter, 100 liter and 22.5 liter.
Operating a cGMP facility requires highly specialized personnel and equipment that must be maintained on a continual basis. Prior to the formation of Avid, we manufactured our own antibodies for over 10 years and developed the manufacturing expertise and quality systems to provide the same service to other biopharmaceutical and biotechnology companies. We believe Avid’s existing facility is well positioned to meet the growing needs of the industry. Avid is also well positioned to increase its capacity in the future in order to become a significant supplier of contract manufacturing services.
Avid provides an array of services for Peregrine as well as working with a variety of companies in the biotechnology and pharmaceutical industries. Even though much of the process is very technical, knowledge of the process should assist you in understanding the overall business and complexities involved in cGMP manufacturing. The manufacturing of monoclonal antibodies and recombinant proteins under cGMP is a complex process andthat includes several phases before the finished drug product is released for clinical or commercial use. The first phase of the manufacturing process is to receive the production cell line (the cells that produce the desired protein) and any available process information from the client. The cell line must be adequately tested according to FDA guidelines by an outside laboratory to certify that it is suitable for cGMP manufacturing. This testing generally takes between one and three months to complete, depending on the necessary testing. The cell line that is used may either be from a master cell bank (base cells from which all future cells will be grown), which is already fully tested or may represent a research cell line. In the case of a research cell line, Avid can use the research cell line to produce master and working cell banks. Clients often request further development through media screening and adaptation followed by small scale bioreactor process development in 1 to 5 liter bioreactor systems. In parallel to the production of the master and working cell banks, the growth and productivity characteristics of the cell line may be evaluated in the research andprocess development labs and paper work to support the production plan.labs. The whole manufacturing process (master cell bank characterization, process development, assay development, raw materials specifications, test methods, downstream processing methods, purification methods, testing methods and final release specifications) must be developed and documented prior to the commencement of manufacturing in the bioreactors. The second phase of the process is in the manufacturing facility. Once the process is developed, pilot runs are generally performed using smaller scale bioreactors, such as the 22.5 liter bioreactor, in order to verify the process. Once the process is set, a pilot run or runs at full scale runs will be performed to finalize manufacturing batch records. Material produced during these runs is often used for toxicology studies. After completing the pilot batch run(s) is completed,, full-scale cGMP manufacturing is typically initiated. Once the cGMP run(s) is completed, batch samples are sent to an outside lab for various required tests, including sterility and viral testing. Once the test results verify that the antibodies meet specifications, the product is released for clinical or commercial use.
Each product manufactured is tailored to meet the specific needs of Peregrine or the client. Full process development from start to product release can take ten months or longer. Research and development work can take from two months to over six months. All stages of manufacturing can generally take betweenfrom one to several weeks depending on the manufacturing method and process. Product testing and release can take up to three months to complete.
Given its inherent complexity, necessity for detail, and magnitude (contracts may be into the millions of dollars), the contract negotiations and sales cycle for cGMP manufacturing services can take a significant amount of time. Our anticipated sales cycle from client introduction to signing an agreement will take anywhere from between three to six months to over one year. Introduction to Avid’s services will usually come from exhibiting at trade shows, exposure from attending conferences and through word of mouth, exposure from direct mailings, exposure from attendance at conferences or from advertising in trade journals.mouth. The sales cycle consists of the introduction phase, the proposal phase, the audit phase, the contract phase and the project initiation phase.
To date, Avid has been audited and qualified by both large, and small, domestic and foreign biotechnology companies interested in the production of monoclonal antibodies for clinical trialtrials and, as discussed below, commercial use. Additionally, Avid has been audited by the European Agency for the Evaluation of Medicinal Products (“EMEA”),Regulatory authorities, the United States Food and Drug Administration (“FDA”) and the California Department of Health.
In 2005, Avid was inspected by the FDA in a Pre-Approval Inspection ("PAI"(“PAI”) in support ofsupporting a New Drug Application for a commercial application by a client company. The Los Angeles District FDA office did recommendrecommended to Washington that the facility be approved as a site for the Active Pharmaceutical Ingredient ("API"(“API”) for the client company. The client'sclient’s New Drug Application was in fact approved later in 2005 and includes Avid as the source of the API. Avid is currently producing commericalcommercial product for the client company under this approved New Drug Application.
Government Regulation
Regulation by governmental authorities in the United States and other countries is a significant factor in our ongoing research and development activities and in the production of our products under development. Our products and our research and development activities are subject to extensive governmental regulation in the U.S., including the Federal Food, Drug, and Cosmetic Act, as amended, the Public Health Service Act, also as amended, as well as to other federal, state, and local statutes and regulations. These laws, and similar laws outside the U.S., govern the clinical and non-clinical testing, manufacture, safety, effectiveness, approval, labeling, distribution, sale, import, export, storage, record keeping, reporting, advertising and promotion of our products, if approved. Violations of regulatory requirements at any stage may result in various adverse consequences, including regulatory delay in approving or refusal to approve a product, enforcement actions, including withdrawal of approval, labeling restrictions, seizure of products, fines, injunctions and/or civil or criminal penalties. Any product that we develop must receive all relevant regulatory approvals or clearances before it may be marketed in a particular country.
The regulatory process, which includes extensive pre-clinical testing and clinical trials of each clinical candidate to study its safety and efficacy, is uncertain, takes many years and requires the expenditure of substantial resources. We cannot assure you that the clinical trials of our product candidates under development will demonstrate the safety and efficacy of those product candidates to the extent necessary to obtain regulatory approval.
The activities required before a product may be marketed in the United States, such as Cotara® or bavituximab, (formerly known as Tarvacin), are generally performed in the following sequential steps:
| | 1. | Pre-clinical testing. This generally includes laboratory testingevaluation of our products in the laboratory or in animals to determine characterization, safety efficacy and potential toxicity. Pre-clinicalefficacy. Some pre-clinical studies must be conducted by laboratories that comply with FDA regulations regarding good laboratory practice. |
| | 2. | Submission to the FDA of an investigational new drug application (“IND”). The results of pre-clinical studies, together with manufacturing information, analytical data and proposed clinical trial protocols, are submitted to the FDA as part of an IND, which must become effective before the clinical trials can begin. Once the IND is filed, the FDA has 30 days to review it. The IND will automatically become effective 30 days after the FDA receives it, unless the FDA indicates prior to the end of the 30-day period that the proposed protocol raises concerns that must be resolved to the FDA’s satisfaction before the trialstrial may proceed. If the FDA raises concerns, we may be unable to resolve the proposed protocol to the FDA’s approval in a timely fashion, if at all. |
| | 3. | Completion of clinical trials. Human clinical trials are necessary to seek approval for a new drug or biologic and typically involve a three-phase process. In phasePhase I, small clinical trials are generally conducted to determine the safety of the product. In phasePhase II, clinical trials are generally conducted to assess safety, acceptable dose, and gain preliminary evidence of the efficacy of the product. In phasePhase III, clinical trials are generally conducted to provide sufficient data for the statistically valid proof of safety and efficacy. Clinical trialsA clinical trial must be conducted according to good clinical practices under protocols that detail the trial’s objectives, inclusion and exclusion criteria, the parameters to be used to monitor safety and the efficacy criteria to be evaluated, and informed consent must be obtained from all study subjects. Each protocol must be submitted to the FDA as part of the IND. The FDA may impose a clinical hold on an ongoing clinical trial if, for example, safety concerns arise, in which case the study cannot recommence without FDA authorization under terms sanctioned by the Agency. In addition, before a clinical trial can be initiated, each clinical site or hospital administering the product must have the protocol reviewed and approved by an institutional review board (“IRB”). The IRB will consider, among other things, ethical factors and the safety of human subjects. The IRB may require changes in a protocol, which may delay initiation or completion of a study. Phase I, Phase II or Phase III clinical trials may not be completed successfully within any specific period of time, if at all, with respect to any of our potential products. Furthermore, we, the FDA or an IRB may suspend a clinical trial at any time for various reasons, including a finding that the healthy individuals or the patients are being exposed to an unacceptable health risk. |
| | 4. | Submission to the FDA of a Biologics License Application (“BLA”) or New Drug Application (“NDA”). After completion of clinical studies for an investigational product, a Biologics License Application (“BLA”) or New Drug Application (“NDA”) is submitted to the FDA for product marketing approval. No action can be taken to market any new drug or biologic product in the United States until the FDA has approved an appropriate marketing application. |
| | 5. | FDA review and approval of the BLA or NDA before the product is commercially sold or shipped. The results of pre-clinical studies and clinical trials and manufacturing information are submitted to the FDA in the form of a BLA or NDA for approval of the manufacture, marketing and commercial shipment of the product. The FDA may take a number of actions after the BLA or NDA is filed, including but not limited to, denying the BLA or NDA if applicable regulatory criteria are not satisfied, requiring additional clinical testing or information; or requiring post-market testing and surveillance to monitor the safety or efficacy of the product. Adverse events that are reported after marketing approval can result in additional limitations being placed on the product’s use and, potentially, withdrawal of the product from the market. Any adverse event, either before or after marketing approval, can result in product liability claims against us. |
In addition, we are subject to regulation under state, federal, and international laws and regulations regarding occupational safety, laboratory practices, the use and handling of radioactive isotopes, environmental protection and hazardous substance control, and other regulations. Our clinical trial and research and development activities involve the controlled use of hazardous materials, chemicals and radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials cannot be completely eliminated. In the event of such an accident, we could be held liable for any damages that result and any such liability could exceed our financial resources. In addition, disposal of radioactive materials used in our clinical trials and research efforts may only be made at approved facilities. We believe that we are in material compliance with all applicable laws and regulations including those relating to the handling and disposal of hazardous and toxic waste.
Our product candidates, if approved, may also be subject to import laws in other countries, the food and drug laws in various states in which the products are or may be sold and subject to the export laws of agencies of the United States government.
In addition, we must also adhere to current Good Manufacturing Practice (“cGMP”) and product-specific regulations enforced by the FDA through its facilities inspection program. Failure to comply with manufacturing regulations can result in, among other things, warning letters, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, refusal of the government to renew marketing applications and criminal prosecution.
During fiscal year 1999, the Office of Orphan Products Development of the FDA determined that Cotara® qualified for orphan designation for the treatment of recurrent glioblastoma multiforme and anaplastic astrocytoma (both brain cancers). The 1983 Orphan Drug Act (with amendments passed by Congress in 1984, 1985, and 1988) includes various incentives that have stimulated interest in the development of orphan drug and biologic products. These incentives include a seven-year period of marketing exclusivity for approved orphan products, tax credits for clinical research, protocol assistance, and research grants. Additionally, legislation re-authorizing FDA user fees also created an exemption for orphan products from fees imposed when an application to approve the product for marketing is submitted. A grant of an orphan designation is not a guarantee that a product will be approved. If a sponsor receives orphan drug exclusivity upon approval, there can be no assurance that the exclusivity will prevent another entity from receiving approval for the same or a similar drug for the same or other uses.
Cotara® was granted Fast Track designation by the FDA in fiscal year 2002 for the treatment of recurrent glioblastoma multiforme. This designation facilitates the development and expedites the review of new drugs that are intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs. The Fast Track mechanism is described in the Food and Drug Administration Modernization Act of 1997 (FDAMA). The benefits of Fast Track include scheduled meetings to seek FDA input into development plans, the option of submitting a New Drug Application in sections rather than all components simultaneously, and the option of requesting evaluation of studies using surrogate endpoints.
Manufacturing and Raw Materials
Manufacturing. We manufacture pharmaceutical-grade products to supply our previous and ongoing clinical trials through our wholly owned subsidiary, Avid Bioservices,Bioservices®, Inc. We have assembled a team of experienced scientific, production and regulatory personnel to facilitate the manufacturing of our antibodies, including Cotara® and bavituximab (formerly known as Tarvacin).bavituximab.
Our bavituximab product is shipped directly from our facility to the clinical trial sites or to contract research organizations that distribute the clinical trial materials to clinical sites. Our TNT antibodies are shipped to a third party facility for radiolabeling (the process of attaching the radioactive agent, Iodine 131, to the antibody). From the radiolabeling facility, Cotara® (the radiolabeled-TNT antibodies) is shipped directly to the clinical site for use in clinical trials.
Any commercial radiolabeling supply arrangement will require a significant investment of funds by us in order for a radiolabeling vendor to develop the expanded facilities necessary to support our product. There can be no assurance that material produced by our current radiolabeling supplier will be suitable for commercial quantities to meet the possible demand of Cotara®, if approved. We will continue with our research in radiolabeling scale-up, but we believe this research will be eventually supported by a potential licensing or marketing partner for Cotara®.
Raw Materials. Various common raw materials are used in the manufacture of our products and in the development of our technologies. These raw materials are generally available from several alternate distributors of laboratory chemicals and supplies. We have not experienced any significant difficulty in obtaining these raw materials and we do not consider raw material availability to be a significant factor in our business.
Patents and Trade Secrets
Peregrine continues to seek patents on inventions originating from ongoing research and development activities within the Company and in collaboration with other companies and university researchers. Patents, issued or applied for, cover inventions relating in general to cancer therapy and anti-viral therapy and in particular to different proteins, antibodies and conjugates, methods and devices for labeling antibodies, and therapeutic uses of the antibodies and conjugates. We intend to pursue opportunities to license these technologies and any advancements or enhancements, as well as to pursue the incorporation of our technologies in the development of our own products.
Our issued patents extend for varying periods according to the date of patent application filing or grant and the legal term of patents in the various countries where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon the type of patent, the scope of its coverage and the availability of legal remedies in the country. We have either been issued patents or have patent applications pending that relate to a number of current and potential products including products licensed to others. We consider that in the aggregate our patent applications, patents and licenses under patents owned by third parties are of material importance to our operations. In general, we have obtained licenses from various parties that we deem to be necessary or desirable for the manufacture, use or sale of our products. These licenses (both exclusive and non-exclusive) generally require us to pay royalties to the parties. The terms of the licenses, obtained and that we expect to be obtained, are not expected to significantly impact the cost structure or marketability of the Company’s products.
In general, the patent position of a biotechnology firm is highly uncertain and no consistent policy regarding the breadth of issued claims has emerged from the actions of the U.S. Patent Office with respect to biotechnology patents. Similar uncertainties also exist for biotechnology patents in important overseas markets. Accordingly, there can be no assurance that our patents, including those issued and those pending, will provide protection against competitors with similar technology, nor can there be any assurance that such patents will not be legally challenged, invalidated, infringed upon and/or designed around by others.
International patents relating to biologics are numerous and there can be no assurance that current and potential competitors have not filed or in the future will not file patent applications or receive patents relating to products or processes utilized or proposed to be used by the Company. In addition, there is certain subject matter which is patentable in the United States but which may not generally be patentable outside of the United States. Statutory differences in patentable subject matter may limit the protection the Company can obtain on some of its products outside of the United States. These and other issues may prevent the Company from obtaining patent protection outside of the United States. Failure to obtain patent protection outside the United States may have a material adverse effect on the Company’s business, financial condition and results of operations.
No one has sued us for infringement and no third party has asserted their patents against us that we believe are of any merit. However, there can be no assurances that such lawsuits have not been or will not be filed and, if so filed, that we will prevail or be able to reach a mutually beneficial settlement. We also intend to continue to rely upon trade secrets and improvements, unpatented proprietary know-how, and continuing technological innovation to develop and maintain our competitive position in research and development of therapeutic and diagnostic products. We typically place restrictions in our agreements with third parties, which contractually restrict their right to use and disclose any of the Company's proprietary technology with which they may be involved. In addition, we have internal non-disclosure safeguards, including confidentiality agreements, with our employees. There can be no assurance, however, that others may not independently develop similar technology or that the Company's secrecy will not be breached.
Customer Concentration and Geographic Area Financial Information
We are currently in the research and development phase for all of our products and we have not generated any product sales from any of our technologies under development. For financial information concerning Avid’s customer concentration and geographic areas of its customers, see Note 11,10, “Segment Reporting” to the consolidated financial statements.
Marketing Our Potential Products
We intend to sell our products, if approved, in the United States and internationally in collaboration with marketing partners or through an internal sales force. If the FDA approves Cotara® or bavituximab or our other product candidates under development, the marketing of these product candidates will be contingent upon us entering into an agreement with a company to market our products or upon us recruiting, training and deploying our own sales force. We do not presently possess the resources or experience necessary to market Cotara®, bavituximab, or any of our other product candidates and we currently have no arrangements for the distribution of our product candidates, if approved. Development of an effective sales force requires significant financial resources, time, and expertise. There can be no assurance that we will be able to obtain the financing necessary to establish such a sales force in a timely or cost effective manner or that such a sales force will be capable of generating demand for our product candidates.
Competition
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 whichthat are comparable or superior to our technologies and products.
We are conducting the Cotara® dose confirmation and dosimetry clinical trial for the treatment of recurrent glioblastoma multiforme (“GBM”), the most aggressive form of brain cancer as a stand-alone study in collaboration with New Approaches to Brain Tumor Therapy (“NABTT”) consortium. Existingcancer. Approved treatments for brain cancer include the Gliadel® Wafer (polifeprosan 20 with carmustine implant) from MGI Pharma, Inc. and Temodar® (temazolomide)(temozolomide) from Schering-Plough Corporation. Gliadel® is inserted in the tumor cavity following surgery and releases a chemotherapeutic agent over time. Temodar® is administered orally to patients receiving concurrent radiation therapy.with brain cancer.
Because Cotara® targets brain tumors from the inside out, it is a novel treatment dissimilar from other drugs in development for this disease. Some of the products thatin development may compete within the brain cancer categorywith Cotara® should they become approved for marketing. These products include, GLI-328 (Novartis),but are not limited to: Neuradiab, a gene therapy treatment that is injected into the walls of the tumor cavity following surgery; IL13-PE38QQR (cintredekin besudotox) from NeoPharm, Inc. continuesradiolabeled anti-tenascin monoclonal antibody sponsored by Bradmer Pharmaceuticals, CDX-110, a peptide vaccine under development by Celldex, cilengitide in a Phase III trial; In March 2006 Eli Lillynewly diagnosed GBM patients being evaluated by Merk KGaA, and Company began a Phase III trial of enzastuarincediranib for the treatment of GBM; TransMID™ (Xenova Group plc) is a product based on the diphtheria toxin and began a Phase III trial in May 2004.patients with recurrent GBM being developed by AstraZeneca. In addition, Gleevec® by Novartis, which is an oncology productproducts marketed for other indications issuch as Gleevec® (Novartis), Tarceva® (Genentech/OSI), Avastin® (Genentech) and Nexavar® (Bayer), are being tested in clinical trials for the treatment of brain cancer.
Bavituximab is currently in clinical trials for the treatment of advanced solid cancers is currently in Phase I clinical trials.cancers. 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 Genentech, Inc., Gleevec® by Novartis, Tarceva® by OSI Pharmaceuticals, Inc. and Genentech, Inc., Erbitux® by ImClone Systems Incorporated and Brystol-MyersBristol-Myers Squibb Company, Rituxan® and Herceptin® by Biogen Idec Inc. and Genentech, Inc., Herceptin®and Vectibix™ by Genentech, Inc. and panitumumab by Amgen®.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 have completed a Phase I single-dose clinical trialare evaluating bavituximab for the treatment of HCV infection and have begun enrolling patients in a multiple-dose Phase Ib clinical trial.HCV. Bavituximab is a first-in-class approach for the treatment of HCV infection.HCV. We are aware of no other products in development targeting PSphosphatidylserine as a potential therapy for HCV infection.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®Peg-Intron® (pegylated interferon-alpha-2b), Rebetol®Rebetol® (ribavirin), and Intron-A (interferon-alpha-2a), which are marketed by Schering-Plough Corporation, and Pegasys®Pegasys® (pegylated interferon-alpha-2a), Copegus®Copegus® (ribavirin USP) and Roferon-A®Roferon-A® (interferon-alpha-2a), which are marketed by Roche Pharmaceuticals, and Infergen®Infergen® (interferon alfacon-1) now marketed by ValeantThree Rivers Pharmaceuticals, International.LLC. First line treatment for HCV has changed little since alpha interferon was first introduced in 1991. The current standard of care for HCV infection 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 disordersside 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 Abluferon™Albuferon™ (albumin interferon) from Human Genome Sciences, Inc. and Viramidine™ (taribavirin), a prodrug analog of ribavirin being developed by Valeant Pharmaceuticals International. Other developmental approaches include, but are not limited to, protease inhibitors such as VX-950telaprevir from Vertex Pharmaceuticals Incorporated and SCH7boceprevir from Schering-Plough Corporation, and NM283, a polymerase inhibitor by Idenix Pharmaceuticals, Inc.Corporation.
Research and Development
A major portion of our operating expenses to date is related to research and development. Research and development expenses primarily include (i) payroll and related costs associated with research and development personnel, (ii) costs related to clinical and pre-clinical testing of our technologies under development, (iii) costs to develop and manufacture the product candidates, including raw materials and supplies, product testing, depreciation, and facility related expenses, (iv) technology access and maintenance fees, including intellectual property fees and fees incurred under licensing agreements, (v) expenses for research services provided by universities and contract laboratories, including sponsored research funding, and (vi) other research and development expenses. Research and development expenses were $18,279,000 in fiscal year 2008, $15,876,000 in fiscal year 2007, and $12,415,000 in fiscal year 2006, $11,164,000 in fiscal year 2005, and $9,673,000 in fiscal year 2004. 2006.
Corporate Governance
Our Board is committed to legal and ethical conduct in fulfilling its responsibilities. The Board expects all directors, as well as officers and employees, to act ethically at all times and to adhere to the policies comprising the Company's Code of Business Conduct and Ethics. The Board of Directors (the "Board") of the Company adopted the corporate governance policies and charters. Copies of the following corporate governance documents are posted on our website, and are available free of charge, at www.peregrineinc.comwww.peregrineinc.com: (1) Peregrine Pharmaceuticals, Inc. Code of Business Conduct and Ethics (2) Peregrine Pharmaceuticals, Inc. Charter of the Nominating Committee of the Board of Directors, (3) Peregrine Pharmaceuticals, Inc. Charter of the Audit Committee of the Board of Directors, and (4) Peregrine Pharmaceuticals, Inc. Charter of the Compensation Committee of the Board of Directors. If you would like a printed copy of any of these corporate governance documents, please send your request to Peregrine Pharmaceuticals, Inc., Attention: Corporate Secretary, 1427214282 Franklin Avenue, Tustin, California 92780.
Human Resources
As of April 30, 2006,2008, we employed 102129 full-time employees and 64 part-time employees. Each of our employees has signed a confidentiality agreement and none are covered by a collective bargaining agreement. We have never experienced employment-related work stoppages and consider our employee relations to be good.
GLOSSARY OF TERMS
ADJUVANT - – Anagent added to a drug to increase or aid its effect.
ANGIOGENESIS –- The formation of new blood vessels.
ANTIBODY - – Protein formed by the body to help defend against infection and disease.
ANTIGEN - – Any substance that antagonizes or stimulates the immune system to produce antibodies.
CHEMOTHERAPY – - Treatment of disease by means of chemical substances or drugs.
CHIMERIC -– A type of antibody that is mostly human and partially mouse.
cGMP -- current Good Manufacturing Practices; regulations established by the FDA for the manufacture, processing, packing, or holding of a drug to assure that such drug meets the requirements of the Federal Food, Drug and Cosmetic Act as to safety, and has the identity and strength and meets the quality and purity characteristics that it purports or is represented to possess.
COTARA® - – The trade name of our first Tumor Necrosis Therapy (“TNT”) clinical compound. Cotara® is a chimeric monoclonal antibody combined with Iodine 131 (radioisotope) that targets dead and dying cells found primarily at the core of a tumor.
CYTOKINE - – A chemical messenger protein released by certain white blood cells. The cytokines include the interferons, the interleukins, tumor necrosis factor, and many others.
DNA (DEOXYRIBONUCLEIC ACID) - – A complex polynucleotide that is the carrier of genetic information.
ENDOTHELIAL CELLS – -A layer of flat cells that line blood vessels.
FDA -- the U.S. Food and Drug Administration; the government agency responsible for regulating the food, drug and cosmetic industries, including the commercial approval of pharmaceuticals in the United States.
GLIOBLASTOMA MULTIFORME – - A type of brain tumor that forms from glial (supportive) tissue of the brain. Also called grade IV astrocytoma.
IND – - Investigational New Drug Application; the application submitted to the FDA requesting permission to conduct human clinical trials.
MAXIMUM TOLERATED DOSE – - The highest nontoxic dose that can be reasonably given to patients.
NECROSISor NECROTIC – - The death and degradation of cells within a tissue.
ONCOLOGY – - The study and treatment of cancer.
PHARMACOKINETIC - – Concerning the study of how a drug is processed by the body, with emphasis on the time required for absorption, distribution in the body metabolism and excretion.
PHOSPHOLIPIDS – - Phospholipids are normal cellular structures that are present in all cells of the human body and form the building blocks that make-up the outer and inner surface of cells responsible for maintaining integrity and normal functions.
PRE-CLINICAL - – Generally refers to research that is performed in animals or tissues in the laboratory.
PROTOCOL - – A detailed plan for studyingconducting a treatment forresearch study such as a specific condition.clinical trial.
RADIOLABELINGor RADIOLABELED – - Process of attaching a radioactive isotope, such as Iodine 131.
RECURRENT - – The return or flare up of a condition thought to be cured or in remission.
SOLID TUMORS – - Cancer cells which grow as a solid mass.
TUMOR NECROSIS THERAPY (“TNT”) – - Therapeutic agents that target dead and dying cells found primarily at the core of a tumor.
This Annual Report on Form 10-K contains forward-looking information based on our current expectations. Because our actual results may differ materially from any forward-looking statements made by or on behalf of Peregrine, this section includes a discussion of important factors that could affect our actual future results, including, but not limited to, our potential product sales, potential royalties, contract manufacturing revenues, expenses, net income(loss) and earnings(loss) per common share.
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 JuneApril 30, 2006,2008, we had approximately $26.3 million$15,130,000 in cash and cash equivalents. We have expended substantial funds on (i) the research, development and clinical trials of our product candidates, and (ii) funding the operations of our wholly owned subsidiary, Avid Bioservices, Inc. 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, unlessfuture. Our net losses incurred during the past three fiscal years ended April 30, 2008, 2007 and 2006 amounted to $23,176,000, $20,796,000, and $17,061,000, 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. Whiledevelopment, we expect Avid to generate revenues in the foreseeable future, we expect our monthly negative cash flowsuch losses to continue for the foreseeable future duein fiscal year 2009.
Therefore, our ability to continue our clinical trial activities using Cotara® for the treatment of brain cancer, our ongoing clinical studies of bavituximab for the treatment of both solid tumors and hepatitis C virus infection, our anticipated researchtrials and development costs associatedefforts 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. As discussed in Note 1 to the possible expansionconsolidated financial statements, there exists substantial doubt regarding our ability to continue as a going concern.
We will need additional capital to support the costs of our clinical indications using bavituximabfor the treatment of other viral indications, including possible supporting trials outside the U.S., our continued research directed towards our other technologies inand pre-clinical development, and our possible expansion of our manufacturing capabilities. We believe we have sufficient cash on hand to meet our obligations on a timely basis through at least fiscal year 2007.
In addition to the operations of Avid, we plan to obtain any necessary financingprograms through one or more methods including either equity or debt financing and/financing. If we raise additional capital through the issuance of debt securities, the debt securities may be secured and any interest payments would reduce the amount of cash available to operate and grow our business. If we raise additional capital through the issuance of equity securities, such issuances will likely cause dilution to our stockholders, particularly if we are required to do so during periods when our common stock is trading at historically low price levels. As of April 30, 2008, we had an aggregate of approximately 5,031,000 shares available under our existing effective Form S-3 registration statements for possible future registered transactions. In addition, we filed a separate shelf registration statement on Form S-3, File Number 333-139975, 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 $7,500,000.
We may also raise additional capital though negotiating additional licensing or collaboration agreements for our technology platforms. ThereIn addition, our wholly owned subsidiary Avid Bioservices, Inc., represents an additional asset in our portfolio and we are actively pursuing strategic initiatives for Avid as a means of raising additional capital.
Although we will continue to explore these potential opportunities, there can be no assurances that we will be successful in raising such fundssufficient capital on terms acceptable to us, or at all, or that sufficient additional capitalrevenues will be raisedgenerated from Avid or under potential licensing or partnering agreements or from a potential strategic transaction related to our subsidiary, Avid Bioservices, Inc. to complete the research, development, and clinical testing of our product candidates. Based on our current projections, which includes projected revenues from existing customers of Avid Bioservices, Inc., combined with the projected revenues from our government contract, 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 fiscal year 2009. There are a number of uncertainties associated with our financial projections, including but not limited to, termination of contracts and technical challenges, which would reduce or delay our future projected cash-inflows. The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern. Our independent registered public accountants have included an explanatory paragraph related to the uncertainity of our ability to continue as a going concern in their opinion on our 2008 consolidated financial statements.
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 during the past three fiscal years:
| | | Net Loss | |
| Fiscal Year 2008 | | $ | 23,176,000 | |
| Fiscal Year 2007 | | $ | 20,796,000 | |
| Fiscal Year 2006 | | $ | 17,061,000 | |
As of April 30, 2008, we had an accumulated deficit of $230,836,000. 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 April 30, 2008, there were approximately 226,211,000 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 20,921,509 additional shares of our common stock that are reserved for future issuance under our shelf registration statements and stock option plans, as further described in the following table:
| | Number of Shares of Common Stock Reserved For Issuance | |
Shares reserved for issuance under two effective shelf registration statements | | | 5,030,634 | |
Common shares reserved for issuance upon exercise of outstanding options or reserved
for future option grants under our stock incentive plans | | | 15,890,875 | |
Total | | | 20,921,509 | |
In addition, the above table does not include shares of common stock that we have available to issue from the registration statement we filed during January 2007 on Form S-3, File Number 333-139975, 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 $7,500,000.
Of the total options outstanding as of April 30, 2008, approximately 4,073,000 options 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 April 30, 2008.
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.
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 three fiscal years ended April 30, 2008:
| | | Common Stock Sales Price | | | Common Stock Daily Trading Volume (000’s omitted) | |
| | | High | | | Low | | | High | | | Low | |
| Fiscal Year 2008 | | | | | | | | | | | | |
| Quarter Ended April 30, 2008 | | $ | 0.73 | | | $ | 0.35 | | | | 3,846 | | | | 130 | |
| Quarter Ended January 31, 2008 | | $ | 0.65 | | | $ | 0.35 | | | | 3,111 | | | | 140 | |
| Quarter Ended October 31, 2007 | | $ | 0.79 | | | $ | 0.54 | | | | 2,631 | | | | 169 | |
| Quarter Ended July 31, 2007 | | $ | 1.40 | | | $ | 0.72 | | | | 21,653 | | | | 237 | |
| Fiscal Year 2007 | | | | | | | | | | | | | | | | |
| Quarter Ended April 30, 2007 | | $ | 1.26 | | | $ | 0.86 | | | | 6,214 | | | | 408 | |
| Quarter Ended January 31, 2007 | | $ | 1.39 | | | $ | 1.09 | | | | 4,299 | | | | 203 | |
| Quarter Ended October 31, 2006 | | $ | 1.48 | | | $ | 1.12 | | | | 3,761 | | | | 277 | |
| Quarter Ended July 31, 2006 | | $ | 1.99 | | | $ | 1.30 | | | | 23,790 | | | | 429 | |
| Fiscal Year 2006 | | | | | | | | | | | | | | | | |
| Quarter Ended April 30, 2006 | | $ | 1.76 | | | $ | 1.20 | | | | 9,922 | | | | 391 | |
| Quarter Ended January 31, 2006 | | $ | 1.40 | | | $ | 0.88 | | | | 12,152 | | | | 251 | |
| Quarter Ended October 31, 2005 | | $ | 1.28 | | | $ | 0.91 | | | | 4,619 | | | | 156 | |
| Quarter Ended July 31, 2005 | | $ | 1.31 | | | $ | 0.92 | | | | 7,715 | | | | 178 | |
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, including but not limited to any potential reverse stock split; |
| · | 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.
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 presently 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. |
On July 25, 2007, we received a deficiency notice from The Nasdaq Stock Market notifying us that we had not met the $1.00 minimum closing bid price requirement for thirty consecutive trading days as set forth above. According to the Nasdaq notice, we were automatically afforded an initial “compliance period” of 180 calendar days, or until January 22, 2008, to regain compliance with this requirement. Although we did not achieve compliance with the minimum closing bid price requirement after the initial 180 calendar day period, on January 22, 2008, we received a letter from the Nasdaq Stock Market providing us with the additional “compliance period” of 180 calendar days, or until July 21, 2008, to regain compliance. In order to regain compliance with the minimum closing bid price, the closing bid price of our common stock must be $1.00 or more for at least 10 consecutive trading days. If we are not able to demonstrate compliance with the minimum bid price rule by July 21, 2008, the company will be notified by the Nasdaq Stock Market that our common stock will be delisted. If this occurs, we will have the opportunity to appeal the determination to delist our common stock. We intend to pursue all available options to ensure our continued listing on the Nasdaq Stock Market. Although we currently meet all other Nasdaq listing requirements, the market price of our common stock has generally been highly volatile and we cannot guarantee that we will be able to regain compliance with the minimum closing bid price requirement within the required compliance period. If we fail to regain compliance with the minimum closing bid price requirement or fail to comply with any other The Nasdaq Capital Market listing requirements, the market value of our common stock could fall and holders of common stock would likely find it more difficult to dispose of the common stock.
If our common stock is 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 our licensing partners and we have not begun the commercial salessale 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.
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 during the past three fiscal years ended April 30, 2006:
| | | Net Loss | |
| Fiscal Year 2006 | | $ | 17,061,000 | |
| Fiscal Year 2005 | | $ | 15,452,000 | |
| Fiscal Year 2004 | | $ | 14,345,000 | |
As of April 30, 2006, we had an accumulated deficit of $186,864,000. 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 revenues sufficient to become profitable or to sustain profitability.
Our Product Development Efforts May Not Be Successful.
Since our inception, we have been engaged in the development of drugs and related therapies for the treatment of people with cancer. During fiscal year 2005, we began exploring the use of one of our product candidates, bavituximab, for the treatment of viral infections (in particular enveloped viruses). We recently completed a single dose Phase Ia trial for the treatment of people with the hepatitis C virus (“HCV”) infection, including the extension of the study to test an additional six patients at a higher dose. We have also recently initiated a Phase 1b repeat dose study and are planning a combination therapy study using bavituximab with standard anti-viral therapies. 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.24
| 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. |
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.
| Our International Clinical Trials May Be Delayed Or Otherwise Adversely Impacted By Social, Political And Economic Factors Affecting The Particular Foreign Country. |
We are presently conducting clinical trials in India and the Republic of Georgia. 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 we will be conducting a number of our Phase II clinical trials in India and the Republic of Georgia and potentially other foreign countries, any disruption to our international clinical trial program could significantly delay our product development efforts. In addition, doing business in the Republic of Georgia, which is in Eastern Europe, involves other significant risks which could materially and adversely affect our business as there remains a high degree of political instability in many parts of Eastern Europe.
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.
Positive results from pre-clinical studies and our Phase I clinical trialtrials should not be relied upon as evidence that later or larger-scale clinical trials will succeed. The Phase I clinical trialstudies we have completed to date have been designed to primarily assess safety in a small number of bavituximab for the treatment of the Hepatitis C virus (“HCV”) infection has been conducted only in small numbers of patients that may not fully represent the diversity present in larger populations infected with HCV.patients. The limited results we have obtained may not predict results fromfor any future studies in larger numbers of patients drawn from more diverse populations and also may not predict the ability of bavituximab to achieve a sustained anti-viral response or the ability to provide a long-termfuture therapeutic benefit. These initial trials in HCV have not been designed to assess the long-term therapeutic utility of bavituximab. We will be required to demonstrate through larger-scale clinical trials that bavituximab isand Cotara® are safe and effective for use in a diverse population before we can seek regulatory approval for itstheir 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.
We have concluded acompleted Phase I and Phase I/II studystudies with Cotara® for the treatment of recurrent Glioblastoma Multiforme (“GBM”), a deadly form of brain cancer. WeIn addition, we are currently collaborating with various universities that are members of the New Approaches to Brain Tumor Therapy (“NABTT”) consortium to complete theconducting a dose confirmation and dosimetry clinical trial. The next steptrial in patients with recurrent glioblastoma multiforme (“GBM”) in the development of Cotara® will be to treatU.S. In June 2007, we opened enrollment in a group of approximately 40 patientsPhase II safety and efficacy study in India using a single administration of the drug withthrough an optimized delivery using two catheters.method. Taken together, the NABTTcurrent U.S. study along with data collected from the treatment of the approximate 40 additional patientsPhase II safety and efficacy study in India should provide the safety, dosimetry and efficacy data that will support the final design of the larger Phase III study. Once we complete these two Cotara® studies for the initial two partstreatment of the Cotara® study for brain cancer,GBM, substantial financial resources will be needed to complete the final part of the trial and any additional supportive clinical studies necessary for potential product approval. We do not presently have the financial resources internally to complete the larger Phase III study. We therefore intend to continue to seek a licensing or funding partner for Cotara®, and hope that the data from this collaboration with members of NABTT together with other data from additional 40 patients,the U.S. and the Phase II study in India will enhance our opportunities of finding such partner. If a partner is not found for this technology, 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 anti-canceroncology drug, we may not find a suitable partnering candidate for Cotara®. We also cannot assure youensure that we will be able to find a suitable licensing partner for this technology. Furthermore, we cannot assure youensure that if we do find a suitable licensing partner, the financial terms that they propose will be acceptable to the Company.
Our Dependency On OneOur Radiolabeling SupplierSuppliers May Negatively Impact Our Ability To Complete Clinical Trials And Market Our Products.
We have procured our antibody radioactive isotope combination services (“radiolabeling”) for Cotara® with Iso-tex Diagnostics, Inc. for all U.S. clinical trials using Cotara®.and with the Board of Radiation & Isotope Technology (“BRIT”) for our Phase II study in India. If this suppliereither 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 trial or potential licensing partner’s 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., 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,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, 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:
| | · | 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.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.
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 a five-year contract 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 Transformational Medical Technologies Initiative (TMTI) of the U.S. Department of Defense's Defense Threat Reduction Agency (DTRA). This federal contract is expected to provide us with up to $22.3 million in funding over a 24-month base period, with $5 million appropriated immediately for the current federal fiscal year ending September 30, 2008. The remainder of the $22.3 million in funding is expected to be appropriated over the remainder of the two-year base period ending June 29, 2010. Subject to the progress of the program and budgetary considerations in future years, the contract can be extended beyond the base period to cover up to $44.4 million in funding over the five-year contract period. Work under this contract commenced on June 30, 2008. 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.
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..
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 presently 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. |
We cannot guarantee that we will be able to maintain the minimum closing bid price requirement or maintain any of the other requirements in the future. The market price of our common stock has generally been highly volatile. During the fiscal year 2006, the trading price of our common stock on The Nasdaq Capital Market ranged from $0.88 per share to $1.76 per share. If we fail to meet any of The Nasdaq Capital Market listing requirements, the market value of our common stock could fall and holders of common stock would likely find it more difficult to dispose of the common stock. During the third quarter ended January 31, 2006, the closing bid price of our common stock was less than $1.00 for a period of 27 consecutive trading days. Had the closing bid price not equaled at least $1.00 prior to the close of the 30th day, we would have been out of compliance with a continued listing requirement and subject to delisting if we did not regain compliance in accordance with the Nasdaq listing rules within 180 days thereafter.
If our common stock is 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 or quoted on the NASDAQ Global or Capital Market, 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.
The Sale Of Substantial Shares Of Our Common Stock May Depress Our Stock Price.
As of April 30, 2006, we had approximately 179,382,000 shares of our common stock outstanding, and for that date the last reported sales price of our common stock was $1.39 per share.
We could also issue up to approximately 38,798,000 additional shares of our common stock reserved for future issuance under our shelf registration statements, stock option plans and outstanding warrants, as further described in the following table:
| | Number of Shares
of Common Stock Reserved For Issuance
| |
Shares reserved for under two effectiveshelf registration statements
| | | 15,179,180 | |
Common shares reserved for issuance under stock option plans | | | 11,307,279 | |
Common shares available for future grant under option plans | | | 5,346,418 | |
Common shares issuable upon exercise of outstanding warrants | | | 6,964,653 | |
Total | | | 38,797,530 | |
Ofthe total warrants and options outstanding as of April 30, 2006, approximately 11,205,000 options and warrants 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 April 30, 2006.
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 three years ended April 30, 2006:
| | | Common Stock Sales Price | | Common Stock Daily Trading Volume (000’s omitted) |
| | | High | | Low | | High | | Low |
Fiscal Year 2006 | | | | | | | | | |
| Quarter Ended April 30, 2006 | | $1.76 | | $1.20 | | 9,922 | | | 391 |
| Quarter Ended January 31, 2006 | | $1.40 | | $0.88 | | 12,152 | | | 251 |
| Quarter Ended October 31, 2005 | | $1.28 | | $0.91 | | 4,619 | | | 156 |
| Quarter Ended July 31, 2005 | | $1.31 | | $0.92 | | 7,715 | | | 178 |
Fiscal Year 2005 | | | | | | | | | |
| Quarter Ended April 30, 2005 | | $1.64 | | $1.11 | | 5,945 | | | 223 |
| Quarter Ended January 31, 2005 | | $1.45 | | $0.99 | | 6,128 | | | 160 |
| Quarter Ended October 31, 2004 | | $1.96 | | $0.95 | | 2,141 | | | 148 |
| Quarter Ended July 31, 2004 | | $1.92 | | $0.88 | | 1,749 | | | 131 |
Fiscal Year 2004 | | | | | | | | | |
| Quarter Ended April 30, 2004 | | $2.85 | | $1.56 | | 3,550 | | | 320 |
| Quarter Ended January 31, 2004 | | $3.14 | | $2.01 | | 6,062 | | | 201 |
| Quarter Ended October 31, 2003 | | $2.44 | | $1.25 | | 18,060 | | | 314 |
| Quarter Ended July 31, 2003 | | $2.19 | | $0.60 | | 12,249 | | | 255 |
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; |
| ·
| 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 |
| ·
| health care reimbursement reform and cost-containment measures implemented by government agencies. |
These and other external factors have caused and may continue to cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock, and may otherwise negatively affect the liquidity of our common stock.
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 United States 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. |
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 materially adversely affecthave 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 whichthat are comparable or superior to our technologies and products.
We are conducting the Cotara® dose confirmation and dosimetry clinical trial for the treatment of recurrent glioblastoma multiforme (“GBM”), the most aggressive form of brain cancer as a stand-alone study in collaboration with New Approaches to Brain Tumor Therapy (“NABTT”) consortium. Existingcancer. Approved treatments for brain cancer include the Gliadel® Wafer (polifeprosan 20 with carmustine implant) from MGI Pharma, Inc. and Temodar® (temazolomide)(temozolomide) from Schering-Plough Corporation. Gliadel® is inserted in the tumor cavity following surgery and releases a chemotherapeutic agent over time. Temodar® is administered orally to patients receiving concurrent radiation therapy.with brain cancer.
Because Cotara® targets brain tumors from the inside out, it is a novel treatment dissimilar from other drugs in development for this disease. Some of the products thatin development may compete within the brain cancer categorywith Cotara® should they become approved for marketing. These products include, GLI-328 (Novartis),but are not limited to: Neuradiab, a gene therapy treatment that is injected into the walls of the tumor cavity following surgery; IL13-PE38QQR (cintredekin besudotox) from NeoPharm continuesradiolabeled anti-tenascin monoclonal antibody sponsored by Bradmer Pharmaceuticals, CDX-110, a peptide vaccine under development by Celldex, cilengitide in a Phase III trial; In March 2006 Eli Lillynewly diagnosed GBM patients being evaluated by Merk KGaA, and Company began a Phase III trial of enzastuarincediranib for the treatment of GBM; TransMID (Xenova Group plc) is a product based on the diphtheria toxin and began a Phase III trial in May 2004.patients with recurrent GBM being developed by AstraZeneca. In addition, Gleevec® by Novartis, which is an oncology productproducts marketed for other indications issuch as Gleevec® (Novartis), Tarceva® (Genentech/OSI), Avastin® (Genentech) and Nexavar® (Bayer), are being tested in clinical trials for the treatment of brain cancer.
Bavituximab is currently in clinical trials for the treatment of advanced solid cancers is currently in Phase I clinical trials.cancers. 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 Genentech, Inc., Gleevec® by Novartis, Tarceva® by OSI Pharmaceuticals, Inc. and Genentech, Inc., Erbitux® by ImClone Systems Incorporated and Brystol-MyersBristol-Myers Squibb Company, Rituxan® and Herceptin® by Biogen Idec Inc. and Genentech, Inc., Herceptin®and Vectibix™ by Genentech, Inc. and panitumumab by Amgen®.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 have completed a Phase I single-dose clinical trialare evaluating bavituximab for the treatment of HCV and have begun enrolling patients in a multiple-dose Phase Ib clinical trial.HCV. Bavituximab is a first-in-class approach for the treatment of HCV. We are aware of no other products in development targeting PSphosphatidylserine 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 ValeantThree Rivers Pharmaceuticals, International.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 disordersside 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 Abluferon™Albuferon™ (albumin interferon) from Human Genome Sciences, Inc. and Viramidine™ (taribavirin), a prodrug analog of ribavirin being developed by Valeant Pharmaceuticals International. Other developmental approaches include, but are not limited to, protease inhibitors such as VX-950telaprevir from Vertex Pharmaceuticals Incorporated and SCH7boceprevir from Schering-Plough Corporation, and NM283, a polymerase inhibitor by Idenix Pharmaceuticals, Inc.Corporation.
New And Potential New Accounting Pronouncements May Impact Our Future Financial Position And Results Of Operations
There may be potential new accounting pronouncements or regulatory rulings, which may have an impact on our future financial position and results of operations. For example, in December 2004, the FASB issued an amendment to SFAS No. 123, Accounting For Stock-Based Compensation (“SFAS No. 123R”), which we adopted May 1, 2006. SFAS No. 123R eliminates the ability to account for share-based compensation transactions using Accounting Principles Board Opinion No. 25 (“APB No. 25”), and instead requires companies to recognize compensation expense using a fair-value based method for costs related to share-based payments including stock options. The adoption of SFAS No. 123R will materially impact our financial position and results of operations for future periods. Although we have not yet determined the final impact of SFAS No. 123R, we believe the non-cash compensation expense for fiscal year 2007 related to the adoption of SFAS No. 123R may be up to approximately $1,000,000 based on actual shares granted and unvested as of April 30, 2006. However, the actual share-based compensation expense recorded in fiscal year 2007 as a result of adopting SFAS No. 123R may differ materially from our estimate as a result of changes in a number of factors that affect the amount of non-cash compensation expense, including the number of options granted by our Board of Directors during fiscal year 2007, the price of our common stock on the date of grant, the volatility of our stock price, the estimate of the expected life of options granted and the risk free interest rates as measured at the grant date. Also, a change in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective. Other new accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practice have occurred and may occur in the future. Changes to existing rules, future changes, if any, or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business, which may also adversely affect our stock price.
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 and& 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. |
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.
Not Applicable.applicable.
Our corporate, research and development, and clinical trial operations are located in two Company-leased office and laboratory buildings with aggregate square footage of approximately 47,770 feet. The facilities are adjacent to one another and are located at 14272 and 14282 Franklin Avenue, Tustin, California 92780-7017. We currently make combined monthly lease payments of approximately $62,000$64,000 for these facilities with a 3.35% rental increase every two years. The next rental increase is scheduled for December 2006.2008. The lease, which commenced in December 1998, has an initial twelve-year term with two five-year term extensions. During December 2005, we entered into a lease amendment with our landlord and extended the original lease term for seven additional years through December 2017 while maintaining our two five-year term extensions that could extend our lease through December 2027. In addition, our monthly lease payments stillwill continue to increase at a rate of 3.35% every two years under the lease amendment. We believe our facilities are adequate for our current needs and that suitable additional substitute space would be available if needed.
In the ordinary course of business, we are at times subject to various legal proceedings and disputes. WeAlthough we currently are not aware of any such legal proceedingproceedings or claim that we believe will have, individually or in the aggregate, a material adverse effect on our business, prospects, operating results or cash flows.flows, however, we did file or are involved with the following lawsuits:
On January 12, 2007, we filed a complaint in the Superior Court of the State of California for the County of Orange against Cancer Therapeutics Laboratories (“CTL”). The original complaint has been amended three times based on the ongoing discovery to include claims against Shanghai MediPharm and its related entities, and Alan Epstein, MD. The lawsuit alleges claims for breach of contract, interference with contractual relations, declaratory relief, and injunctive relief against the defendants. Peregrine's claims stem from a 1995 license agreement with CTL, and two amendments thereto (collectively referred to as the "License Agreement"). Peregrine claims that CTL breached the License Agreement by, among other things, (i) not sharing with Peregrine all inventions, technology, know-how, patents and other information, derived and/or developed in the People's Republic of China and/or at the CTL laboratory, as was required under the License Agreement; (ii) not splitting revenue appropriately with Peregrine as required under the License Agreement; (iii) utilizing Peregrine's licensed technologies outside of the People's Republic of China; and (iv) failing to enter a sublicense agreement with a Chinese sponsor obligating the Chinese sponsor to comply with the terms and obligations in the License Agreement. Peregrine further alleges that Medibiotech and Shanghai Medipharm Biotech Co., Ltd. ("Medipharm Entities") interfered with the License Agreement, leading to CTL's breaches. This interference by the Medipharm Entities includes: 1) posturing Shanghai Medipharm as the designated sublicensee under the License Agreement, without binding any of the Medipharm Entities to the terms and obligations of an appropriate sublicense agreement called for under the License Agreement; 2) entering into a license agreement with defendant Epstein ("Epstein License Agreement") instead of CTL; 3) restricting the information CTL was allowed to provide to Peregrine, thereby prohibiting CTL from providing to Peregrine all information required under the License Agreement; and 4) providing compensation to CTL, and its principals, so that CTL would enter agreements that prohibited CTL from performing under the License Agreement. These same monetary inducements also interfered with the 1999 Material Transfer Agreement between Peregrine and Dr. Epstein ("MTA"), and caused Dr. Epstein to breach the MTA. Dr. Epstein has attempted to have our claims against him referred to binding Arbitration. The Superior Court has declined his request.
On March 28, 2007, CTL filed a cross-complaint, which it amended on May 30, 2007, alleging that the Company breached the Agreement, improperly terminated the Agreement, is interfering with CTL’s agreements with various MediPharm entities and is double-licensing the technology licensed to CTL to another party. CTL’s cross-complaint, which seeks $20 million in damages, is in part predicated on the existence of a sublicense agreement between CTL and MediPharm. We are challenging the cross-complaint on the basis that not only did CTL fail to allege an agreement with which the Company interfered, they have been unable to produce the alleged sublicense agreement with MediPharm despite our repeated demands.
On February 22, 2008, the MediPharm entities filed a cross-complaint alleging, as a third party beneficiary, that that the Company breached the Agreement by double-licensing the technology licensed to CTL to another party, intentionally interfered with a prospective economic advantage, and unjust enrichment. MediPharm’s cross-complaint, which seeks $30 million in damages, is in part predicated on MediPharm being the “Chinese Sponsor” under the Agreement. We intend to bring pre-trial motions to dispose of the MediPharm cross-complaint.
The discovery phase on the aforementioned cases is still ongoing. Until we complete the discovery phase and our objections are considered, we cannot estimate the magnitude of the claims of the parties against each other or probable outcome of the litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the quarter ended April 30, 2006.2008.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDERS’ MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 5. | MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS’ MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
(a) Market Information. The Company is listed on the The Nasdaq Capital Market under the stock trading symbol “PPHM”. The following table shows the high and low sales price of the Company’s common stock for each quarter in the two years ended April 30, 2006:2008:
| | | Common Stock Sales Price |
| | | High | | Low |
Fiscal Year 2006 | | | | |
| Quarter Ended April 30, 2006 | | $1.76 | | $1.20 |
| Quarter Ended January 31, 2006 | | $1.40 | | $0.88 |
| Quarter Ended October 31, 2005 | | $1.28 | | $0.91 |
| Quarter Ended July 31, 2005 | | $1.31 | | $0.92 |
Fiscal Year 2005 | | | | |
| Quarter Ended April 30, 2005 | | $1.64 | | $1.11 |
| Quarter Ended January 31, 2005 | | $1.45 | | $0.99 |
| Quarter Ended October 31, 2004 | | $1.96 | | $0.95 |
| Quarter Ended July 31, 2004 | | $1.92 | | $0.88 |
| | | Common Stock Sales Price | |
| | | High | | | Low | |
| Fiscal Year 2008 | | | | | | |
| Quarter Ended April 30, 2008 | | $ | 0.73 | | | $ | 0.35 | |
| Quarter Ended January 31, 2008 | | $ | 0.65 | | | $ | 0.35 | |
| Quarter Ended October 31, 2007 | | $ | 0.79 | | | $ | 0.54 | |
| Quarter Ended July 31, 2007 | | $ | 1.40 | | | $ | 0.72 | |
| Fiscal Year 2007 | | | | | | | | |
| Quarter Ended April 30, 2007 | | $ | 1.26 | | | $ | 0.86 | |
| Quarter Ended January 31, 2007 | | $ | 1.39 | | | $ | 1.09 | |
| Quarter Ended October 31, 2006 | | $ | 1.48 | | | $ | 1.12 | |
| Quarter Ended July 31, 2006 | | $ | 1.99 | | | $ | 1.30 | |
(b)Holders.Holders. As of June 30, 2006,2008, the number of stockholders of record of the Company's common stock was 5,875.5,800.
(c)Dividends.Dividends. No dividends on common stock have been declared or paid by the Company. The Company intends to employ all available funds for the development of its business and, accordingly, does not intend to pay any cash dividends in the foreseeable future.
(d) Securities Authorized for Issuance Under Equity Compensation. The information included under Item 12 of Part III of this Annual Report is hereby incorporated by reference into this Item 5 of Part II of this Annual Report.
(e) Recent Sale of Unregistered Securities. During the year ended April 30, 2008, warrants to purchase an aggregate of 53,416 shares of the Company’s common stock were exercised by two institutional investors on a cash basis under separate transactions for net proceeds of $46,000 and the issuance of 53,416 shares of our common stock.
The following selected financial data has been derived from audited consolidated financial statements of the Company for each of the five years in the period ended April 30, 2006.2008. These selected financial summaries should be read in conjunction with the financial information contained for each of the three years in the period ended April 30, 2006,2008, included in the consolidated financial statements and notes thereto, Management's Discussion and Analysis of Results of Operations and Financial Condition, and other information provided elsewhere herein.
CONSOLIDATED STATEMENTS OF OPERATIONS | |
FIVE YEARS ENDED APRIL 30, | |
| | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
| | | | | | | | | | | | |
| Revenues | | $ | 3,193,000 | | $ | 4,959,000 | | $ | 3,314,000 | | $ | 3,921,000 | | $ | 3,766,000 | |
| | | | | | | | | | | | | | | | | |
| Net loss | | $ | (17,061,000 | ) | $ | (15,452,000 | ) | $ | (14,345,000 | ) | $ | (11,559,000 | ) | $ | (11,718,000 | ) |
| | | | | | | | | | | | | | | | | |
| Basic and diluted loss per common share | | $ | (0.10 | ) | $ | (0.11 | ) | $ | (0.11 | ) | $ | (0.10 | ) | $ | (0.11 | ) |
| | | | | | | | | | | | | | | | | |
| Weighted average common shares outstanding | | | 168,294,782 | | | 144,812,001 | | | 134,299,407 | | | 116,468,353 | | | 104,540,204 | |
CONSOLIDATED BALANCE SHEET DATA | |
AS OF APRIL 30, | |
| | | | | | | | | | | | |
| | | 2006 | | 2005 | | 2004 | | 2003 | | 2002 | |
| | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 17,182,000 | | $ | 9,816,000 | | $ | 14,884,000 | | $ | 3,137,000 | | $ | 6,072,000 | |
| | | | | | | | | | | | | | | | | |
| Working capital | | $ | 15,628,000 | | $ | 7,975,000 | | $ | 13,631,000 | | $ | 1,949,000 | | $ | 4,007,000 | |
| | | | | | | | | | | | | | | | | |
| Total assets | | $ | 22,676,000 | | $ | 14,245,000 | | $ | 19,137,000 | | $ | 5,399,000 | | $ | 7,866,000 | |
| | | | | | | | | | | | | | | | | |
| Long-term debt | | $ | 545,000 | | $ | 434,000 | | $ | - | | $ | 760,000 | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Accumulated deficit | | $ | (186,864,000 | ) | $ | (169,803,000 | ) | $ | (154,351,000 | ) | $ | (140,006,000 | ) | $ | (128,447,000 | ) |
| | | | | | | | | | | | | | | | | |
| Stockholders’ equity | | $ | 17,626,000 | | $ | 9,610,000 | | $ | 14,759,000 | | $ | 2,131,000 | | $ | 5,083,000 | |
| CONSOLIDATED STATEMENTS OF OPERATIONS | |
| FIVE YEARS ENDED APRIL 30, | |
| | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | |
| Revenues | | $ | 6,093,000 | | | $ | 3,708,000 | | | $ | 3,193,000 | | | $ | 4,959,000 | | | $ | 3,314,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net loss | | $ | (23,176,000 | ) | | $ | (20,796,000 | ) | | $ | (17,061,000 | ) | | $ | (15,452,000 | ) | | $ | (14,345,000 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Basic and diluted loss per common share | | $ | (0.10 | ) | | $ | (0.11 | ) | | $ | (0.10 | ) | | $ | (0.11 | ) | | $ | (0.11 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Weighted average common shares outstanding | | | 221,148,342 | | | | 192,297,309 | | | | 168,294,782 | | | | 144,812,001 | | | | 134,299,407 | |
| CONSOLIDATED BALANCE SHEET DATA | |
| AS OF APRIL 30, | |
| | | | | | | | | | | | | | | | |
| | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | 2004 | |
| | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | 15,130,000 | | | $ | 16,044,000 | | | $ | 17,182,000 | | | $ | 9,816,000 | | | $ | 14,884,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Working capital | | $ | 12,403,000 | | | $ | 14,043,000 | | | $ | 15,628,000 | | | $ | 7,975,000 | | | $ | 13,631,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | $ | 23,057,000 | | | $ | 22,997,000 | | | $ | 22,676,000 | | | $ | 14,245,000 | | | $ | 19,137,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| Long-term debt | | $ | 22,000 | | | $ | 149,000 | | | $ | 545,000 | | | $ | 434,000 | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Accumulated deficit | | $ | (230,836,000 | ) | | $ | (207,660,000 | ) | | $ | (186,864,000 | ) | | $ | (169,803,000 | ) | | $ | (154,351,000 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Stockholders’ equity | | $ | 15,595,000 | | | $ | 16,989,000 | | | $ | 17,626,000 | | | $ | 9,610,000 | | | $ | 14,759,000 | |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
The following discussion is included to describe the Company’s financial position and results of operations for each of the three years in the period ended April 30, 2006.2008. The consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion.
Overview
We are a clinical stage biopharmaceutical company developing monoclonal antibodies for the treatment of cancer and hepatitis C virus ("HCV") infection. We are advancing three separate clinical programs with a portfolio ofour first-in-class compounds bavituximab and Cotara® that employ our two platform technologies: Anti-Phosphatidylserine (“Anti-PS”) therapeutics and Tumor Necrosis Therapy (“TNT”). Our lead Anti-PS product, bavituximab, is being evaluated under two separate clinical and pre-clinical stage monoclonal antibody-based targeted therapeuticsprograms for the treatment of solid cancers and viral infections. We are currently advancing three separate clinical trial programs for the treatment of cancer and chronic hepatitis C virus (“HCV”) infections.infection. Under our Anti-Phosphatidylserine (“Anti-PS”) ImmunotherapeuticTNT technology platform, technology, our lead candidate bavituximab (formerly known as Tarvacin)Cotara®, is currently in a multi-center Phase Iadvancing through two clinical trialstudies for the treatment of solid cancers as well as a multi-center phase Ib clinical trial for the treatment of chronic HCV infection. Our third clinical program is a dose confirmation and dosimetry clinical trial using our lead Tumor Necrosis Therapy (TNT) agent, Cotara®, for the treatment of glioblastoma multiforme, a deadly form ofpatients with brain cancer.
We are organized into two reportable operating segments: (i) Peregrine, the parent company, is engaged in the research and development of monoclonal antibody-based targeted therapeuticsantibody products for the treatment of cancer and viral infections and (ii) Avid Bioservices,Bioservices®, Inc., (“Avid”) a wholly owned subsidiary, is engaged in providing bio-manufacturingcontract manufacturing services for Peregrine and outside customers on a fee-for-services basis.
Going Concern
The Company’s 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 April 30, 2008, we had approximately $15,130,000 in cash and cash equivalents. We have expended substantial funds on (i) the research, development and clinical trials of our product candidates, and (ii) funding the operations of our wholly owned subsidiary, Avid Bioservices, Inc. 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, 2008, 2007 and 2006 amounted to $23,176,000, $20,796,000, and $17,061,000, 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 in fiscal year 2009.
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. As discussed in Note 1 to the consolidated financial statements, there exists substantial doubt regarding our ability to continue as a going concern.
We will need additional capital to support the costs of our clinical and pre-clinical programs through one or more methods including either equity or debt financing. As of April 30, 2008, we had an aggregate of approximately 5,031,000 shares available under our existing effective Form S-3 registration statements for possible future registered transactions. In addition, we filed a separate shelf registration statement on Form S-3, File Number 333-139975, 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 $7,500,000.
We may also raise additional capital though negotiating licensing or collaboration agreements for our technology platforms. In addition, our wholly owned subsidiary Avid Bioservices, Inc., represents an additional asset in our portfolio and we are actively pursuing strategic initiatives for Avid as a means of raising additional capital.
Although 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 sufficient additional revenues will be generated from Avid or under potential licensing or partnering agreements or from a potential strategic transaction related to our subsidiary, Avid Bioservices, Inc. to complete the research, development, and clinical testing of our product candidates. Based on our current projections, which includes projected revenues from existing customers of Avid Bioservices, Inc., combined with the projected revenues from our government contract, 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 fiscal year 2009. There are a number of uncertainties associated with our financial projections, including but not limited to, termination of contracts and technical challenges, which would reduce or delay our future projected cash-inflows. The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.
Results of Operations
The following table compares the consolidated statements of operations for the fiscal years ended April 30, 2006, 20052008, 2007 and 2004.2006. This table provides you with an overview of the changes in the statement of operations for the comparative periods, which changes are further discussed below.
| | | Years Ended April 30, | | | Years Ended April 30, | |
| | | 2008 | | | 2007 | | | $ Change | | | 2007 | | | 2006 | | | $ Change | |
| | | (in thousands) | | | (in thousands) | |
| REVENUES: | | | | | | | | | | | | | | | | | | |
| Contract manufacturing | | $ | 5,897 | | | $ | 3,492 | | | $ | 2,405 | | | $ | 3,492 | | | $ | 3,005 | | | $ | 487 | |
| License revenue | | | 196 | | | | 216 | | | | (20 | ) | | | 216 | | | | 188 | | | | 28 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 6,093 | | | | 3,708 | | | | 2,385 | | | | 3,708 | | | | 3,193 | | | | 515 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| COST AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | |
| Cost of contract manufacturing | | | 4,804 | | | | 3,296 | | | | 1,508 | | | | 3,296 | | | | 3,297 | | | | (1 | ) |
| Research and development | | | 18,279 | | | | 15,876 | | | | 2,403 | | | | 15,876 | | | | 12,415 | | | | 3,461 | |
| Selling, general and administrative | | | 7,150 | | | | 6,446 | | | | 704 | | | | 6,446 | | | | 6,564 | | | | (118 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Total cost and expenses | | | 30,233 | | | | 25,618 | | | | 4,615 | | | | 25,618 | | | | 22,276 | | | | 3,342 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| LOSS FROM OPERATIONS | | | (24,140 | ) | | | (21,910 | ) | | | (2,230 | ) | | | (21,910 | ) | | | (19,083 | ) | | | (2,827 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | | | |
| Recovery of note receivable | | | - | | | | - | | | | - | | | | - | | | | 1,229 | | | | (1,229 | ) |
| Interest and other income | | | 989 | | | | 1,160 | | | | (171 | ) | | | 1,160 | | | | 846 | | | | 314 | |
| Interest and other expense | | | (25 | ) | | | (46 | ) | | | 21 | | | | (46 | ) | | | (53 | ) | | | 7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| NET LOSS | | $ | (23,176 | ) | | $ | (20,796 | ) | | $ | (2,380 | ) | | $ | (20,796 | ) | | $ | (17,061 | ) | | $ | (3,735 | ) |
| | | Years Ended April 30, | | Years Ended April 30, | |
| | | 2006 | | 2005 | | $ Change | | 2005 | | 2004 | | $ Change | |
| | | (in thousands) | | (in thousands) | |
REVENUES: | | | | | | | | | | | | | | | | | | | |
| Contract manufacturing | | $ | 3,005 | | $ | 4,684 | | $ | (1,679 | ) | $ | 4,684 | | $ | 3,039 | | $ | 1,645 | |
| License revenue | | | 188 | | | 275 | | | (87 | ) | | 275 | | | 275 | | | 0 | |
| Total revenues | | | 3,193 | | | 4,959 | | | (1,766 | ) | | 4,959 | | | 3,314 | | | 1,645 | |
| | | | | | | | | | | | | | | | | | | | |
COST AND EXPENSES: | | | | | | | | | | | | | | | | | | | |
| Cost of contract manufacturing | | | 3,297 | | | 4,401 | | | (1,104 | ) | | 4,401 | | | 2,212 | | | 2,189 | |
| Research and development | | | 12,415 | | | 11,164 | | | 1,251 | | | 11,164 | | | 9,673 | | | 1,491 | |
| Selling, general and administrative | | | 6,564 | | | 5,098 | | | 1,466 | | | 5,098 | | | 4,225 | | | 873 | |
| Total cost and expenses | | | 22,276 | | | 20,663 | | | 1,613 | | | 20,663 | | | 16,110 | | | 4,553 | |
| | | | | | | | | | | | | | | | | | | | |
LOSS FROM OPERATIONS | | | (19,083 | ) | | (15,704 | ) | | (3,379 | ) | | (15,704 | ) | | (12,796 | ) | | (2,908 | ) |
| | | | | | | | | | | | | | | | | | | | |
OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | |
| Recovery of note receivable | | | 1,229 | | | - | | | 1,229 | | | - | | | - | | | - | |
| Interest and other income | | | 846 | | | 265 | | | 581 | | | 265 | | | 291 | | | (26 | ) |
| Interest and other expense | | | (53 | ) | | (13 | ) | | (40 | ) | | (13 | ) | | (1,840 | ) | | 1,827 | |
NET LOSS | | $ | (17,061 | ) | $ | (15,452 | ) | $ | (1,609 | ) | $ | (15,452 | ) | $ | (14,345 | ) | $ | (1,107 | ) |
Total Revenues
Year Ended April 30, 20062008 Compared to the Year Ended April 30, 2005: 2007:
The decreaseincrease in revenues of $1,766,000$2,385,000 during the year ended April 30, 20062008 compared to the prior year was due to a decreasean increase in contract manufacturing revenue of $1,679,000 combined with$2,405,000 offset by a $20,000 decrease in license revenue of $87,000.revenue. The decreaseincrease in contract manufacturing revenue was primarily due to an increase in services provided to unrelated entities on a decreasefee-for-service basis associated with an increase in product development services including an increase in the number of completed manufacturing runs associated with unrelated entities compared to the prior year during which time we significantly increased our utilization of our manufacturing facility to manufacture clinical grade materials to support Peregrine’s three active clinical trials and other products under development.year.
We expect to continue to generate contract manufacturing revenue during fiscal year 20072009 based on the anticipated completion of in-process customer related projects and the anticipated demand for Avid’s services under signed contracts and outstanding proposals. Although Avid is presently working on several active projects for unrelated entities and has submitted project proposals with various potential customers, we cannot estimate nor can we determine the likelihood that we will be successful in completing these ongoing projects or convert any of these outstanding project proposals into definitive agreements during the remainder of fiscal year 2007.
Year Ended April 30, 20052007 Compared to the Year Ended April 30, 2004: 2006:
The increase in revenues of $1,645,000$515,000 during the year ended April 30, 20052007 compared to the priorfiscal year 2006 was due to an increase in contract manufacturing revenue of the same amount.$487,000 combined with an increase in license revenue of $28,000. The fiscal year 2005 increase in contract manufacturing revenue was primarily due to anthe increase in services provided to unrelated entities on a fee-for-service basis combined with the numbercollection of manufacturing runsdisputed services in the amount of $300,000 during fiscal year 2007 associated with unrelated entities completedmanufacturing services performed during the year ended April 30, 2005. Since collectibility of the receivable was not reasonably assured, in fiscalaccordance with SAB No. 104, Revenue Recognition, we did not recognize revenue in prior years and the related work-in-process inventory was written off and included in cost of contract manufacturing during the year 2005 compared to fiscal year 2004.ended April 30, 2005.
Cost of Contract Manufacturing
Year Ended April 30, 20062008 Compared to the Year Ended April 30, 2005: 2007:
The decreaseincrease in cost of contract manufacturing of $1,104,000$1,508,000 during the year ended April 30, 20062008 compared to the prior year was primarilydirectly related to the current year decreaseincrease in contract manufacturing revenue. In addition, the cost of contract manufacturing as a percentage of contract manufacturing revenues improved from 94% in fiscal year 2007 to 81% in fiscal year 2008, which was primarily due to an increase in contract manufacturing revenues combined with improved efficiencies in costs associated with manufacturing runs.
Year Ended April 30, 2007 Compared to the Year Ended April 30, 2006:
The currentcost of contract manufacturing as a percentage of contract manufacturing revenues improved from 110% in fiscal year decrease was offset by2006 to 94% in fiscal year 2007. In fiscal year 2006, we reported an increase in cost of contract manufacturing as a percentage of revenues primarily due to the write-off of unusable work-in-process inventory generated for an unrelated entity during the quarter ended April 30, 2006 combined with an estimated contract loss provision for the same unrelated entity which amount in the aggregate totaled $882,000.during fiscal year 2005.
Research and Development Expenses
Year Ended April 30, 20052008 Compared to the Year Ended April 30, 2004:
The increase in cost of contract manufacturing of $2,189,000 during the year ended April 30, 2005 compared to fiscal year 2004 was primarily due to the fiscal year 2005 increase in contract manufacturing revenue. In addition, the increase was further supplemented by costs associated with the write-off of unusable work-in-process inventory generated during the quarter ended April 30, 2005 in the amount of $605,000.
Research and Development Expenses
Year Ended April 30, 2006 Compared to the Year Ended April 30, 2005: 2007:
The increase in research and development (“R&D”) expenses of $1,251,000$2,403,000 during the year ended April 30, 20062008 compared to the prior year was primarily due to a netan increase in expenses associated with each of our following platform technologies under development:
| | | R&D Expenses – Fiscal Year Ended April 30, | |
| | | 2008 | | | 2007 | | | $ Change | |
| Technology Platform: | | | | | | | | | |
| Anti-PS Immunotherapeutics (bavituximab) | | $ | 11,371,000 | | | $ | 9,324,000 | | | $ | 2,047,000 | |
| TNT (Cotara®) | | | 3,942,000 | | | | 3,898,000 | | | | 44,000 | |
| VTA and Anti-Angiogenesis Agents | | | 2,350,000 | | | | 2,037,000 | | | | 313,000 | |
| VEA | | | 616,000 | | | | 617,000 | | | | (1,000 | ) |
| Total R&D Expenses | | $ | 18,279,000 | | | $ | 15,876,000 | | | $ | 2,403,000 | |
| o | Anti-PhosphatidylserineAnti-PhosphatidylSerine (“Anti-PS”) Immunotherapeutics (bavituximab) - During fiscal year 2006, Anti-PS Immunotherapeutics program expenses increased $3,202,000 from $5,069,000 in fiscal year 2005 to $8,271,000 in fiscal year 2006. This current year – The increase in Anti-PS Immunotherapeutics program expenses resultedof $2,047,000 during the year ended April 30, 2008 compared to the prior year is primarily fromdue to increases in clinical trial and manufacturing expenses to support the advancement of four clinical trials using bavituximab for the treatment of solid tumors and one clinical trial for the treatment of HCV patients co-infected with HIV. During fiscal year 2008, we submitted two separate Phase II clinical protocols in India, one to treat patients with non-small cell lung cancer (“NSCLC”) and one to treat patients with breast cancer, both of which received initial protocol approval in January 2008. In addition, we initiated and completed patient enrollment in the first part of our two-stage Phase II study in the Republic of Georgia and treated 15 patients with breast cancer using our product bavituximab in combination with chemotherapy. These expenses were further supplemented by increases in pre-clinical development expenses to support the possible expansion of bavituximab to treat other viral infections. The foregoing increases in Anti-PS Immunotherapeutics were offset by a decrease in non-cash stock-based compensation expense associated with shares of common stock earned by employees in the prior fiscal year under a stock bonus plan, which expired in fiscal year 2007.
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| o | Tumor Necrosis Therapy (“TNT”) (Cotara®) – TNT program expenses remained in line with the prior year and increased slightly by $44,000 as we continued our efforts to support the advancement of our firsttwo ongoing Cotara® clinical trials for the treatment of brain cancer in the U.S. and India. |
| o | Vascular Targeting Agents (“VTAs”) and Anti-Angiogenesis Agents – The increase in VTA and Anti-Angiogenesis Agents program expenses of $313,000 during the year ended April 30, 2008 compared to the prior year is primarily due to increases in manufacturing expenses as we developed a manufacturing process at a 1,000 liter scale for our anti-angiogensis product. These increases in manufacturing expense were offset by decreases in pre-clinical program expenses associated with our VTA program. Although VTA and Anti-Angiogenesis program expenses increased overall compared to the prior year, we have significantly curtailed these research efforts and are currently seeking partners to further advance these technologies. |
| o | Vasopermeation Enhancements Agents (“VEAs”) – VEA program expenses remained in line with the prior year and decreased slightly by $1,000 as we have initiated efforts to significantly curtail our development expenses associated with this program and are focusing our efforts on seeking partners to further advance this technology. |
Based on our current projections, which includes estimated clinical trial enrollment rates that are always uncertain, we expect research and development expenses in fiscal year 2009 to remain in line with fiscal year 2008. During fiscal year 2009, we expect to direct the majority of our research and development expenses on our bavituximab and Cotara® clinical programs.
Year Ended April 30, 2007 Compared to the Year Ended April 30, 2006:
The increase in research and development (“R&D”) expenses of $3,461,000 during the year ended April 30, 2007 compared to the year ended April 30, 2006 was primarily due to an increase in expenses associated with each of our following platform technologies under development:
| | | R&D Expenses – Fiscal Year Ended April 30, | |
| | | 2007 | | | 2006 | | | $ Change | |
| Technology Platform: | | | | | | | | | |
| Anti-PS Immunotherapeutics (bavituximab) | | $ | 9,324,000 | | | $ | 8,271,000 | | | $ | 1,053,000 | |
| TNT (Cotara®) | | | 3,898,000 | | | | 2,372,000 | | | | 1,526,000 | |
| VTA and Anti-Angiogenesis Agents | | | 2,037,000 | | | | 1,416,000 | | | | 621,000 | |
| VEA | | | 617,000 | | | | 356,000 | | | | 261,000 | |
| Total R&D Expenses | | $ | 15,876,000 | | | $ | 12,415,000 | | | $ | 3,461,000 | |
| o | Anti-PhosphatidylSerine (“Anti-PS”) Immunotherapeutics (bavituximab) – The increase in Anti-PS Immunotherapeutic agent, bavituximab (formerly known as Tarvacin). DuringImmunotherapeutics program expenses of $1,053,000 during the currentyear ended April 30, 2007 compared to fiscal year we increased manufacturing, in-house antibody2006 is primarily from continuing efforts to support the development and clinical trials expensesdevelopment of bavituximab as we supported the manufacturing commercial scale-up efforts andour first Anti-PS Immunotherapeutics agent, bavituximab. During fiscal year 2007, clinical trial expenses to supportincreased as we advanced the development of two separate Phase I clinical studiesprograms using bavituximab for the treatment of advanced solid cancers and chronic hepatitis C virus infection. The foregoing expenses were supplemented with an increaseinfection (“HCV”), including the initiation and completion of a Phase Ib study in technology access fees associated with clinical trial milestones achievedIndia during the current fiscal year in accordance with third party licensing agreements, an increase in sponsored research fees, and an increase in outside animal research studies to support the possible expansion of2007 using bavituximab clinical trials in other anti-viral indications. These increases were primarily offset by a decrease in pre-clinical toxicology study expenses incurred in the prior year to support the bavituximab Investigational New Drug (“IND”) applications that were filed in the prior fiscal year combined with a decrease in intellectual property access fees and a decrease in outside antibody development fees related to our humanized antibody in development. |
| o | Tumor Necrosis Therapy (“TNT”) (Cotara®) - During fiscal year 2006, TNT program expenses decreased $811,000 from $3,183,000 in fiscal year 2005 to $2,372,000 in fiscal year 2006. The decrease in TNT program expenses is primarily due to a decrease in payroll and related expenses and radiolabeling process development expenses incurred in the prior year to support the initiation of the Cotara® dose confirmation and dosimetry clinical trial for the treatment of brain canceradvanced solid cancers in collaborationcombination with the New Approaches to Brain Tumor Therapy consortium, and to support other development programs associated with our TNT technology platform.chemotherapy. These decreasesincreases in clinical trial expenses were further supplemented by a decrease in technology access fees incurred in the prior year supporting the production of monoclonal antibodies for Cotara®.
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| o | Vascular Targeting Agents (“VTAs”) and Anti-Angiogenesis - During fiscal year 2006, VTA and Anti-Angiogenesis pre-clinical program expenses decreased $922,000 from $2,338,000 in fiscal year 2005 to $1,416,000 in fiscal year 2006. The decrease in VTA and Anti-Angiogenesis pre-clinical program expenses is primarily due to a decrease in intellectual property access fees and sponsored research fees as our outside researchers are currently focused on the development of our Anti-PS Immunotherapeutics technology platform.
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| o | Vasopermeation Enhancements Agents (“VEAs”) -During fiscal year 2006, VEA program expenses decreased $211,000 from $567,000 in fiscal year 2005 to $356,000 in fiscal year 2006. The decrease in VEA program expenses is primarily due to a decrease in sponsored research fees and technology license fees combined with a decrease in antibody development fees regarding expenses incurred in the prior year. In January 2005, we entered into an agreement with Merck KGaA of Darmstadt, Germany, that gave us access to Merck's technology and expertise in protein expression to advance the development of our VEA technology and other platform technologies. We are currently developing a clinical candidate under our VEA technology utilizing Merck’s expertise in protein expression.
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We expect research and development expenses to increase over the near term primarily under the following ongoing research and development programs:
| 1. | Bavituximab clinical studies for the treatment of solid tumors and chronic hepatitis C virus infection and the possible expansion of clinical trials into other anti-viral indications; |
| 2. | Cotara® clinical study for the treatment of brain cancer in collaboration with New Approaches to Brain Tumor Therapy (“NABTT”), a brain tumor treatment consortium; |
| 3. | Anti-PS Immunotherapeutics research and development program; |
| 4. | 2C3 (anti-angiogenesis antibody) research and development program; |
| 5. | Vascular Targeting Agent research and development program; and |
| 6. | Vasopermeation Enhancement Agent research and development program. |
Due to the number of ongoing research programs, if we fail to obtain additional funding during fiscal year 2007, we may be forced to scale back our product development efforts, or our operations, in a manner that will ensure we can pay our obligations as they come due in the ordinary course of business beyond fiscal year 2007.
Year Ended April 30, 2005 Compared to the Year Ended April 30, 2004:
The increase in research and development expenses of $1,491,000 during the year ended April 30, 2005 compared to the prior year was primarily due to a net increase in expenses associated with our following platform technologies under development:
| o | Anti-Phosphatidylserine("Anti-PS") Immunotherapeutics(bavituximab) - During fiscal year 2005, Anti-PS Immunotherapeutics (bavituximab) program expenses increased $1,992,000 to $5,069,000 compared to $3,077,000 in fiscal year 2004. The increase in Anti-PS Immunotherapeutics (bavituximab) program expenses of $1,992,000 was primarily due to increases in payroll and related expenses, various clinical trial start-up expenses, and allocated manufacturing expenses to support two separate Investigational New Drug (“IND”) applications that were filed with the U.S. Food & Drug Administration (“FDA”) during fiscal year 2005 using bavituximab, our lead Anti-PS Immunotherapeutics product, for the treatment of solid cancer tumors and chronic hepatitis C virus infection, in addition to supporting the related bavituximab Phase I clinical studies associated with these IND’s. In addition, intellectual property access fees increased during fiscal year 2005 as we expanded our rights under the Anti-PS Immunotherapeutics platform. These increases were offset by a decrease in antibody development and access fees associated with the timing of various payments due under our licensing agreements to support bavituximab and other related antibodies under development.
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| o | TNT (Cotara®) - During fiscal year 2005, TNT (Cotara®) program expenses increased $833,000 to $3,183,000 compared to $2,350,000 in fiscal year 2004. The increase in TNT (Cotara®) program expenses of $833,000 is primarily due to an increase in manufacturing expenses, payroll and related expenses, and radiolabeling process expenses to support the planned initiation of the Cotara® dose confirmation and dosimetry clinical study for the treatment of brain cancer in collaboration with the New Approaches to Brain Tumor Therapy consortium, and to support the increase in research and development programs associated with our TNT technology platform. These increases were further supplemented by an increase in technology access fees, which was primarily due to an up-front license fee to obtain certain worldwide non-exclusive rights used in the manufacturing process for the Cotara® antibody.
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| o | VEA - During fiscal year 2005, VEA program expenses decreased $624,000 to $567,000 compared to $1,191,000 in fiscal year 2004. The decrease in VEA program expenses of $624,000 is primarily due to a decrease in sponsored research fees paid to University of Southern California andincluding non-cash stock-based compensation expense associated with the amortization of the fair value of options granted to non-employee consultants performing researchemployees in accordance with the adoption of SFAS No. 123R on May 1, 2006 and development activities thatnon-cash expenses associated with shares of common stock earned by employees under our February 2006 Stock Bonus Plan. These amounts were fully amortized in fiscal year 2003. These decreases were further supplementedoffset by a decrease in allocatednon-cash stock-based compensation expenses associated with non-employee consultants. These increases in Anti-PS Immunotherapeutics program expenses were further offset by decreases in (i) manufacturing expenses as weincurred in fiscal year 2006 regarding manufacturing commercial scale-up efforts to support our clinical trials, (ii) outside antibody development fees related to a humanized antibody in development, and (iii) technology access fees primarily associated with clinical milestones achieved during fiscal year 2006 in accordance with third party licensing agreements.
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| o | Tumor Necrosis Therapy (“TNT”) (Cotara®) – The increase in TNT program expenses of $1,526,000 during the year ended April 30, 2007 compared to fiscal year 2006 is primarily due to increased clinical trial expenses to support the Cotara® dose confirmation and dosimetry clinical trial for the treatment of recurrent glioblastoma multiforme (“GBM”) and the initiation of a Phase II clinical trial in India for patients with GBM at first relapse. These increases in clinical trial expenses were further supplemented with increases in payroll and related expenses to support our Cotara® clinical studies and in-house TNT research and development efforts combined with an increase in non-cash stock-based compensation expense primarily associated with the manufacturingamortization of bavituximab and Cotara® during fiscal year 2005 and a decreasethe fair value of options granted to employees in technology access fees. In January 2005, we entered into an agreementaccordance with Merck KGaAthe adoption of Darmstadt, Germany, that will provide us access to Merck’s technology and expertise in protein expression to advance the development of our VEA technology.SFAS No. 123R on May 1, 2006. |
| | o | VTAVascular Targeting Agents (“VTAs”) and Anti-Angiogenesis Agents - During fiscal year 2005, VTA and Anti-angiogenesis program expenses decreased $481,000 to $2,338,000 compared to $2,819,000 in fiscal year 2004.– The decreaseincrease in VTA and Anti-Angiogenesis Agents program expenses of $481,000$621,000 during the year ended April 30, 2007 compared to fiscal year 2006 is primarily due to a decrease in intellectual property access fees, antibody development fees and manufacturing expenses, offset with an increaseincreases in payroll and related feesexpenses, manufacturing expenses and outside research studies associated with increased efforts to supportadvance the pre-clinical development of our increase in active VTA and Anti-Angiogenesis pre-clinical researchAgents programs. These increases were further supplemented by an increase in non-cash stock-based compensation expense primarily associated with the amortization of the fair value of options granted to employees in accordance with the adoption of SFAS No. 123R on May 1, 2006.
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| | o | Other research programsVasopermeation Enhancements Agents (“VEAs”) - During fiscal year 2005, other research program expenses decreased $229,000 to $7,000 compared to $236,000– The increase in fiscal year 2004. The decrease in other researchVEA program expenses of $229,000$261,000 during the year ended April 30, 2007 compared to fiscal year 2006 is primarily due to allocatedincreases in payroll and related expenses, laboratory materials and outside antibody development studies associated with increased efforts to advance the pre-clinical development of our VEA program. These increases were further supplemented by an increase in non-cash stock-based compensation expense primarily associated with the amortization of the fair value of options granted to employees in accordance with the adoption of SFAS No. 123R on May 1, 2006. The above VEA increases were offset with a decrease in technology license fees incurred in the fiscal year 2003 to manufacture LYM materials for research purposes only.2006 associated with an annual license fee due under a former license agreement.
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The following represents the research and development expenses (“R&D Expenses”) we incurred by each major technology platform under development:
Technology Platform | | R&D Expenses- Year Ended April 30, 2004 | | R&D Expenses- Year Ended April 30, 2005 | | R&D Expenses- Year Ended April 30, 2006 | | R&D Expenses- May 1, 1998 to April 30, 2006 | |
| Anti-PS Immunotherapeutics (bavituximab) | | $ | 3,077,000 | | $ | 5,069,000 | | $ | 8,271,000 | | $ | 16,417,000 | |
| TNT (Cotara®) | | | 2,350,000 | | | 3,183,000 | | | 2,372,000 | | | 31,188,000 | |
| VTA and Anti-Angiogenesis | | | 2,819,000 | | | 2,338,000 | | | 1,416,000 | | | 11,907,000 | |
| VEA | | | 1,191,000 | | | 567,000 | | | 356,000 | | | 5,724,000 | |
| Other research programs | | | 236,000 | | | 7,000 | | | - | | | 13,441,000 | |
| Total R&D Expenses | | $ | 9,673,000 | | $ | 11,164,000 | | $ | 12,415,000 | | $ | 78,677,000 | |
From inception to April 1998, we have expensed $20,898,000 on research and development of our product candidates, with the costs primarily being closely split between TNT and prior developed technologies. In addition to the above costs, we have expensed an aggregate of $32,004,000 for the acquisition of our TNT and VTA technologies, which were acquired during fiscal years 1995 and 1997, respectively.
Looking beyond the next twelve months, it is extremely difficult for us to reasonably estimate all future research and development costs associated with each of our technologies due to the number of unknowns and uncertainties associated with pre-clinical and clinical trial development. These unknown variables and uncertainties include, but are not limited to:
| · | the uncertainty of our capital resources to fund research, development and clinical studies beyond fiscal year 2007; |
| · | the uncertainty of future costs associated with our pre-clinical candidates, including Vascular Targeting Agents, Anti-Angiogenesis Agents, and Vasopermeation Enhancement Agents, which costs are dependent on the success of pre-clinical development. We are uncertain whether or not these product candidates will be successful and we are uncertain whether or not we will incur any additional costs beyond pre-clinical development; |
| · | 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 future costs associated with our pre-clinical candidates, including Vascular Targeting Agents, Anti-Angiogensis Agents, and Vasopermeation Enhancement Agents, which costs are dependent on the success of pre-clinical development. We are not certain whether these product candidates will be successful or whether we will incur any additional costs beyond pre-clinical development given our above stated intent to find partners to move these programs forward; |
| · | the uncertainty of terms related to potential future partnering or licensing arrangements; and |
| · | the uncertainty of protocol changes and modifications in the design of our clinical trial studies, which may increase or decrease our future costs. |
We or our potential partners will need to do additional development and clinical testing prior to seeking any regulatory approval for commercialization of our product candidates as all of our products are in 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, and we or our potential partners may not be able to obtain all necessary governmental clearances and approvals to market our products.
Selling, General and Administrative Expenses
Year Ended April 30, 20062008 Compared to the Year Ended April 30, 2005: 2007:
Selling, general and administrative expenses consist primarily of payroll and related expenses, director fees, legal and accounting fees, stock-based compensation expense, investor and public relation fees, insurance, and other expenses relating to ourthe general management, administration, and business development activities of the Company.
The increase in selling, general and administrative expenses of $1,466,000$704,000 during the year ended April 30, 20062008 compared to the prior year is primarily due to an increaseincreases in payroll and related expenses, of $517,000corporate legal fees, and travel and related expenses. Payroll and related expenses increased $564,000 from $2,357,000$2,837,000 in fiscal year 20052007 compared to $2,874,000$3,401,000 in fiscal year 20062008 primarily due to an increase in headcount across most corporate functions to support our increased operations which were offset by a decreasecombined with an increase in consulting fees primarily associated with the expansion of our business development activities. Corporate legal fees increased $322,000 from $417,000 in fiscal year 2007 to $739,000 in fiscal year 2008 primarily related to legal fees associated with the priorlawsuit described in this Annual Report on Form 10-K under Part I, Item 3, “Legal Proceedings”, combined with legal fees associated with other corporate matters. Travel and related expenses increased $150,000 from $394,000 in fiscal year 2007 compared to $544,000 in fiscal year 2008 primarily due to increased business development efforts ofin the Company. During fiscal year 2006, we hiredU.S., Europe and Asia and increased participation in corporate and investor relation activities. These increases in selling, general and administrative expenses were offset with a Vice President of Business Development whose responsibilities include those previously performed by outside consultants. The current year increase is also due to an increasedecrease in (i) stock basednon-cash stock-based compensation expense of $230,000$240,000 from $110,000$535,000 in fiscal year 20052007 to $340,000$295,000 in fiscal year 20062008 primarily associated with the amortization of the fair value of options granted to employees in accordance with the adoption of SFAS No. 123R and warrants provided to non-employee consultants for business development and general corporate services, (ii) investor and public relation feesnon-cash expenses associated with shares of $167,000 from $248,000 in fiscal year 2005 to $415,000 in fiscal year 2006 primarily due to services providedcommon stock earned by public relation firms assisting the Company with its investor and public relations activities, whose services were not utilizedemployees in the prior year (iii) travel and related expenses of $141,000 from $243,000under a stock bonus plan, which expired in fiscal year 2005 to $384,000 in fiscal year 2006 primarily associated with our participation in several investor conferences and non-deal marketing road shows during the current year combined with an increase in travel associated with business development and other corporate activities, and (iv) board of director fees of $137,000 from $276,000 in fiscal year 2005 to $413,000 in fiscal year 2006 primarily due to an increase in the number of non-employee directors combined with an increase in the number of Company Board meetings. These increases were supplemented with increases in other general corporate matters primarily associated with an incremental increase in corporate legal fees and facility expenses combined with fees associated with the adoption of the Company’s Stockholder Rights Agreement in March 2006.2007.
Year Ended April 30, 20052007 Compared to the Year Ended April 30, 2004: 2006:
The increasedecrease in selling, general and administrative expenses of $873,000$118,000 during the year ended April 30, 20052007 compared to fiscal year 20042006 is primarily due to decreases in corporate legal fees, investor and public relation fees, and payroll and related expenses. Corporate legal fees decreased $146,000 from $563,000 in fiscal year 2006 to $417,000 in fiscal year 2007 primarily due to corporate legal fees incurred in fiscal year 2006 associated with a legal settlement related to certain technology agreements with a university that was reached in March 2006. Investor and public relation fees decreased $138,000 from $415,000 in fiscal year 2006 to $277,000 in fiscal year 2007 primarily due to consolidating the outsourcing of our investor and public relation activities. Payroll and related expenses remained in line with fiscal year 2006 and decreased slightly from $2,874,000 in fiscal year 2006 compared to $2,837,000 in fiscal year 2007. These decreases in selling, general and administrative expenses were offset with an increase in (i) payroll and related expensesnon-cash stock-based compensation expense of $173,000$156,000 from $2,184,000$379,000 in fiscal year 20042006 to $2,357,000$535,000 in fiscal year 2005 primarily2007 due to an increase in headcount across most corporate functions to support the increased operations primarily pertaining to Avidadoption of SFAS No. 123R on May 1, 2006 and the expansionissuance of non-cash stock bonuses during fiscal year 2007 associated with the our pre-clinical and clinical development plans,achievement of pre-determined milestones as set forth in the Company’s February 2006 Stock Bonus Plan, which were offset by a decrease in consulting feesnon-cash stock-based compensation expenses associated with the prior year business development efforts of Avid, (ii) audit and accounting fees of $253,000 from $164,000non-employee consultants. In addition, we incurred incremental increases in fiscal year 2004 to $417,000 in fiscal year 2005 primarily related to the implementation of Section 404 of the Sarbanes-Oxley Act of 2002, (iii) legal fees of $345,000 from $196,000 in fiscal year 2004 to $541,000 in fiscal year 2005 primarily pertaining to litigation and disputes that were settled in fiscal year 2006 and other patent andgeneral corporate matters, (iv) public relation fees of $141,000 from $107,000 in fiscal year 2004 to $248,000 in fiscal year 2005 primarily due to the addition of a new public relations firm assisting the Company with its public relations activities, and (v) facility and related expenses of $114,000 from $204,000 in fiscal year 2004 to $318,000 in fiscal year 2005 primarily related to an increased allocation of lease expense resulting from the termination of a sub-lease arrangement combinedassociated with an increase in other facility related expenses associated with the increase in employee headcount in the general and administrative departments. These increases were offset by an $188,000 decrease in director fees from $464,000 in fiscal year 2004 to $276,000 in fiscal year 2005 primarily due to a one-time aggregate director fee of $180,000 incurred in the prior year associated with our director’s increased oversight responsibilities mandated by the Sarbanes-Oxley Act of 2002. Prior to fiscal year 2004, directors did not receive any cash compensation other than the reimbursement of expenses.and officers insurance fees.
Recovery of Note Receivable
Year Ended April 30, 20062008 Compared to the Year Ended April 30, 2005
The increase in recovery of note receivable of $1,229,000 during the year ended2007 and April 30, 2006 compared to the prior
During fiscal year is due the recovery of2006, we recovered a previously fully reserved note receivable in the amount of $1,229,000 during the currentwhich amount did not occur in either fiscal year 2008 or fiscal year 2007 as further discussed in Note 3, "Note Receivable"4, “Recovery of Note Receivable” to the accompanying consolidated financial statements.
Interest and Other Income
Year Ended April 30, 20062008 Compared to the Year Ended April 30, 20052007
The decrease in interest and other income of $171,000 during the year ended April 30, 2008 compared to the prior year is due to a $129,000 decrease in other income primarily associated with the sale of a trademark name in the prior year combined with a $42,000 decrease in interest income primarily resulting from lower prevailing interest rates.
Year Ended April 30, 2007 Compared to the Year Ended April 30, 2006
The increase in interest and other income of $581,000$314,000 during the year ended April 30, 20062007 compared to the priorfiscal year 2006 is due to a $212,000$556,000 increase in interest income as a result of a higher average cash balance on hand and higher prevailing interest rates during the currentfiscal year 2007 compared to the priorfiscal year combined2006 offset with a $369,000 increasenet decrease in other income whichof $242,000. The net decrease in other income is primarily due to $363,000 of other income recorded during the quarter ended April 30,fiscal year 2006 in accordanceconnection with a March 2006 global legal settlement.
Interest and Other Expense
Year Ended April 30, 2006 Comparedsettlement related to certain technology agreements with a university, which amount was offset by the Year Ended April 30, 2005:
The increase in interest and other expensesale of $40,000 during the year ended April 30, 2006 compared to the prior year is primarily due to an increase in long-term debt as we financed additional laboratory equipment during the current fiscal year.
Year Ended April 30, 2005 Compared to the Year Ended April 30, 2004:
The decrease in interest and other expense of $1,827,000 during the year ended April 30, 2005 compared to fiscal year 2004 is primarily due to a decrease in non-cash interest expense of $1,811,000 associated with the amortization of the convertible debt discount and debt issuance costs in fiscal year 2004. We did not incur any interest expense associated with convertible debt discount and debt issuance coststrademark name during fiscal year 2005 as all outstanding convertible debt was converted into common stock and associated discount and issuance costs were fully amortized2007 in fiscal year 2004.the amount of $130,000.
Critical Accounting Policies
The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. We evaluate our estimates and judgments on an 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 accounting policies are the most critical to us, in that they are important to the portrayal of our financial statements and they require our most difficult, subjective or complex judgments in the preparation of our consolidated financial statements:
Revenues
We recognize revenues pursuant to the SEC’s Staff Accounting Bulletin No. 104 (��(“SAB No. 104”), Revenue Recognition. In accordance with SAB No. 104, revenue is generally realized or realizable and earned when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable, and (iv) collectibility is reasonably assured.
In addition, we comply with Financial Accounting Standards Board’s Emerging Issues Task Force No. 00-21 (“EITF 00-21”), Revenue Arrangements with Multiple Deliverables. In accordance with EITF 00-21, 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, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
Revenues associated with licensing agreements primarily consist of nonrefundable up-front license fees and milestonesmilestone payments. Revenues under licensing agreements are recognized based on the performance requirements of the agreement. Nonrefundable up-front license fees received under license agreements, whereby continued performance or future obligations are considered inconsequential to the relevant licensed technology, are generally recognized as revenue upon delivery of the technology. Nonrefundable up-front license fees, whereby we have an ongoing involvement or performance obligations, are generally recorded as deferred revenue and generally recognized as revenue over the term of the performance obligation or relevant agreement. Milestone payments are generally recognized as revenue upon completion of the milestone assuming there are no other continuing obligations. Under some license agreements, the obligation period may not be contractually defined. Under these circumstances, we must exercise judgment in estimating the period of time over which certain deliverables will be provided to enable the licensee to practice the license.
Contract manufacturing revenues are generally recognized once the service has been provided and/or upon shipment of the product to the customer. We also record a provision for estimated contract losses, if any, in the period in which they are determined.
In July 2000, the Emerging Issues Task Force (“EITF”) released Issue 99-19 (“EITF 99-19”), Reporting Revenue Gross as a Principal versus Net as an Agent. EITF 99-19 summarized the EITF’s views on when revenue should be recorded at the gross amount billed to a customer because it has earned revenue from the sale of goods or services, or the net amount retained (the amount billed to the customer less the amount paid to a supplier) because it has earned a fee or commission. In addition, the EITF released Issue 00-10 (“EITF 00-10”), Accounting for Shipping and Handling Fees and Costs,, and Issue 01-14 (“EITF 01-14”), Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. EITF 00-10 summarized the EITF’s views on how the seller of goods should classify in the income statement amounts billed to a customer for shipping and handling and the costs associated with shipping and handling. EITF 01-14 summarized the EITF’s views on when the reimbursement of out-of-pocket expenses should be characterized as revenue or as a reduction of expenses incurred. Our revenue recognition policies are in compliance with EITF 99-19, EITF 00-10 and EITF 01-14 whereby we record revenue for the gross amount billed to customers (the cost of raw materials, supplies, and shipping, plus the related handling mark-up fee) and we record the cost of the amounts billed as cost of sales as we act as a principal in these transactions.
Stock-based Compensation Expense
We currently maintain four equity compensation plans which provide for the granting of options to purchase shares of our common stock at exercise prices not less than the fair market value of our common stock at the date of grant. The granting of options are share-based payments and are subject to the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”), Share-Based Payment (Revised 2004), which requires the recognition of compensation expense, using a fair value based method, for costs related to all share-based payments including grants of employee stock options. On May 1, 2006, we adopted SFAS No. 123R using the modified-prospective method and, accordingly, stock-based compensation cost recognized beginning May 1, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of May 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or subsequent to May 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. Under the modified-prospective method results for fiscal year 2006 have not been restated.
The fair value of each option grant is estimated using the Black-Scholes option valuation model and are amortized as compensation expense on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period (typically two to four years). Use of a valuation model requires us to make certain estimates and assumptions with respect to selected model inputs. Expected volatility is based on daily historical volatility of our stock covering the estimated expected term. The expected term of options granted prior to November 1, 2007 was based on the expected time to exercise using the “simplified” method allowable under the Security and Exchange Commission’s (SEC’s) Staff Accounting Bulletin No. 107 (“SAB No. 107”). Effective November 1, 2007, the expected term reflects actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options and will be applied to all option grants subsequent to October 31, 2007. The risk-free interest rate is based on U.S. Treasury notes with terms within the contractual life of the option at the time of grant. In addition, SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Our losses from operations for fiscal years ended April 30, 2008 and 2007 included stock-based compensation expenses of $829,000 and $964,000, respectively. As of April 30, 2008, the total estimated unrecognized compensation cost related to non-vested stock options was $1,949,000. This cost is expected to be recognized over a weighted average period of 2.25 years.
Allowance for Doubtful Accounts. 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 appear reasonable under the circumstances.
Liquidity and Capital Resources
point in time. As of April 30, 2006,2008, based on our analysis of our accounts receivable balances and based on historical collectibility of receivables from our current customers we determined no allowance for doubtful accounts was necessary.
Liquidity and Capital Resources
At April 30, 2008, we had $17,182,000$15,130,000 in cash and cash equivalents compared to $9,816,000$16,044,000 at April 30, 2005. During June 2006, we received an additional $13,000,000 in net proceeds from the sale of shares of our common stock and we have $26,318,000 in cash and cash equivalents at June 30, 2006. Although we have sufficient cash on hand to meet our current planned obligations through at least fiscal year 2007 our development efforts are highly dependent on our ability to raise additional capital to support our future operations.
. We have expended substantial funds on (i) the research, development and clinical trials of our product candidates, and (ii) funding the operations of our wholly owned subsidiary, Avid Bioservices, Inc. As a result, we have incurredhistorically experienced negative cash flows from operations forsince our inception and we expect the majority of our years since inception. Since inception, we have generally financed our operations primarily through the sale of our common stock and issuance of convertible debt, which has been supplemented with payments received from various licensing collaborations and through the revenues generated by Avid. We expect negative cash flows from operations to continue for the foreseeable future. Our net losses incurred during the past three fiscal years ended April 30, 2008, 2007 and 2006 amounted to $23,176,000, $20,796,000, and $17,061,000, respectively. Unless and until we are able to generate sufficient revenuerevenues from theAvid’s contract manufacturing services provided by Avid and/or from the sale and/or licensing of our products under development.development, we expect such losses to continue in fiscal year 2009.
Revenues earned by Avid during fiscal years ended April 30, 2006, 2005 and 2004 amounted to $3,005,000, $4,684,000 and $3,039,000, respectively. We expect that Avid will continue to generate revenues which should partially offset our consolidated cash flows used in operations, although we expect those near term revenues will be insufficient to cover anticipated cash flows used in operations. In addition, revenues from the sale and/or licensing of our products under development are always uncertain. 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 beyond fiscal year 2007.operations. As discussed in Note 1 to the consolidated financial statements, there exists substantial doubt regarding our ability to continue as a going concern.
We plan to raisewill need additional capital primarily throughto support the registered offer and sale of sharescosts of our common stock from our shelf registration statements on Form S-3 which, asclinical and pre-clinical programs through one or more methods including either equity or debt financing. As of JuneApril 30, 2006,2008, we had an aggregate of approximately 5,893,0005,031,000 shares available under our existing effective Form S-3 registration statements for possible future registered transactions; provided, however, in connection with our recent financing on June 16, 2006,transactions. In addition, we agreed not to (i) file anotherfiled a separate shelf registration statement pursuanton Form S-3, File Number 333-139975, under which we may issue, from time to Rule 415time, in one or more offerings, shares of our common stock for remaining gross proceeds of up to $7,500,000.
We may also raise additional capital though negotiating licensing or collaboration agreements for our technology platforms. In addition, our wholly owned subsidiary Avid Bioservices, Inc., represents an additional asset in our portfolio and we are actively pursuing strategic initiatives for Avid as a means of raising additional capital. We have not classified the Securities Actrelated assets as held for sale in accordance with Statement of 1933,Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, as amended, for a period of one hundred eighty days following June 16, 2006, nor (ii) without the prior written consent of the purchaser in such financing, prior to January 2, 2007, enter into any subsequent or further offerpartnering or sale of securities at a price or possible price below $2.50 per share. Notwithstanding the availabilitysuch assets are not currently probable under Statement of our Form S-3, given uncertain market conditions and the volatility of our stock price and trading volume, we may not be able to sell our securities at prices or on terms that are favorable to us, if at all.
In addition to equity financing, we actively explore various other sources of funding, including possible debt financing and leveraging our many assets, including our intellectual property portfolio. Our broad intellectual property portfolio allows us to develop products internally while at the same time we are able to out-license certain areas of the technology, which would not interfere with our internal product development efforts.Financial Accounting Standards No. 5, Accounting for Contingencies.
ThereAlthough 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 sufficient additional revenues will be generated from Avid or under potential licensing or partnering agreements or from a potential strategic transaction related to our subsidiary, Avid Bioservices, Inc. to complete the research, development, and clinical testing of our product candidates beyondcandidates. Based on our current projections, which includes projected revenues from existing customers of Avid Bioservices, Inc., combined with the projected revenues from our government contract, 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 fiscal year 2007.2009. There are a number of uncertainties associated with our financial projections, including but not limited to, termination of contracts and technical challenges, which would reduce or delay our future projected cash-inflows. The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.
Significant components of the changes in cash flows from operating, investing, and financing activities for the year ended April 30, 20062008 compared to the prior year 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 year ended April 30, 2006,2008, cash used in operating activities increased $3,789,000$2,448,000 to $16,957,000$20,927,000 compared to $13,168,000$18,479,000 for the year ended April 30, 2005.2007. The increase in cash used in operating activities was primarily relateddue to the timingan increase in net loss reported during fiscal year 2008 after taking into consideration non-cash operating expenses of cash flows as reflected in the changes$3,235,000. This amount was offset by a net change in operating assets and payment or reduction of liabilities in the aggregate amount of $1,910,000.$787,000. The amount of the increase was further supplemented by an increase of $1,879,000 in net cash used in operating activities after deducting non-cash operating expenses and adjustments toour fiscal year 2008 net loss and before considering the changes in operating assets and liabilities. This increase was primarily due to a decreasecurrent period increases in cost of contract manufacturing, revenue combined with an increase in research and development expenses and selling, general and administrative expenses.expenses, which were offset by an increase in contract manufacturing revenue.
The changes in operating activities 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 are as follows:
| | | Year Ended April 30, | | | Year Ended April 30, | |
| | | 2006 | | 2005 | | | 2008 | | | 2007 | |
| Net loss, as reported | | $ | (17,061,000 | ) | $ | (15,452,000 | ) | | $ | (23,176,000 | ) | | $ | (20,796,000 | ) |
Less non-cash operating expenses: Depreciation Stock-based compensation expense Stock issued for research services Stock bonus plan compensation expense Gain on sale of property Recovery of note receivable | | | 415,000 499,000 1,048,000 44,000 (6,000 (1,229,000 | ) ) | | 325,000 231,000 485,000 - - - | | |
| Less non-cash operating expenses: | | | | | | | | |
| Depreciation and amortization | | | 486,000 | | | | 475,000 | |
| Stock-based compensation and common stock issued under stock bonus plan | | | 850,000 | | | | 1,324,000 | |
| Amortization of expenses paid in shares of common stock | | | - | | | | 391,000 | |
| Loss (gain) on sale of property | | | | - | | | | 1,000 | |
| | | | | | | | | |
Net cash used in operating activities before changes in operating assets and liabilities | | $ | (16,290,000 | ) | $ | (14,411,000 | ) | | $ | (21,840,000 | ) | | $ | (18,605,000 | ) |
| Net change in operating assets and liabilities | | $ | (667,000 | ) | $ | 1,243,000 | | | $ | 913,000 | | | $ | 126,000 | |
| Net cash used in operating activities | | $ | (16,957,000 | ) | $ | (13,168,000 | ) | | $ | (20,927,000 | ) | | $ | (18,479,000 | ) |
Cash Provided By (Used In)Used In Investing Activities. During Net cash used in investing activities amounted to $580,000 for the year ended April 30, 2006, net cash provided by investing activities amounted2008 compared to $440,000 primarily due to the recovery of a previously fully reserved note receivable in the amount of $1,229,000 offset by the purchase of property in the amount of $618,000 to support the expanded research efforts of Peregrine and the expanded services of Avid combined with an increase in other assets of $171,000 related to security deposits paid to GE Capital Corporation on notes payable. The net cash used in investing activities forof $80,000 during the same prior year ended April 30, 2005period. This increase in net cash used in investing activities of $500,000 was primarily due to the purchase of laboratory equipmenta $471,000 increase in the amount $1,090,000property acquisitions to support our research efforts and the expanded services of Avid,current operations combined with ana $179,000 increase in other assetsassets. These increases in net cash used in investing activities were offset by the receipt of $101,000 primarily related to$150,000 in net security deposits paid tofrom GE Capital Corporation on notes payable.during the current fiscal year upon the payment in full of various note payable amounts.
Cash Provided By Financing Activities.Net cash provided by financing activities increased $14,592,000$3,172,000 to $23,883,000$20,593,000 for the year ended April 30, 20062008 compared to net cash provided of $9,291,000$17,421,000 for the same prior year period. Cash provided by financing activities during fiscal year 20062008 was primarily due to proceeds received under five separatea security purchase agreementsagreement whereby we sold and issued a total of 24,707,21730,000,000 shares of our common stock in exchange for aggregate net proceeds of $22,894,000,$20,859,000, which was supplemented with net proceeds of $733,000$73,000 from thisthe exercise of stock options and warrants and $566,000 received from the financing of laboratory equipment with GE Capital Corporation.warrants. Cash provided by financing activities during fiscal year 20052007 was primarily due to net proceeds received from the sale of our common stock under two separatea security purchase agreementsagreement in the aggregate amount of $6,486,000$12,970,000 supplemented with net proceeds of $2,137,000$4,895,000 from thisthe exercise of stock options and warrants and $733,000 received from the financing of laboratory equipment with GE Capital Corporation.warrants.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contingent liabilities for which we cannot reasonably predict future payments. The following chart represents our contractual obligations as of April 30, 2006,2008, aggregated by type:
| | | Payments Due by Period (in thousands) | |
| | | Total | | | < 1 year | | | 1-3 years | | | 4-5 years | | | After 5 years | |
| | | | | | | | | | | | | | | | |
| Operating leases, net (1) | | $ | 8,198 | | | $ | 816 | | | $ | 2,468 | | | $ | 1,682 | | | $ | 3,232 | |
| Capital lease obligation (2) | | | 47 | | | | 24 | | | | 23 | | | | - | | | | - | |
| Other long-term liabilities - minimum license obligations (3) | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Total contractual obligations | | $ | 8,245 | | | $ | 840 | | | $ | 2,491 | | | $ | 1,682 | | | $ | 3,232 | |
| | | Payments Due by Period (in thousands) | |
| | | Total | | < 1 year | | 1-3 years | | 4-5 years | | After 5 years | |
| Operating leases, net (1) | | $ | 9,749 | | $ | 804 | | $ | 2,404 | | $ | 1,627 | | $ | 4,914 | |
| Notes payable (2) | | | 996 | | | 475 | | | 521 | | | - | | | - | |
| Capital lease obligation (3) | | | 70 | | | 19 | | | 51 | | | - | | | - | |
| Other long-term liabilities - minimum license obligations (4) | | | 100 | | | 100 | | | - | | | - | | | - | |
| Total contractual obligations | | $ | 10,915 | | $ | 1,398 | | $ | 2,976 | | $ | 1,627 | | $ | 4,914 | |
______________
| | (1) | Represents our (i) facility operating lease in Tustin, California under a non-cancelable lease agreement, (ii) facility operating lease in Houston, Texas, which has an originala three year lease term under a First Amendment to Lease Agreement dated March 1, 2008, and (iii) various office equipment leases, which generally have a five year lease term.terms. |
| | (2) | Represents our note payablecapital lease agreements entered into with General Electric Capital Corporation during fiscal years 2006 and 2005 to finance certain office and laboratory equipment. Amounts include principal and interest. |
| | (3) | Represents our capital lease agreement to finance certain office equipment. |
| (4) | Welicensing agreements we periodically enter into licensing agreements with third parties to obtain exclusive or non-exclusive licenses for certain technologies. The terms of certain of these agreements require us to pay future milestone payments based on product development success. We do not anticipate we may makemaking any milestone payments inunder any of our licensing agreements for at least the amount of $100,000 duringnext fiscal year. In addition, milestone payments beyond fiscal year 2007 under in-licensing agreements pertaining to our bavituximab clinical trials. Other milestones fees under these and other licensing agreements2009 cannot be predicted due to the uncertainty of future clinical trial results and development milestones and therefore, cannot be reasonably predicted or estimated at the present time. |
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 will be effective for our fiscal year 2009, beginning May 1, 2008. Our adoption of SFAS No. 157 is not expected to have a material impact on our consolidated financial statements.
In December 2004,February 2007, the FASB issued Statement of Financial Accounting Standards No. 123R159 (“SFAS No. 123R”159”), The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB statement No. 115 . SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. If the fair value method is selected, a business entity shall report unrealized gains and losses on elected items in earnings at each subsequent reporting date. The standard also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 will be effective for our fiscal year 2009, beginning May 1, 2008. Our adoption of SFAS No. 159 is not expected to have a material impact on our consolidated financial statements.
Share-Based Payment (Revised 2004)In June 2007, the FASB ratified EITF Issue No. 07-3 (“EITF No. 07-3”), Accounting for Non-Refundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, which requires companies to recognizenonrefundable advance payments for goods and services that will be used or rendered for future research and development activities be deferred and capitalized. These amounts will be recognized as expense in the period that the related goods are delivered or the related services are performed. EITF No. 07-3 will be effective for our fiscal year 2009, beginning May 1, 2008. Our adoption of EITF No. 07-3 is not expected to have a material impact on our consolidated financial statementsstatements.
In November 2007, the fair valueFASB ratified EITF Issue 07-01 (“EITF No. 07-01”), Accounting for Collaborative Arrangements, which defines collaborative arrangements and requires that revenues and costs incurred with third parties that do not participate in the collaborative arrangements be reported in the statement of all employee share-basedoperations gross or net pursuant to the guidance in EITF No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Classification of payments including grantsmade between participants of employee stock options as well as compensatory employee stock purchase plans,a collaborative arrangement are to be based on other applicable authoritative accounting literature or, in the absence of other applicable authoritative accounting literature, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. EITF No. 07-01 will be effective for interim periodsfiscal years beginning after JuneDecember 15, 2005. In April 2005, the Securities and Exchange Commission adopted a rule amendment that delayed the compliance dates of SFAS No. 123R such that2008, which we are now allowedwould be required to adopt the new standardimplement no later than May 1, 2006. SFAS No. 123R eliminates the ability2009, and applied as a change in accounting principal to account for share-based compensation using APB No. 25, and the pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition.
We adopted SFAS No. 123R on May 1, 2006, using the “modified-prospective method,” in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123Rall prior periods retrospectively for all share-based payments granted after the effective date and (b) based on the requirementscollaborative arrangements existing as of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. We apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which will then be amortized on a straight-line basis. Although we have not yet determinedevaluated the finalpotential impact of SFASadopting EITF No. 123R, we believe the non-cash compensation expense for fiscal year 2007 related to the adoption of SFAS No. 123R may be up to approximately $1,000,000 based07-01 on actual shares granted and unvested as of April 30, 2006. However, the actual expense recorded during fiscal year 2007 as a result of the adoption of SFAS No. 123R may differ materially from our estimate as a result of changes in a number of factors that affect the amount of non-cash compensation expense, including the number of options granted by our Board of Directors during fiscal year 2007, the price of our common stock on the date of grant, the volatility of our stock price, the estimate of the expected life of options granted and the risk free interest rates as measured at the grant date.
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Changes in United States interest rates would affect the interest earned on our cash and cash equivalents. Based on our overall interest rate exposure at April 30, 2006,2008, a near-term change in interest rates, based on historical movements, would not materially affect the fair value of interest rate sensitive instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements included in this Report at pages F-1 through F-33.F-32.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
Not applicable.
(a) Evaluation of Disclosure Controls and Procedures. The term “disclosure controls and procedures” (defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”) refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods. Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as of April 30, 2006.2008. Based on this evaluation, our president and chief executive officeofficer and our chief financial officer concluded that our disclosure controls and procedures were effective as of April 30, 20062008 to ensure the timely disclosure of required information in our Securities and Exchange Commission filings.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, the design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all future events, no matter how remote. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.
(b) Management’s Report on Internal Control Over Financial Reporting. Management’s Report on Internal Control Over Financial Reporting which appearsand the report of our independent registered public accounting firm on the following page, is incorporated herein by this reference. Our management’s assessment of the effectiveness of our internal control over financial reporting, as of April 30, 2006 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in its report which appearsappear on page 44 of this Annual Report, and which isthe following pages, are incorporated herein by this reference.
(c) Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting during the fourth quarter of the fiscal year ended April 30, 20062008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PEREGRINE PHARMACEUTICALS, INC.
MANAGEMENT’S REPORT ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of the Company is responsible for establishing and maintaining effective internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is a process designed, as defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting is supported by written policies and procedures that:
| | · | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; |
| | · | provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and |
| | · | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of the Company’s annual consolidated financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“the COSO Framework”). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of the Company’s internal control over financial reporting.
Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of April 30, 2006.2008.
Ernst & Young LLP, the independent registered public accounting firm that audited the company’s consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on management’s assessment ofthe Company’s internal control over financial reporting which appears on the following page.
| | | | | | | | |
| By: | | /s/ Steven W. King | | By: | | /s/ Paul J. Lytle | | |
| | | Steven W. King, | | | | Paul J. Lytle | | |
| | | President and& Chief Executive Officer, and Director | | | | Chief Financial Officer | | |
July 7, 200611, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Peregrine Pharmaceuticals, Inc.
We have audited management's assessment, included in the accompanying Management's Annual Report on Internal Control Over Financial Reporting included in Item 9A, that Peregrine Pharmaceuticals,Pharmaceutical Inc.’s (the “Company”) maintained effective internal control over financial reporting as of April 30, 2006,2008, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Peregrine Pharmaceuticals, Inc.'sThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Peregrine Pharmaceuticals, Inc. maintained effective internal control over financial reporting as of April 30, 2006 is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Peregrine Pharmaceuticals, Inc. maintained, in all material respects, effective internal control over financial reporting as of April 30, 2006,2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Peregrine Pharmaceuticals, Inc. as of April 30, 20062008 and 2005,2007, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended April 30, 20062008 and our report dated July 12, 200610, 2008 expressed an unqualified opinion including an explanatory paragraph thereon.
/s/ Ernst & Young LLP
| /s/ Ernst & Young LLP |
| Orange County, California | |
| July 10, 2008 | |
Orange County, California
July 12, 2006
PART III
ITEM 10. DIRECTORS,AND EXECUTIVE OFFICERS OF THE REGISTRANTAND CORPORATE GOVERNANCE
The information required by this item, including, without limitation, disclosureItem regarding our Codedirectors, executive officers and committees of Ethics,our board of directors is incorporated by reference to the information set forth under the caption “Directorscaptions “Election of Directors” and Executive Officers”“Executive Compensation and Related Matters” in our 20062008 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2006.2008 (the “2008 Definitive Proxy Statement”).
Information required by this Item regarding Section 16(a) reporting compliance is incorporated by reference to the information set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2008 Proxy Statement.
Information required by this Item regarding our code of ethics is incorporated by reference to the information set forth under the caption “Corporate Governance” in Part I of this Annual Report on Form 10-K.
The information required by this itemItem is incorporated by reference to the information set forth under the caption “Executive Compensation”Compensation and Related Matters” in our 20062008 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2006.2008.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this itemItem is incorporated by reference to the information set forth under the caption “Common Stock“Security Ownership of Directors and Executive Officers and Certain Beneficial Owners and Management”Owners” in our 20062008 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2006.2008.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this itemItem is incorporated by reference to the information set forth under the captioncaptions “Certain Relationships and Related Transactions” and “Compensation Committee Interlocks and Insider Participation” in our 20062008 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2006.2008.
The information required by this itemItem is incorporated by reference to the information set forth under the caption “Independent Registered Public Accounting Firm Fees” in our 20062008 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2006.2008.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 15. | EXHIBITS AND CONSOLIDATED FINANCIAL STATEMENT SCHEDULES |
| (a) | (1) | Consolidated Financial Statements |
Index to consolidated financial statements:
| | | Index to consolidated financial statements: |
| Page |
| | | |
| | F-1 |
| | | |
| 2007 | F-2 |
| | | |
| 2008 | F-4 |
| | | |
| 2008 | F-5 |
| | | |
| 2008 | F-6 |
| | | |
| | F-8 |
| (2) | Financial Statement Schedules
|
The following schedule is filed as part of this Form 10-K:
| | (2) | Financial Statement Schedules |
| | The following schedule is filed as part of this Form 10-K: |
All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and therefore have been omitted.
Exhibit Number | | Description |
| | | |
| 3.1 | | Certificate of Incorporation of Techniclone Corporation, a Delaware corporation (Incorporated by reference to Exhibit B to the Company’s 1996 Proxy Statement as filed with the Commission on or about August 20, 1996). |
| | | |
| 3.2 | | Amended and Restated Bylaws of Peregrine Pharmaceuticals, Inc. (formerly Techniclone Corporation), a Delaware corporation (Incorporated by reference to Exhibit 3.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2003). |
| | | |
| 3.3 | | Certificate of Designation of 5% Adjustable Convertible Class C Preferred Stock as filed with the Delaware Secretary of State on April 23, 1997. (Incorporated by reference to Exhibit 3.1 contained in Registrant’s Current Report on Form 8-K as filed with the Commission on or about May 12, 1997). |
| | | |
| 3.4 | | Certificate of Amendment to Certificate of Incorporation of Techniclone Corporation to effect the name change to Peregrine Pharmaceuticals, Inc., a Delaware corporation. (Incorporated by reference to Exhibit 3.4 contained in Registrant’s Annual Report on Form 10-K for the year ended April 30, 2001). |
| | | |
| 3.5 | | Certificate of Amendment to Certificate of Incorporation of Peregrine Pharmaceuticals, Inc. to increase the number of authorized shares of the Company’s common stock to two hundred million shares (Incorporated by reference to Exhibit 3.5 to Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2003). |
| | |
| 3.6 | | Certificate of Amendment to Certificate of Incorporation of Peregrine Pharmaceuticals, Inc. to increase the number of authorized shares of the Company’s common stock to two hundred fifty million shares (Incorporated by reference to Exhibit 3.6 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2005). |
| | | |
| 3.7 | | Certificate of Designation of Rights, Preferences and Privileges of Series D Participating Preferred Stock of the Registrant, as filed with the Secretary of State of the State of Delaware on March 16, 2006. (Incorporated by reference to Exhibit 3.7 to Registrant’s Current Report on Form 8-K as filed with the Commission on March 17, 2006). |
| | |
| 3.8 | Certificate of Amendment to Certificate of Incorporation of Peregrine Pharmaceuticals, Inc. to increase the number of authorized shares of the Company’s common stock to three hundred twenty five million shares (Incorporated by reference to Exhibit 3.8 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2007). |
| |
| 3.9 | Amended and Restated Bylaws of Peregrine Pharmaceuticals, Inc., a Delaware corporation (Incorporated by reference to Exhibit 3.9 to Registrant’s Current Report on Form 8-K as filed with the Commission on December 21, 2007). |
| |
| 4.1 | | Form of Certificate for Common Stock (Incorporated by reference to the exhibit of the same number contained in Registrant’s Annual Report on Form 10-K for the year end April 30, 1988). |
| |
| 4.13 | | Form of Stock Purchase Warrant to be issued to the Equity Line Subscribers pursuant to the Regulation D Common Stock Equity Subscription Agreement (Incorporated by reference to Exhibit 4.7 contained in Registrant’s Current Report on Form 8-K as filed with the Commission on or about June 29, 1998). |
Exhibit Number | | Description |
| | | |
4.16 | | Form of Non-qualified Stock Option Agreement by and between Registrant, Director and certain consultants dated December 22, 1999 (Incorporated by reference to the exhibit contained in Registrant’s Registration Statement on Form S-3 (File No. 333-40716)).* |
| | | |
| 4.17 | | Peregrine Pharmaceuticals, Inc. 2002 Non-Qualified Stock Option Plan (Incorporated by reference to the exhibit contained in Registrant’s Registration Statement in Form S-8 (File No. 333-106385)).* |
| | | |
| 4.18 | | Form of 2002 Non-Qualified Stock Option Agreement (Incorporated by reference to the exhibit contained in Registrant’s Registration Statement in Form S-8 (File No. 333-106385)).* |
| | | |
| 4.19 | | Preferred Stock Rights Agreement, dated as of March 16, 2006, between the Company and Integrity Stock Transfer, Inc., including the Certificate of Designation, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively (Incorporated by reference to Exhibit 4.19 to Registrant’s Current Report on Form 8-K as filed with the Commission on March 17, 2006). |
| 10.40 | | 1996 Stock Incentive Plan (Incorporated by reference to the exhibit contained in Registrant's Registration Statement in form S-8 (File No. 333-17513)).* |
| | | |
| 10.41 | | Stock Exchange Agreement dated as of January 15, 1997 among the stockholders of Peregrine Pharmaceuticals, Inc. and Registrant (Incorporated by reference to Exhibit 2.1 to Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 1997). |
| | | |
| 10.42 | | First Amendment to Stock Exchange Agreement among the Stockholders of Peregrine Pharmaceuticals, Inc. and Registrant (Incorporated by reference to Exhibit 2.1 contained in Registrant’s Current Report on Form 8-K as filed with the Commission on or about May 12, 1997). |
| | | |
| 10.43 | | Termination and Transfer Agreement dated as of November 14, 1997 by and between Registrant and Alpha Therapeutic Corporation (Incorporated by reference to Exhibit 10.1 contained in Registrant’s Current Report on Form 8-K as filed with the commission on or about November 24, 1997). |
| | | |
| 10.47 | | Real Estate Purchase Agreement by and between Techniclone Corporation and 14282 Franklin Avenue Associates, LLC dated December 24, 1998 (Incorporated by reference to Exhibit 10.47 to Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 1999). |
| | | |
| 10.48 | | Lease and Agreement of Lease between TNCA, LLC, as Landlord, and Techniclone Corporation, as Tenant, dated as of December 24, 1998 (Incorporated by reference to Exhibit 10.48 to Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 1999). |
| | | |
| 10.49 | | Promissory Note dated as of December 24, 1998 between Techniclone Corporation (Payee) and TNCA Holding, LLC (Maker) for $1,925,000 (Incorporated by reference to Exhibit 10.49 to Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 1999). |
Exhibit Number | | Description |
| | |
| 10.50 | | Pledge and Security Agreement dated as of December 24, 1998 for $1,925,000 Promissory Note between Grantors and Techniclone Corporation (Secured Party) (Incorporated by reference to Exhibit 10.50 to Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 1999). |
| | | |
| 10.56 | | License Agreement dated as of March 8, 1999 by and between Registrant and Schering A.G. (Incorporated by reference to Exhibit 10.56 to Registrant's Annual Report on Form 10-K for the year ended April 30, 1999).** |
| | | |
| 10.57 | | Patent License Agreement dated October 8, 1998 between Registrant and the Board of Regents of the University of Texas System for patents related to Targeting the Vasculature of Solid Tumors (Vascular Targeting Agent patents) (Incorporated by reference to Exhibit 10.57 to Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999). |
| | | |
| 10.58 | | Patent License Agreement dated October 8, 1998 between Registrant and the Board of Regents of the University of Texas System for patents related to the Coagulation of the Tumor Vasculature (Vascular Targeting Agent patents) (Incorporated by reference to Exhibit 10.58 to Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999). |
| | | |
| 10.59 | | License Agreement between Northwestern University and Registrant dated August 4, 1999 covering the LYM-1 and LYM-2 antibodies (Oncolym) (Incorporated by reference to Exhibit 10.59 to Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 1999). |
| | | |
| 10.67 | | Warrant to purchase 750,000 shares of Common Stock of Registrant issued to Swartz Private Equity, LLC dated November 19, 1999 (Incorporated by reference to Exhibit 10.67 to Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 2000). |
| 10.73 | | Common Stock Purchase Agreement to purchase up to 6,000,000 shares of Common Stock of Registrant issued to ZLP Master Fund, LTD, ZLP Master Technology Fund, LTD, Eric Swartz, Michael C. Kendrick, Vertical Ventures LLC and Triton West Group, Inc. dated November 16, 2001 (Incorporated by reference to Exhibit 10.73 to Registrant’s Current Report on Form 8-K dated November 19, 2001, as filed with the Commission on November 19, 2001). |
| | | |
| 10.74 | | Form of Warrant to be issued to Investors pursuant to the Common Stock Purchase Agreement dated November 16, 2001 (Incorporated by reference to Exhibit 10.74 to Registrant’s Current Report on Form 8-K dated November 19, 2001, as filed with the Commission on November 19, 2001). |
| | | |
| 10.75 | | Common Stock Purchase Agreement to purchase 1,100,000 shares of Common Stock of Registrant issued to ZLP Master Fund, LTD and Vertical Capital Holdings, Ltd. dated January 28, 2002 (Incorporated by reference to Exhibit 10.75 to Registrant’s Current Report on Form 8-K dated January 31, 2002, as filed with the Commission on February 5, 2002). |
| | | |
| 10.76 | | Form of Warrant to be issued to Investors pursuant to the Common Stock Purchase Agreement dated January 28, 2002 (Incorporated by reference to Exhibit 10.76 to Registrant’s Current Report on Form 8-K dated January 31, 2002, as filed with the Commission on February 5, 2002). |
Exhibit Number | Description |
| | |
| 10.77 | | Securities Purchase Agreement dated as of August 9, 2002 between Registrant and Purchasers (Incorporated by reference to Exhibit 10.77 to Registrant’s Registration Statement on Form S-3 (File No. 333-99157), as filed with the Commission on September 4, 2002). |
Exhibit
Number
| | Description
|
| | |
| 10.78 | | Form of Convertible Debentures issued to Purchasers pursuant to Securities Purchase Agreement dated August 9, 2002 (Incorporated by reference to Exhibit 10.78 to Registrant’s Registration Statement on Form S-3 (File No. 333-99157), as filed with the Commission on September 4, 2002). |
| | | |
| 10.79 | | Registration Rights Agreement dated August 9, 2002 between Registrant and Purchasers of Securities Purchase Agreements dated August 9, 2002 (Incorporated by reference to Exhibit 10.79 to Registrant’s Registration Statement on Form S-3 (File No. 333-99157), as filed with the Commission on September 4, 2002). |
| | | |
| 10.80 | | Form of Warrant to be issued to Purchasers pursuant to Securities Purchase Agreement dated August 9, 2002 (Incorporated by reference to Exhibit 10.80 to Registrant’s Registration Statement on Form S-3 (File No. 333-99157), as filed with the Commission on September 4, 2002). |
| |
| 10.81 | | Form of Warrant issued to Debenture holders pursuant to Securities Purchase Agreement dated August 9, 2002 (Incorporated by reference to Exhibit 10.81 to Registrant’s Registration Statement on Form S-3 (File No. 333-99157), as filed with the Commission on September 4, 2002). |
| | | |
| 10.82 | | Form of Adjustment Warrant issued to Investors pursuant to Securities Purchase Agreement dated August 9, 2002 (Incorporated by reference to Exhibit 10.82 to Registrant’s Registration Statement on Form S-3 (File No. 333-99157), as filed with the Commission on September 4, 2002). |
| | | |
| 10.83 | | Securities Purchase Agreement dated as of August 9, 2002 between Registrant and ZLP Master Fund, Ltd. (Incorporated by reference to Exhibit 10.83 to Registrant’s Registration Statement on Form S-3 (File No. 333-99157), as filed with the Commission on September 4, 2002). |
| | | |
| 10.84 | | Registration Rights Agreement dated August 9, 2002 between Registrant and ZLP Master Fund, Ltd. (Incorporated by reference to Exhibit 10.84 to Registrant’s Registration Statement on Form S-3 (File No. 333-99157), as filed with the Commission on September 4, 2002). |
| | | |
| 10.85 | | Form of Warrant to be issued to ZLP Master Fund, Ltd. pursuant to Securities Purchase Agreement dated August 9, 2002 (Incorporated by reference to Exhibit 10.85 to Registrant’s Registration Statement on Form S-3 (File No. 333-99157), as filed with the Commission on September 4, 2002). |
| | | |
| 10.86 | | Form of Adjustment Warrant issued to ZLP Master Fund, Ltd. pursuant to Securities Purchase Agreement dated August 9, 2002 (Incorporated by reference to Exhibit 10.86 to Registrant’s Registration Statement on Form S-3 (File No. 333-99157), as filed with the Commission on September 4, 2002). |
| | | |
| 10.87 | | Common Stock Purchase Agreement dated June 6, 2003 between Registrant and eight institutional investors (Incorporated by reference to Exhibit 10.87 to Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2003). |
10.88Exhibit Number | Description |
| |
| 10.88 | Common Stock Purchase Agreement dated June 6, 2003 between Registrant and one institutional investor (Incorporated by reference to Exhibit 10.88 to Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2003). |
| 10.89 | | Common Stock Purchase Agreement dated June 26, 2003 between Registrant and seven institutional investors (Incorporated by reference to Exhibit 10.89 to Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2003). |
| | | |
| 10.90 | | Common Stock Purchase Agreement dated July 24, 2003 between Registrant and one institutional investor (Incorporated by reference to Exhibit 10.90 to Registrant's Quarterly Report on Form 10-Q for the quarter ended July 31, 2003). |
| | | |
| 10.91 | | Common Stock Purchase Agreement dated September 18, 2003 between Registrant and one institutional investor (Incorporated by reference to Exhibit 10.91 to Registrant's Quarterly Report on Form 10-Q for the quarter ended October 31, 2003). |
| |
| 10.92 | | Common Stock Purchase Agreement dated January 22, 2004 between Registrant and one institutional investor (Incorporated by reference to Exhibit 10.92 to Registrant's Quarterly Report on Form 10-Q for the quarter ended January 31, 2004). |
| | | |
| 10.93 | | Common Stock Purchase Agreement dated March 31, 2004 between Registrant and one institutional investor (Incorporated by reference to Exhibit 10.93 to Registrant’s Annual Report on Form 10-K for the year ended April 30, 2005). |
| | | |
| 10.95 | | 2003 Stock Incentive Plan Non-qualified Stock Option Agreement (Incorporated by reference to the exhibit contained in Registrant’s Registration Statement in form S-8 (File No. 333-121334).* |
| | | |
| 10.96 | | 2003 Stock Incentive Plan Incentive Stock Option Agreement (Incorporated by reference to the exhibit contained in Registrant’s Registration Statement in form S-8 (File No. 333-121334)).* |
| | | |
| 10.97 | | Common Stock Purchase Agreement dated January 31, 2005 between Registrant and one institutional investor (Incorporated by reference to Exhibit 10.97 to Registrant’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2005). |
| | | |
| 10.98 | | Form of Incentive Stock Option Agreement for 2005 Stock Incentive Plan (Incorporated by reference to Exhibit 10.98 to Registrant’s Current Report on Form 8-K as filed with the Commission on October 28, 2005).* |
| | | |
| 10.99 | | Form of Non-Qualified Stock Option Agreement for 2005 Stock Incentive Plan (Incorporated by reference to Exhibit 10.99 to Registrant’s Current Report on Form 8-K as filed with the Commission on October 28, 2005).* |
| | | |
| 10.100 | | Peregrine Pharmaceuticals, Inc. 2005 Stock Incentive Plan (Incorporated by reference to Exhibit B to Registrant’s Definitive Proxy Statement filed with the Commission on August 29, 2005).* |
| | | |
| 10.101 | | First Amendment to Lease and Agreement of Lease between TNCA, LLC, as Landlord, and Peregrine Pharmaceuticals, Inc., as Tenant, dated December 22, 2005 (Incorporated by reference to Exhibit 99.1 and 99.2 to Registrant’s Current Report on Form 8-K as filed with the Commission on December 23, 2005). |
Exhibit
Number
| | Description
|
| | |
| 10.102 | | Common Stock Purchase Agreement dated May 11, 2005 between Registrant and one institutional investor (Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the Commission on May 11, 2005). |
Exhibit Number | Description |
| | |
| 10.103 | | Common Stock Purchase Agreement dated June 22, 2005 between Registrant and one institutional investor (Incorporated by reference to Exhibit 99.1 to Registrant’s Current Report on Form 8-K as filed with the Commission on June 24, 2005). |
| | | |
| 10.104 | | Common Stock Purchase Agreement dated November 23, 2005 between Registrant and one institutional investor (Incorporated by reference to Registrant’s Current Report on Form 8-K as filed with the Commission on November 23, 2005). |
| | | |
| 10.105 | | Common Stock Purchase Agreement dated April 5, 2006 between Registrant and one institutional investor (Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K as filed with the Commission on April 6, 2006). |
| |
| 10.106 | | Form of IncentivePerformance Share Award Agreement / Stock Bonus Plan dated February 13, 2006 between Registrant and key employees and consultants. **, *** |
| | |
| 10.107 | Common Stock Purchase Agreement dated June 16, 2006 between Registrant and one institutional investor (Incorporated by reference to Exhibit 99.2 to Registrant’s Current Report on Form 8-K as filed with the Commission on June 19, 2006). |
| |
| 10.108 | Placement Agent Agreement dated June 27, 2007, between Registrant and Rodman & Renshaw, LLC (Incorporated by reference to Exhibit 1.1 to Registrant’s Current Report on Form 8-K as filed with the Commission on June 28, 2007). |
| |
| 10.109 | Form of Securities Purchase Agreement dated June 28, 2007 (Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K as filed with the Commission on June 28, 2007). |
| | |
| 21 | | Subsidiaries of Registrant *** |
| | | |
| 23.1 | | Consent of Independent Registered Public Accounting Firm *** |
| | | |
| 31.1 | | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*** |
| | | |
| 31.2 | | Certification of 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.*** |
| _______________________________ |
* ** **
*** | | This Exhibit is a management contract or a compensation plan or arrangement. Portions omitted pursuant to a request of confidentiality filed separately with the Commission. Filed herewith. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Dated: July 11, 2008 | | |
| PEREGRINE PHARMACEUTICALS, INC. |
|
|
|
Dated: July 7, 2006
| By: | /s/ STEVEN W. KING Steven W. King, |
|
|
| Steven W. King, President and& Chief Executive Officer, and Director |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Steven W. King, President and Chief Executive Officer, and Paul J. Lytle, Chief Financial Officer and Corporate Secretary, and each of them, his true and lawful attorneys-in-fact and agents, with the full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature | Capacity | Capacity
| | Date |
| | | | | |
/s/ Steven W. King Steven W. King | | President & Chief Executive | Officer (Principal Executive Officer), and Director | July 7, 2006 |
Steven W. King | | Officer (Principal Executive | | |
| | Officer) | | 11, 2008 |
| | | | | |
/s/ Paul J. Lytle Paul J. Lytle | | Chief Financial Officer | | July 7, 2006 |
Paul J. Lytle | | (Principal Financial and | | |
| | Principal Accounting Officer) | | July 11, 2008 |
| | | | | |
/s/ Carlton M. Johnson | Carlton M. Johnson | Director | | July 7, 200611, 2008 |
Carlton M. Johnson | | | | |
/s/ David H. Pohl David H. Pohl | Director | July 11, 2008 |
| | | |
/s/ David H. Pohl | Eric S. Swartz Eric S. Swartz | Director | | July 7, 200611, 2008 |
David H. Pohl | | | | |
| | | | |
/s/ Eric S. Swartz | | Director | | July 7, 2006 |
Eric S. Swartz | | | | |
| | | | |
/s/ Dr. Thomas A. Waltz | | Director | | July 7, 2006 |
Thomas A. Waltz, M.D. | Director | | | July 11, 2008 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Peregrine Pharmaceuticals, Inc.
We have audited the accompanying consolidated balance sheets of Peregrine Pharmaceuticals, Inc. (the “Company”) as of April 30, 20062008 and 2005,2007, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended April 30, 2006.2008. Our audits also included the financial statement schedule listed in the Index at Item 15 (a)(2). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Peregrine Pharmaceuticals, Inc. at April 30, 20062008 and 2005,2007, and the consolidated results of its operations and its cash flows for each of the three years in the period ended April 30, 2006,2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for Share-Based Payments in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004) effective May 1, 2006.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Peregrine Pharmaceuticals, Inc.'s internal control over financial reporting as of April 30, 2006,2008, based on criteria established in Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated July 12, 200610, 2008 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLPThe accompanying financial statements have been prepared assuming Peregrine Pharmaceuticals, Inc. will continue as a going concern. As more fully described in Note 1, the Company’s recurring losses from operations and recurring negative cash flows from operating activities raise substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
| /s/ Ernst & Young LLP |
| |
Orange County, California July 10, 2008 | |
July 12, 2006
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 20062008 AND 20052007
| | | 2008 | | | 2007 | |
| ASSETS | | | | | | |
| | | | | | | |
| CURRENT ASSETS: | | | | | | |
| Cash and cash equivalents | | $ | 15,130,000 | | | $ | 16,044,000 | |
| Trade and other receivables | | | 605,000 | | | | 750,000 | |
| Inventories, net | | | 2,900,000 | | | | 1,916,000 | |
| Prepaid expenses and other current assets | | | 1,208,000 | | | | 1,188,000 | |
| | | | | | | | | |
| Total current assets | | | 19,843,000 | | | | 19,898,000 | |
| | | | | | | | | |
| PROPERTY: | | | | | | | | |
| Leasehold improvements | | | 669,000 | | | | 646,000 | |
| Laboratory equipment | | | 4,140,000 | | | | 3,533,000 | |
| Furniture, fixtures and computer equipment | | | 919,000 | | | | 873,000 | |
| | | | | | | | | |
| | | | 5,728,000 | | | | 5,052,000 | |
| Less accumulated depreciation and amortization | | | (3,670,000 | ) | | | (3,212,000 | ) |
| | | | | | | | | |
| Property, net | | | 2,058,000 | | | | 1,840,000 | |
| | | | | | | | | |
| Other assets | | | 1,156,000 | | | | 1,259,000 | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 23,057,000 | | | $ | 22,997,000 | |
| | | 2006 | | 2005 | |
ASSETS | | | | | |
| | | | | | |
| CURRENT ASSETS: | | | | | | | |
| Cash and cash equivalents | | $ | 17,182,000 | | $ | 9,816,000 | |
| Trade and other receivables, net of allowance for doubtful accounts of nil and $69,000, respectively | | | 579,000 | | | 486,000 | |
| Inventories | | | 885,000 | | | 627,000 | |
| Prepaid expenses and other current assets | | | 1,466,000 | | | 1,197,000 | |
| | | | | | | | |
| Total current assets | | | 20,112,000 | | | 12,126,000 | |
| | | | | | | | |
| PROPERTY: | | | | | | | |
| Leasehold improvements | | | 618,000 | | | 494,000 | |
| Laboratory equipment | | | 3,444,000 | | | 3,029,000 | |
| Furniture, fixtures and computer equipment | | | 666,000 | | | 647,000 | |
| | | | | | | | |
| | | | 4,728,000 | | | 4,170,000 | |
| Less accumulated depreciation and amortization | | | (2,822,000 | ) | | (2,532,000 | ) |
| | | | | | | | |
| Property, net | | | 1,906,000 | | | 1,638,000 | |
| | | | | | | | |
| OTHER ASSETS: | | | | | | | |
| Note receivable, net of allowance of nil and $1,512,000, respectively | | | - | | | - | |
| Other | | | 658,000 | | | 481,000 | |
| | | | | | | | |
| Total other assets | | | 658,000 | | | 481,000 | |
| | | | | | | | |
| TOTAL ASSETS | | $ | 22,676,000 | | $ | 14,245,000 | |
CONSOLIDATED BALANCE SHEETS
AS OF APRIL 30, 20062008 AND 20052007 (continued)
| | | 2008 | | | 2007 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
| | | | | | | |
| CURRENT LIABILITIES: | | | | | | |
| Accounts payable | | $ | 2,060,000 | | | $ | 1,683,000 | |
| Accrued clinical trial site fees | | | 237,000 | | | | 228,000 | |
| Accrued legal and accounting fees | | | 450,000 | | | | 392,000 | |
| Accrued royalties and license fees | | | 222,000 | | | | 337,000 | |
| Accrued payroll and related costs | | | 1,084,000 | | | | 874,000 | |
| Notes payable, current portion | | | - | | | | 379,000 | |
| Capital lease obligation, current portion | | | 22,000 | | | | 17,000 | |
| Deferred revenue | | | 2,196,000 | | | | 1,060,000 | |
| Customer deposits | | | 838,000 | | | | 585,000 | |
| Other current liabilities | | | 331,000 | | | | 300,000 | |
| | | | | | | | | |
| Total current liabilities | | | 7,440,000 | | | | 5,855,000 | |
| | | | | | | | | |
| Notes payable, less current portion | | | - | | | | 119,000 | |
| Capital lease obligation, less current portion | | | 22,000 | | | | 30,000 | |
| Deferred license revenue | | | - | | | | 4,000 | |
| Commitments and contingencies | | | | | | | | |
| | | | | | | | | |
| STOCKHOLDERS' EQUITY: | | | | | | | | |
| Preferred stock - $.001 par value; authorized 5,000,000 shares; non-voting; nil shares outstanding | | | - | | | | - | |
| Common stock - $.001 par value; authorized 325,000,000 shares; outstanding - 226,210,617 and 196,112,201, respectively | | | 226,000 | | | | 196,000 | |
| Additional paid-in-capital | | | 246,205,000 | | | | 224,453,000 | |
| Accumulated deficit | | | (230,836,000 | ) | | | (207,660,000 | ) |
| | | | | | | | | |
| Total stockholders' equity | | | 15,595,000 | | | | 16,989,000 | |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | | $ | 23,057,000 | | | $ | 22,997,000 | |
| LIABILITIES AND STOCKHOLDER'S EQUITY | | | 2006 | | | 2005 | |
| | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | |
| Accounts payable | | $ | 1,233,000 | | $ | 1,325,000 | |
| Accrued clinical trial site fees | | | 170,000 | | | 8,000 | |
| Accrued legal and accounting fees | | | 250,000 | | | 549,000 | |
| Accrued royalties and license fees | | | 138,000 | | | 149,000 | |
| Accrued payroll and related costs | | | 850,000 | | | 806,000 | |
| Notes payable, current portion | | | 429,000 | | | 234,000 | |
| Capital lease obligation, current portion | | | 15,000 | | | - | |
| Deferred revenue | | | 563,000 | | | 517,000 | |
| Other current liabilities | | | 836,000 | | | 563,000 | |
| | | | | | | | |
| Total current liabilities | | | 4,484,000 | | | 4,151,000 | |
| | | | | | | | |
| Notes payable, less current portion | | | 498,000 | | | 434,000 | |
| Capital lease obligation, less current portion | | | 47,000 | | | - | |
| Deferred license revenue | | | 21,000 | | | 50,000 | |
| Commitments and contingencies | | | | | | | |
| | | | | | | | |
| STOCKHOLDERS’ EQUITY: | | | | | | | |
Preferred stock - $.001 par value; authorized 5,000,000 shares; non-voting; nil shares outstanding | | | - | | | - | |
Common stock-$.001 par value; authorized 250,000,000 shares; outstanding – 179,382,191 and 152,983,460, respectively | | | 179,000 | | | 153,000 | |
| Additional paid-in-capital | | | 204,546,000 | | | 180,011,000 | |
| Deferred stock compensation | | | (235,000 | ) | | (751,000 | ) |
| Accumulated deficit | | | (186,864,000 | ) | | (169,803,000 | ) |
| | | | | | | | |
| Total stockholders’ equity | | | 17,626,000 | | | 9,610,000 | |
| | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 22,676,000 | | $ | 14,245,000 | |
See accompanying notes to consolidated financial statements.
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008
| | | 2006 | | 2005 | | 2004 | | |
| | | | | | | | | | 2008 | | | 2007 | | | 2006 | |
| REVENUES: | | | | | | | | | | | | | | | | | | | |
| Contract manufacturing revenue | | $ | 3,005,000 | | $ | 4,684,000 | | $ | 3,039,000 | | | $ | 5,897,000 | | | $ | 3,492,000 | | | $ | 3,005,000 | |
| License revenue | | | 188,000 | | | 275,000 | | | 275,000 | | | | 196,000 | | | | 216,000 | | | | 188,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total revenues | | | 3,193,000 | | | 4,959,000 | | | 3,314,000 | | | | 6,093,000 | | | | 3,708,000 | | | | 3,193,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| COSTS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | |
| Cost of contract manufacturing | | | 3,297,000 | | | 4,401,000 | | | 2,212,000 | | | | 4,804,000 | | | | 3,296,000 | | | | 3,297,000 | |
| Research and development | | | 12,415,000 | | | 11,164,000 | | | 9,673,000 | | | | 18,279,000 | | | | 15,876,000 | | | | 12,415,000 | |
| Selling, general and administrative | | | 6,564,000 | | | 5,098,000 | | | 4,225,000 | | | | 7,150,000 | | | | 6,446,000 | | | | 6,564,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Total costs and expenses | | | 22,276,000 | | | 20,663,000 | | | 16,110,000 | | | | 30,233,000 | | | | 25,618,000 | | | | 22,276,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| LOSS FROM OPERATIONS | | | (19,083,000 | ) | | (15,704,000 | ) | | (12,796,000 | ) | | | (24,140,000 | ) | | | (21,910,000 | ) | | | (19,083,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| OTHER INCOME (EXPENSE): | | | | | | | | | | | | | | | | | | | | | | |
| Recovery of note receivable | | | 1,229,000 | | | - | | | - | | | | - | | | | - | | | | 1,229,000 | |
| Interest and other income | | | 846,000 | | | 265,000 | | | 291,000 | | | | 989,000 | | | | 1,160,000 | | | | 846,000 | |
| Interest and other expense | | | (53,000 | ) | | (13,000 | ) | | (1,840,000 | ) | | | (25,000 | ) | | | (46,000 | ) | | | (53,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
NET LOSS | | $ | (17,061,000 | ) | $ | (15,452,000 | ) | $ | (14,345,000 | ) | | $ | (23,176,000 | ) | | $ | (20,796,000 | ) | | $ | (17,061,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING | | | 168,294,782 | | | 144,812,001 | | | 134,299,407 | | | | 221,148,342 | | | | 192,297,309 | | | | 168,294,782 | |
BASIC AND DILUTED LOSS PER COMMON SHARE | | $ | (0.10 | ) | $ | (0.11 | ) | $ | (0.11 | ) | | $ | (0.10 | ) | | $ | (0.11 | ) | | $ | (0.10 | ) |
See accompanying notes to consolidated financial statements.
F-4
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008
| | | | | | | Additional | | Deferred | | | | Total | | | | | | Additional | | | Deferred | | | | | | Total | |
| | | Common Stock | | Paid-In | | Stock | | Accumulated | | Stockholders’ | | | Common Stock | | | Paid-In | | | Stock | | | Accumulated | | | Stockholders’ | |
| | | Shares | | Amount | | Captital | | Compensation | | Deficit | | Equity | | | Shares | | | Amount | | | Capital | | | Compensation | | | Deficit | | | Equity | |
BALANCES, April 30, 2003 | | | 119,600,501 | | $ | 120,000 | | $ | 142,274,000 | | $ | (257,000 | ) | $ | (140,006,000 | ) | $ | 2,131,000 | | |
| Common stock issued for cash under June 6, 2003 Financing, net of issuance costs of $104,000 | | | 2,412,448 | | 2,000 | | 1,969,000 | | - | | - | | 1,971,000 | | |
| Common stock issued for cash under June 26, 2003 Financing, net of issuance costs of $101,000 | | | 1,599,997 | | 2,000 | | 1,737,000 | | - | | - | | 1,739,000 | | |
| Common stock issued for cash under option granted under June 26, 2003 Financing, net of issuance costs of $54,000 | | | 1,599,997 | | 2,000 | | 1,784,000 | | - | | - | | 1,786,000 | | |
| Common stock issued for cash under July 24, 2003 Financing, net of issuance costs of $13,000 | | | 2,000,000 | | 2,000 | | 2,885,000 | | - | | - | | 2,887,000 | | |
| Common stock issued for cash under September 18, 2003 Financing, net of issuance costs of $19,000 | | | 2,800,000 | | 2,000 | | 5,271,000 | | - | | - | | 5,273,000 | | |
| Common stock issued for cash under November 17, 2003 Financing, net of issuance costs of $1,000 | | | 2,000,000 | | 2,000 | | 4,254,000 | | - | | - | | 4,256,000 | | |
| Common stock issued for cash under January 22, 2004 Financing, net of issuance costs of $1,000 | | | 1,000,000 | | 1,000 | | 2,274,000 | | - | | - | | 2,275,000 | | |
| Common stock issued to an unrelated entity for research services under a research collaboration agreement, net of issuance costs of under $1,000 | | | 243,101 | | - | | 648,000 | | - | | - | | 648,000 | | |
| Common stock issued upon conversion of convertible debt | | | 2,817,645 | | 3,000 | | 2,392,000 | | - | | - | | 2,395,000 | | |
| Common stock issued upon exercise of options and warrants, net of issuance costs of $134,000 | | | 5,194,493 | | 5,000 | | 3,467,000 | | - | | - | | 3,472,000 | | |
| Reversal of deferred stock compensation associated with the cancellation of unvested options | | | - | | - | | (52,000 | ) | | 28,000 | | - | | (24,000 | ) | |
| Deferred stock compensation | | | - | | - | | 66,000 | | (66,000 | ) | | - | | - | | |
| Stock-based compensation | | | - | | - | | - | | 295,000 | | - | | 295,000 | | |
| Net loss | | | - | | - | | - | | - | | (14,345,000 | ) | | (14,345,000 | ) | |
BALANCES, April 30, 2004 | | | 141,268,182 | | 141,000 | | 168,969,000 | | - | | (154,351,000 | ) | | 14,759,000 | | |
| Common stock issued for cash under March 31, 2004 Financing, net of issuance costs of $43,000 | | | 3,000,000 | | 3,000 | | 3,204,000 | | - | | - | | 3,207,000 | | |
| Common stock issued for cash under January 31, 2005 Financing, net of issuance costs of $1,000 | | | 3,000,000 | | 3,000 | | 3,276,000 | | - | | - | | 3,279,000 | | |
| Common stock issued to various unrelated entities for research services | | | 1,174,682 | | 1,000 | | 1,448,000 | | - | | - | | 1,449,000 | | |
| Common stock issued upon exercise of options and warrants, net of issuance costs of $5,000 | | | 4,540,596 | | 5,000 | | 2,132,000 | | - | | - | | 2,137,000 | | |
| Deferred stock compensation | | | - | | - | | 982,000 | | (982,000 | ) | | - | | - | | |
| Stock-based compensation | | | - | | - | | - | | 231,000 | | - | | 231,000 | | |
| Net loss | | | - | | - | | - | | - | | (15,452,000 | ) | | (15,452,000 | ) | |
BALANCES, April 30, 2005 | | | 152,983,460 | | 153,000 | | 180,011,000 | | (751,000 | ) | | (169,803,000 | ) | | 9,610,000 | | | | 152,983,460 | | | $ | 153,000 | | | $ | 180,011,000 | | | $ | (751,000 | ) | | $ | (169,803,000 | ) | | $ | 9,610,000 | |
| Common stock issued for cash under January 31, 2005 Financing, net of issuance costs of $6,000 | | | 1,582,217 | | 1,000 | | 1,575,000 | | - | | - | | 1,576,000 | | | | 1,582,217 | | | | 1,000 | | | | 1,575,000 | | | | - | | | | - | | | | 1,576,000 | |
| Common stock issued for cash under May 11, 2005 Financing, net of issuance costs of $11,000 | | | 3,125,000 | | 3,000 | | 2,986,000 | | - | | - | | 2,989,000 | | | | 3,125,000 | | | | 3,000 | | | | 2,986,000 | | | | - | | | | - | | | | 2,989,000 | |
| Common stock issued for cash under June 22, 2005 Financing, net of issuance costs of $29,000 | | | 8,000,000 | | 8,000 | | 6,683,000 | | - | | - | | 6,691,000 | | | | 8,000,000 | | | | 8,000 | | | | 6,683,000 | | | | - | | | | - | | | | 6,691,000 | |
| Common stock issued for cash under November 23, 2005 Financing, net of issuance costs of $1,000 | | | 8,000,000 | | 8,000 | | 6,711,000 | | - | | - | | 6,719,000 | | | | 8,000,000 | | | | 8,000 | | | | 6,711,000 | | | | - | | | | - | | | | 6,719,000 | |
| Common stock issued for cash under April 5, 2006 Financing, net of issuance costs of $1,000 | | | 4,000,000 | | 4,000 | | 4,915,000 | | - | | - | | 4,919,000 | | | | 4,000,000 | | | | 4,000 | | | | 4,915,000 | | | | - | | | | - | | | | 4,919,000 | |
| Common stock issued to various unrelated entities for research services | | | 695,820 | | 1,000 | | 906,000 | | - | | - | | 907,000 | | | | 695,820 | | | | 1,000 | | | | 906,000 | | | | - | | | | - | | | | 907,000 | |
| Common stock issued upon exercise of options and warrants | | | 966,742 | | 1,000 | | 732,000 | | - | | - | | 733,000 | | | | 966,742 | | | | 1,000 | | | | 732,000 | | | | - | | | | - | | | | 733,000 | |
| Common stock issued under the Company's stock bonus plan | | | 28,952 | | - | | 44,000 | | - | | - | | 44,000 | | | | 28,952 | | | | - | | | | 44,000 | | | | - | | | | - | | | | 44,000 | |
| Deferred stock compensation | | | - | | - | | (17,000 | ) | | 17,000 | | - | | - | | | | - | | | | - | | | | (17,000 | ) | | | 17,000 | | | | - | | | | - | |
| Stock-based compensation | | | - | | - | | - | | 499,000 | | - | | 499,000 | | | | - | | | | - | | | | - | | | | 499,000 | | | | - | | | | 499,000 | |
| Net loss | | | - | | - | | - | | - | | (17,061,000 | ) | | (17,061,000 | ) | | | - | | | | - | | | | - | | | | - | | | | (17,061,000 | ) | | | (17,061,000 | ) |
BALANCES, April 30, 2006 | | | 179,382,191 | | $ | 179,000 | | $ | 204,546,000 | | $ | (235,000 | ) | $ | (186,864,000 | ) | $ | 17,626,000 | | | | 179,382,191 | | | | 179,000 | | | | 204,546,000 | | | | (235,000 | ) | | | (186,864,000 | ) | | | 17,626,000 | |
| Common stock issued for cash under June 16, 2006 Financing, net of issuance costs of $30,000 | | | | 9,285,714 | | | | 10,000 | | | | 12,960,000 | | | | - | | | | - | | | | 12,970,000 | |
| Common stock issued to various unrelated entities for prepaid research services | | | | 862,832 | | | | 1,000 | | | | 930,000 | | | | - | | | | - | | | | 931,000 | |
| Common stock issued upon exercise of options | | | | 65,350 | | | | - | | | | 59,000 | | | | - | | | | - | | | | 59,000 | |
| Common stock issued upon exercise of warrants, net of issuance costs of $16,000 | | | | 6,266,788 | | | | 6,000 | | | | 4,830,000 | | | | - | | | | - | | | | 4,836,000 | |
| Common stock issued under stock bonus plan | | | | 249,326 | | | | - | | | | 342,000 | | | | - | | | | - | | | | 342,000 | |
| Elimination of deferred stock compensation upon adoption of SFAS No. 123R | | | | - | | | | - | | | | (235,000 | ) | | | 235,000 | | | | - | | | | - | |
| Stock-based compensation | | | | - | | | | - | | | | 1,021,000 | | | | - | | | | - | | | | 1,021,000 | |
| Net loss | | | | - | | | | - | | | | - | | | | - | | | | (20,796,000 | ) | | | (20,796,000 | ) |
| BALANCES, April 30, 2007 | | | | 196,112,201 | | | | 196,000 | | | | 224,453,000 | | | | - | | | | (207,660,000 | ) | | | 16,989,000 | |
| Common stock issued for cash under June 28, 2007 Financing, net of issuance costs of $1,641,000 | | | | 30,000,000 | | | | 30,000 | | | | 20,829,000 | | | | - | | | | - | | | | 20,859,000 | |
| Common stock issued upon exercise of options | | | | 45,000 | | | | - | | | | 27,000 | | | | - | | | | - | | | | 27,000 | |
| Common stock issued upon exercise of warrants, net of issuance costs of nil | | | | 53,416 | | | | - | | | | 46,000 | | | | - | | | | - | | | | 46,000 | |
| Stock-based compensation | | | | - | | | | - | | | | 850,000 | | | | - | | | | - | | | | 850,000 | |
| Net loss | | | | - | | | | - | | | | - | | | | - | | | | (23,176,000 | ) | | | (23,176,000 | ) |
| BALANCES, April 30, 2008 | | | | 226,210,617 | | | $ | 226,000 | | | $ | 246,205,000 | | | $ | - | | | $ | (230,836,000 | ) | | $ | 15,595,000 | |
See accompanying notes to consolidated financial statements.
F-5
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008
| | | 2008 | | | 2007 | | | 2006 | |
| | | | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
| Net loss | | $ | (23,176,000 | ) | | $ | (20,796,000 | ) | | $ | (17,061,000 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | | | |
| Depreciation and amortization | | | 486,000 | | | | 475,000 | | | | 415,000 | |
| Stock-based compensation and issuance of common stock under stock bonus plan | | | 850,000 | | | | 1,324,000 | | | | 543,000 | |
| Amortization of expenses paid in shares of common stock | | | - | | | | 391,000 | | | | 1,048,000 | |
| Loss (gain) on sale of property | | | - | | | | 1,000 | | | | (6,000 | ) |
| Recovery of note receivable | | | - | | | | - | | | | (1,229,000 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | | | | |
| Trade and other receivables | | | 145,000 | | | | (171,000 | ) | | | (93,000 | ) |
| Inventories | | | (984,000 | ) | | | (1,031,000 | ) | | | (258,000 | ) |
| Prepaid expenses and other current assets | | | (203,000 | ) | | | (113,000 | ) | | | (410,000 | ) |
| Accounts payable | | | 377,000 | | | | 450,000 | | | | (92,000 | ) |
| Accrued clinical trial site fees | | | 9,000 | | | | 58,000 | | | | 162,000 | |
| Deferred revenue | | | 1,132,000 | | | | 480,000 | | | | 17,000 | |
| Accrued payroll and related expenses | | | 210,000 | | | | 63,000 | | | | 44,000 | |
| Other accrued expenses and current liabilities | | | 227,000 | | | | 390,000 | | | | (37,000 | ) |
| Net cash used in operating activities | | | (20,927,000 | ) | | | (18,479,000 | ) | | | (16,957,000 | ) |
| | | | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | |
Refund of security deposits on notes payable (net of applied security deposits on notes payable of $175,000 in 2008) | | | 150,000 | | | | - | | | | - | |
| Property acquisitions | | | (691,000 | ) | | | (220,000 | ) | | | (618,000 | ) |
| (Increase) decrease in other assets, net | | | (39,000 | ) | | | 140,000 | | | | (171,000 | ) |
| Recovery of note receivable | | | - | | | | - | | | | 1,229,000 | |
| Net cash (used in) provided by investing activities | | | (580,000 | ) | | | (80,000 | ) | | | 440,000 | |
| | | | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | |
Proceeds from issuance of common stock, net of issuance costs of $1,641,000, $46,000, and $48,000, respectively | | | 20,932,000 | | | | 17,865,000 | | | | 23,627,000 | |
| Proceeds from issuance of notes payable | | | - | | | | - | | | | 566,000 | |
Principal payments on notes payable and capital lease (net of applied security deposits on notes payable of $175,000 in 2008) | | | (339,000 | ) | | | (444,000 | ) | | | (310,000 | ) |
| Net cash provided by financing activities | | | 20,593,000 | | | | 17,421,000 | | | | 23,883,000 | |
| | | 2006 | | 2005 | | 2004 | |
| | | | | | | | |
| CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | |
| Net loss | | $ | (17,061,000 | ) | $ | (15,452,000 | ) | $ | (14,345,000 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | | |
| Depreciation | | | 415,000 | | | 325,000 | | | 374,000 | |
| Stock-based compensation expense | | | 499,000 | | | 231,000 | | | 271,000 | |
| Amortization of discount on convertible debt and debt issuance costs | | | - | | | - | | | 1,811,000 | |
| Stock issued for research services | | | 1,048,000 | | | 485,000 | | | 616,000 | |
| Stock bonus plan compensation expense | | | 44,000 | | | - | | | - | |
| Gain on sale of property | | | (6,000 | ) | | - | | | - | |
| Recovery of note receivable | | | (1,229,000 | ) | | - | | | - | |
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Trade and other receivables | | | (93,000 | ) | | 1,034,000 | | | (1,275,000 | ) |
| Short-term investments | | | - | | | - | | | 242,000 | |
| Inventories | | | (258,000 | ) | | 613,000 | | | (864,000 | ) |
| Prepaid expenses and other current assets | | | (410,000 | ) | | 7,000 | | | 49,000 | |
| Accounts payable | | | (92,000 | ) | | (6,000 | ) | | 771,000 | |
| Accrued clinical trial site fees | | | 162,000 | | | (46,000 | ) | | (206,000 | ) |
| Deferred revenue | | | 17,000 | | | (1,082,000 | ) | | 918,000 | |
| Accrued payroll and related expenses | | | 44,000 | | | 303,000 | | | 189,000 | |
| Other accrued expenses and current liabilities | | | (37,000 | ) | | 420,000 | | | 198,000 | |
| Net cash used in operating activities | | | (16,957,000 | ) | | (13,168,000 | ) | | (11,251,000 | ) |
| | | | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | |
| Property acquisitions | | | (618,000 | ) | | (1,090,000 | ) | | (411,000 | ) |
| Increase in other assets, net | | | (171,000 | ) | | (101,000 | ) | | (250,000 | ) |
| Recovery of note receivable | | | 1,229,000 | | | - | | | - | |
| Net cash provided by (used in) investing activities | | | 440,000 | | | (1,191,000 | ) | | (661,000 | ) |
| | | | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | |
Proceeds from issuance of common stock, net of issuance costs of $48,000, $49,000, and $428,000, respectively | | | 23,627,000 | | | 8,623,000 | | | 23,659,000 | |
| Proceeds from issuance of notes payable | | | 566,000 | | | 733,000 | | | - | |
| Principal payments on notes payable and capital lease | | | (310,000 | ) | | (65,000 | ) | | - | |
| Net cash provided by financing activities | | | 23,883,000 | | | 9,291,000 | | | 23,659,000 | |
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
| | | 2006 | | 2005 | | 2004 | | | 2008 | | | 2007 | | | 2006 | |
| NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | | $ | 7,366,000 | | $ | (5,068,000 | ) | $ | 11,747,000 | | |
| | | | | | | | | | | | | | |
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | $ | (914,000 | ) | | $ | (1,138,000 | ) | | $ | 7,366,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS, Beginning of year | | | 9,816,000 | | | 14,884,000 | | | 3,137,000 | | | | 16,044,000 | | | | 17,182,000 | | | | 9,816,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| CASH AND CASH EQUIVALENTS, End of year | | $ | 17,182,000 | | $ | 9,816,000 | | $ | 14,884,000 | | | $ | 15,130,000 | | | $ | 16,044,000 | | | $ | 17,182,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| SUPPLEMENTAL INFORMATION: | | | | | | | | | | | | | | | | | | | | | | |
| Interest paid | | $ | 49,000 | | $ | 13,000 | | $ | 78,000 | | | $ | 25,000 | | | $ | 50,000 | | | $ | 49,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Property acquired under capital lease | | $ | 65,000 | | $ | - | | $ | - | | | $ | 13,000 | | | $ | - | | | $ | 65,000 | |
| Conversion of convertible debt into common stock | | $ | - | | $ | - | | $ | 2,395,000 | | |
| Applied security deposit on payoff of notes payable to GE Capital | | | $ | 175,000 | | | $ | - | | | $ | - | |
| Common stock issued for research fees and prepayments for future research services | | $ | 907,000 | | $ | 1,449,000 | | $ | 648,000 | | | $ | - | | | $ | 931,000 | | | $ | 907,000 | |
For supplemental information relating to conversion of convertible debentures into common stock, common stock issued in exchange for services, property acquired under capital lease, and property financed in exchange for notes payable, see Notes 4, 75 and 8.
See accompanying notes to consolidated financial statements.
F-7
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)2008
1. | ORGANIZATION AND BUSINESS DESCRIPTION |
1. ORGANIZATION AND BUSINESS DESCRIPTION
Organization - – In this Annual Report, “Peregrine,” “Company,” “we,” “us,” and “our,” refer to Peregrine Pharmaceuticals, IncInc. and our wholly owned subsidiary Avid Bioservices, Inc.. We wereBioservices®, Inc. Peregrine was incorporated inunder the laws of the state of Delaware on September 25, 1996. We were originally incorporated in California in June 1981, under the name Techniclone International Corporationreincorporated in Delaware in September 1996 and subsequently merged into Techniclone Corporation, a Delaware corporation, in March 1997. We changed our name to Peregrine Pharmaceuticals, Inc. in October 2000. In January 2002, we formed our wholly owned subsidiary,commenced operations of Avid Bioservices,Bioservices®, Inc. (“Avid”). in January 2002.
Business Description -– We arePeregrine a biopharmaceutical company withdeveloping a portfolio of clinical stage and pre-clinical stageproduct candidates using monoclonal antibody-based targeted therapeutics for the treatment of solid cancers and viral infections. We are currently advancing three separate clinical trial programsantibodies (“MAb”) for the treatment of cancer and chronicviral diseases. We are advancing three separate clinical programs encompassing two platform technologies: Anti-PhosphatidylSerine (“Anti-PS”) Immunotherapeutics and Tumor Necrosis Therapies (“TNT”). Our lead Anti-PS Immunotherapeutic MAb product, bavituximab, is in clinical trials for the treatment of both solid cancer tumors and hepatitis C virus (“HCV”) infections. Under our Anti-Phosphatidylserine (“Anti-PS”) Immunotherapeutic platform technology, our lead candidate bavituximab (formerly knowninfection. Bavituximab as Tarvacin),an anti-viral agent has completed Phase Ia and Phase Ib clinical studies for the treatment of HCV infection and is currently in a multi-centerthird Phase I clinical study to evaluate the safety and anti-viral activity of bavituximab over a longer dosing period in patients co-infected with HCV and the Human Immunodeficiency Virus (“HIV”). Bavituximab as an anti-cancer agent is in a Phase I monotherapy trial for the treatment of solid cancers as well astumors in the U.S. and has recently completed enrollment in the first stage of a multi-center phase Ib clinicaltwo-stage Phase II trial for the treatment of chronic HCV infection. Our third clinical programbreast cancer in combination with chemotherapy in the Republic of Georgia. In addition during June 2008, we initiated two separate Phase II studies in India for the treatment of patients with non-small cell lung cancer and breast cancer, respectively, using bavituximab in combination with chemotherapy. Under our TNT platform technology, our lead candidate Cotara®, is currently in a dose confirmation and dosimetry clinical trial using our lead Tumor Necrosis Therapy (TNT) agent, Cotara®,in the U.S. and in a Phase II clinical trial in India, both for the treatment of glioblastoma multiforme, a deadly form of brain cancer.
We are organized into two reportable operating segments: (i) Peregrine, the parent company, is engaged in the research and development of monoclonal antibody-based targeted therapeuticsantibodies for the treatment of cancer and viral diseases and (ii) Avid Bioservices,Bioservices®, Inc., (“Avid”) aour wholly owned subsidiary, is engaged in providing bio-manufacturingcontract manufacturing services for Peregrine and outside customers on a fee-for-services basis.
Going Concern – The Company’s 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 April 30, 2008, we had $15,130,000 in cash and cash equivalents. We have expended substantial funds on (i) the research, development and clinical trials of our product candidates, and (ii) funding the operations of Avid. As a result, we have incurredhistorically experienced negative cash flows from operations forsince our inception and we expect the majority of our years since inception. Since inception, we have generally financed our operations primarily through the sale of our common stock and issuance of convertible debt, which has been supplemented with payments received from various licensing collaborations and through the revenues generated by Avid. We expect negative cash flows from operations to continue for the foreseeable future. Our net losses incurred during the past three fiscal years ended April 30, 2008, 2007 and 2006 amounted to $23,176,000, $20,796,000, and $17,061,000, respectively. Unless and until we are able to generate sufficient revenuerevenues from theAvid’s contract manufacturing services provided by Avid and/or from the sale and/or licensing of our products under development.
Revenues earned by Avid during fiscal years ended April 30, 2006, 2005 and 2004 amounted to $3,005,000, $4,684,000 and $3,039,000, respectively. We expect that Avid will continue to generate revenues which should partially offset our consolidated cash flows used in operations, althoughdevelopment, we expect those near term revenues will be insufficientsuch losses to cover anticipated cash flows usedcontinue in operations. In addition, revenues from the sale and/or licensing of our products under development are always uncertain. fiscal year 2009.
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 beyond fiscal year 2007. At April 30, 2006, we had $17,182,000 in cash and cash equivalents compared to $9,816,000 at April 30, 2005. In addition, during June 2006 we received an additional $13,000,000 in net proceeds from the sale of 9,285,714 shares of our common stock under a common stock purchase agreement dated June 16, 2006 (Note 8).operations.
We plan to raise additional capital primarily through the registered offer and sale of shares of our common stock from our shelf registration statements on Form S-3 which, as of June 30, 2006, we had an aggregate of approximately 5,893,000 shares available for possible future registered transactions; provided, however, in connection with our recent financing on June 16, 2006, we agreed not to (i) file another shelf registration statement pursuant to Rule 415 of the Securities Act of 1933, as amended, for a period of one hundred eighty days following June 16, 2006, nor (ii) without the prior written consent of the purchaser in such financing, prior to January 2, 2007, enter into any subsequent or further offer or sale of securities at a price or possible price below $2.50 per share. Notwithstanding the availability of our Form S-3, given uncertain market conditions and the volatility of our stock price and trading volume, we may not be able to sell our securities at prices or on terms that are favorable to us, if at all.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
We will need additional capital to support the costs of our clinical and pre-clinical programs through one or more methods including either equity or debt financing. As of April 30, 2008, we had an aggregate of approximately 5,031,000 shares available under our existing effective Form S-3 registration statements for possible future registered transactions. In addition, we filed a separate shelf registration statement on Form S-3, File Number 333-139975, 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 $7,500,000.
ThereAlthough 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 sufficient additional revenues will be generated from Avid or under potential licensing or partnering agreements or from a potential strategic transaction related to our subsidiary, Avid to complete the research, development, and clinical testing of our product candidates beyondcandidates. Based on our current projections, which includes projected revenues from existing customers of Avid, combined with the projected revenues from our government contract, 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 fiscal year 2007.2009. There are a number of uncertainties associated with our financial projections, including but not limited to, termination of contracts and technical challenges, which would reduce or delay our future projected cash-inflows. The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.
2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The accompanying consolidated financial statements include the accounts of the Peregrine and its wholly owned subsidiary, Avid Bioservices,Bioservices®, Inc. All intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents -- We consider all highly liquid, short-term investments with an initial maturity of three months or less to be cash equivalents.
Allowance for Doubtful Accounts - - 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 appear reasonable under the circumstances.point in time. As of April 30, 2008 and 2007, based on our analysis of our accounts receivable balances, we determined no allowance for doubtful accounts was necessary.
Prepaid Expenses - Our prepaid expenses primarily represent pre-payments made to secure the receipt of services at a future date. During fiscal year 2006 and 2005,In addition, we have prepaid various research and development related services through the issuance of our shares of our common stock withto unrelated entities, which are expensed once the services have been provided under the terms of the arrangement. As of April 30, 20062008 and April 30, 2005,2007, prepaid expenses and other current assets in the accompanying consolidated financialsfinancial statements include $866,000 and $1,028,000, respectively,$475,000 in research and development services prepaid inwith shares of our common stock.stock to Affitech AS under a research collaboration agreement for the generation of fully human monoclonal antibodies against two targets that are currently undefined and contain no expiration clauses. We will expense these prepaid targets once they are defined and delivered to Affitech AS in accordance with the terms of the agreement, which we expect will occur within the next twelve months.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
Inventories -- Inventories are stated at the lower of cost or market and includesinclude raw materials, direct labor, and overhead costs associated with our wholly owned subsidiary, Avid. Cost is determined by the first-in, first-out method. Inventories consist of the following at April 30, 2006 and April 30, 2005::
| | | 2006 | | 2005 | | | 2008 | | | 2007 | |
| Raw materials | | $ | 565,000 | | $ | 445,000 | | |
| Raw materials, net | | | $ | 1,115,000 | | | $ | 810,000 | |
| Work-in-process | | | 320,000 | | | 182,000 | | | | 1,785,000 | | | | 1,106,000 | |
| Total inventories | | $ | 885,000 | | $ | 627,000 | | | $ | 2,900,000 | | | $ | 1,916,000 | |
Concentrations of Credit Risk - - The majority of trade and other receivables as of April 30, 2006,2008, are from customers in the United States and Australia.Germany. The majority of trade and other receivables as of April 30, 2007, are from customers in the United States, Germany and Israel. Most contracts require up-front payments and installment payments asduring the project progresses.term of the service. We perform periodic credit evaluations of our ongoing customers and generally do not require collateral, but we can terminate any contract if a material default occurs. ReservesAllowances are maintained for potential credit losses and such losses have been within our estimates.
PEREGRINE PHARMACEUTICALS, INC.as of April 30, 2008 and 2007 no allowances were deemed necessary.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
Comprehensive Loss- Comprehensive loss is equal to net loss for all periods presented.
Property - Property is recorded at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related asset, generally ranging from three to ten years. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the estimated useful life of the asset or the remaining lease term.
Impairment - Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We assess recoverability of our long-term assets by comparing the remaining carrying value to the value of the underlying collateral or the fair market value of the related long-term asset based on undiscounted cash flows. Long-lived assets are reported at the lower of carrying amount or fair value less cost to sell.
Customer Deposits - Customer deposits primarily represents advance payments received from customers prior to the initiation of contract manufacturing services.
Deferred Revenue - Deferred revenue primarily consists of up-front contract fees and installment payments received by Avid prior to the recognition of revenues under contract manufacturing, and developmentcustomer service agreements and up-front license fees received by Peregrine under technology licensing agreements. Deferred revenue is generally recognized once the service has been provided, all obligations have been met and/or upon shipment of the product to the customer.
Revenue Recognition - We currently derive revenues primarily from licensing agreements associated with Peregrine’s technologies under development and from contract manufacturing services provided by Avid.
We recognize revenues pursuant to the SEC’s Staff Accounting Bulletin No. 104 (“SAB No. 104”), Revenue Recognition. In accordance with SAB No. 104, revenue is generally realized or realizable and earned when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable, and (iv) collectibility is reasonably assured.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
In addition, we comply with Financial Accounting Standards Board’s Emerging Issues Task Force No. 00-21 (“EITF 00-21”), Revenue Arrangements with Multiple Deliverables. In accordance with EITF 00-21, 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, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.
Revenues associated with licensing agreements primarily consist of nonrefundable up-front license fees and milestones payments. Revenues under licensing agreements are recognized based on the performance requirements of the agreement. Nonrefundable up-front license fees received under license agreements, whereby continued performance or future obligations are considered inconsequential to the relevant licensed technology, are generally recognized as revenue upon delivery of the technology. Nonrefundable up-front license fees, whereby ongoing involvement or performance obligations exist, are generally recorded as deferred revenue and generally recognized as revenue over the term of the performance obligation or relevant agreement. Milestone payments are recognized as revenue upon the achievement of mutually agreed milestones, provided that (i) the milestone event is substantive and its achievement is not reasonably assured at the inception of the agreement, and (ii) there are no continuing performance obligations associated with the milestone payment. Under a license agreement with Schering A.G. (Note 7), the obligation period was not contractually defined in relation to a $300,000 upfront fee. Under this circumstance, we exercised judgment in estimating the period of time over which certain deliverables will be provided to enable the licensee to practice the license, which was determined to be 48 months. The estimated period of 48 months was primarily determined based on theour historical experience with Schering A.G. under a separate license agreement.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
Contract manufacturing revenues are generally recognized once the service has been provided and/or upon shipment of the product to the customer. We also record a provision for estimated contract losses, if any, in the period in which they are determined.
In July 2000, the Emerging Issues Task Force (“EITF”) released Issue 99-19 (“EITF 99-19”), Reporting Revenue Gross as a Principal versus Net as an Agent. EITF 99-19 summarized the EITF’s views on when revenue should be recorded at the gross amount billed to a customer because it has earned revenue from the sale of goods or services, or the net amount retained (the amount billed to the customer less the amount paid to a supplier) because it has earned a fee or commission. In addition, the EITF released Issue 00-10 (“EITF 00-10”), Accounting for Shipping and Handling Fees and Costs, and Issue 01-14 (“EITF 01-14”), Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. EITF 00-10 summarized the EITF’s views on how the seller of goods should classify in the income statement amounts billed to a customer for shipping and handling and the costs associated with shipping and handling. EITF 01-14 summarized the EITF’s views on when the reimbursement of out-of-pocket expenses should be characterized as revenue or as a reduction of expenses incurred. Our revenue recognition policies are in compliance with EITF 99-19, EITF 00-10 and EITF 01-14 whereby we record revenue for the gross amount billed to customers (the cost of raw materials, supplies, and shipping, plus the related handling mark-up fee) and we record the cost of the amounts billed as cost of sales as we act as a principal in these transactions.
Fair Value of Financial Instruments -Our financial instruments consist principally of cash and cash equivalents, receivables, inventories, accounts payable, and accrued liabilities. We believe all of the financial instruments' recorded values approximate fair values due to the short-term nature of these instruments.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
Reclassification - Certain amounts in fiscal year 2007 consolidated financial statements have been reclassified to conform to the current year presentation.
Use of Estimates - The preparation of our financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.
Basic and DilutedDilutive Net Loss Per Common Share - Basic and diluteddilutive net loss per common share are calculated in accordance with Statement of Financial Accounting Standards No. 128, Earnings per 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 warrants, and convertible instruments.warrants. Diluted net loss per common share is computed by dividing the net loss by the sum of the weighted average number of common shares outstanding during the period plus the potential dilutive effects of options warrants, and convertible debtwarrants outstanding during the period. Potentially dilutive common shares consist of stock options and warrantsperiod calculated in accordance with the treasury stock method, but are excluded if their effect is antidilutive. The potential dilutive effect of convertible debt was calculated using the if-converted method assuming the conversion of the convertible debt as of the earliest period reported or at the date of issuance, if later.anti-dilutive. Because the impact of options and warrants and other convertible instruments are antidilutiveanti-dilutive during periods of net loss, there was no difference between basic and diluted loss per common share amounts for the three years ended April 30, 2006. 2008.
The calculation of weighted average diluted shares outstanding excludes the dilutive effect of the following shares issuable upon the exercise of options, warrants, and convertible debt outstanding during the period were excluded from dilutive net loss per common share because their effect is antidilutive since we reported a net loss in the periods presented:
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
| | | 2006 | | 2005 | | 2004 | |
| Common stock equivalent shares assuming issuance of shares represented by outstanding stock options and warrants utilizing the treasury stock method | | | 3,433,414 | | | 6,485,168 | | | 11,462,682 | |
| Common stock equivalent shares assuming issuance of shares upon conversion of convertible debt utilizing the if-converted method | | | - | | | - | | | 563,054 | |
| Total | | | 3,433,414 | | | 6,485,168 | | | 12,025,736 | |
Weighted average outstanding options and warrants to purchase up to 9,090,374, 11,946,248928,801, 2,071,087 and 8,393,0833,433,414 shares of common stock for the fiscal years ended April 30, 2008, 2007 and 2006, 2005respectively, since the impact of such options and 2004, respectively, were also excluded from thewarrants are anti-dilutive during periods of net loss.
The calculation of weighted average diluted earnings pershares outstanding also excludes weighted average outstanding options and warrants to purchase up to 10,455,216, 7,218,883 and 9,090,374 shares of common share because theirstock for the fiscal years ended April 30, 2008, 2007 and 2006, respectively, as the exercise prices of those options were greater than the average market price during the period.
During June 2006, we issued 9,285,714 shares of our common stock under a common stock purchase agreement dated June 16, 2006 (Note 8)during the respective periods, resulting in exchange for net proceeds of $13,000,000, which additional shares have been excluded from basic and dilutive net loss per common share for the year ended April 30, 2006.an anti-dilutive effect.
Income Taxes - We utilize the liability method of accounting for income taxes as set forth in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Under the liability method, deferred taxes are determined based on the differences between the consolidated financial statements and tax basis of assets and liabilities using enacted tax rates. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized.
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN No. 48”), Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition. We adopted the provisions of FIN No. 48 on May 1, 2007 (Note 11).
Research and Development - Research and development costs are charged to expense when incurred in accordance with Statement of Financial Accounting Standards No. 2, Accounting for Research and Development Costs. Research and development expenses primarily include (i) payroll and related costs associated with research and development personnel, (ii) costs related to clinical and pre-clinical testing of our technologies under development, (iii) costs to develop and manufacture the product candidates, including raw materials and supplies, product testing, depreciation, and facility related expenses, (iv) technology access and maintenance fees, including intellectual property fees and fees incurred under licensing agreements, (v) expenses for research services provided by universities and contract laboratories, including sponsored research funding, and (vi) other research and development expenses.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
Stock-based CompensationRecent Accounting Pronouncements- In December 2002,September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 148157 (“SFAS No. 148”157”), Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. SFAS No. 157 will be effective for our fiscal year 2009, beginning May 1, 2008. Our adoption of SFAS No. 157 is not expected to have a material impact on our consolidated financial statements.
In June 2007, the FASB ratified EITF Issue No. 07-3 (“EITF No. 07-3”), Accounting for Non-Refundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, which requires nonrefundable advance payments for goods and services that will be used or rendered for future research and development activities be deferred and capitalized. These amounts will be recognized as expense in the period that the related goods are delivered or the related services are performed. EITF No. 07-3 will be effective for our fiscal year 2009, beginning May 1, 2008. Our adoption of EITF No. 07-3 is not expected to have a material impact on our consolidated financial statements.
In November 2007, the FASB ratified EITF Issue 07-01 (“EITF No. 07-01”), Accounting for Collaborative Arrangements, which defines collaborative arrangements and requires that revenues and costs incurred with third parties that do not participate in the collaborative arrangements be reported in the statement of operations gross or net pursuant to the guidance in EITF No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent. Classification of payments made between participants of a collaborative arrangement are to be based on other applicable authoritative accounting literature or, in the absence of other applicable authoritative accounting literature, based on analogy to authoritative accounting literature or a reasonable, rational, and consistently applied accounting policy election. EITF No. 07-01 will be effective for fiscal years beginning after December 15, 2008, which we would be required to implement no later than May 1, 2009, and applied as a change in accounting principal to all prior periods retrospectively for all collaborative arrangements existing as of the effective date. We have not yet evaluated the potential impact of adopting EITF No. 07-01 on our consolidated financial statements.
3. STOCK-BASED COMPENSATION
We currently maintain four equity compensation plans referred to as the 1996 Plan, the 2002 Plan, the 2003 Plan, and the 2005 Plan (collectively referred to as the “Option Plans”). The Option Plans provide for the granting of options to purchase shares of our common stock at exercise prices not less than the fair market value of our common stock at the date of grant. The options generally vest over a two to four year period and no options are exercisable after ten years from the date of grant.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
Prior to May 1, 2006, we accounted for stock options granted under the Option Plans in accordance with Accounting Principles Board No. 25 (“APB No. 25”), Accounting for Stock Issued to Employees and Related Interpretations, as permitted by FASB Statement of Financial Accounting Standard No. 123 (“SFAS No. 123”), Accounting for Stock-Based Compensationand provides alternative methods. Accordingly, no compensation expense was recognized in the accompanying consolidated statements of transitionoperations for a voluntary changefiscal year 2006 related to stock option grants, as all options granted under the Option Plans had an exercise price at least equal to the fair market value of the underlying common stock on the grant date.
On May 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”), Share-Based Payment (Revised 2004), which supersedes our previous accounting under APB No. 25. SFAS No. 123R requires the recognition of compensation expense, using a fair value based method, for costs related to all share-based payments including grants of accounting for stock-based employee compensation.stock options. In addition, SFAS No. 148 amends123R requires companies to estimate the disclosure requirementsfair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods (vesting period). We adopted SFAS No. 123R using the modified-prospective method and, accordingly, stock-based compensation cost recognized beginning May 1, 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of May 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or subsequent to require prominent disclosuresMay 1, 2006, based on the grant date fair value estimated in both annual and interim financial statements about the method of accounting for stock-based employee compensation, and the effect of the method used on reported results.
We have not adopted a method under SFAS No. 148 to expense stock options, but rather we continue to applyaccordance with the provisions of SFAS No. 123; however, we123R. Results for fiscal year 2006 have adopted the additional disclosure provisions of the statement. As SFAS No. 123 permits, we elected to continue accounting for our employee stock options in accordance with Accounting Principles Board Opinion No. 25 (“APB No. 25”), Accounting for Stock Issued to Employeesand Related Interpretations. APB No. 25 requires compensation expense to be recognized for stock options when the market price of the underlying stock exceeds the exercise price of the stock option on the date of the grant.not been restated.
We utilizeOur net loss for fiscal years ended April 30, 2008 and 2007, increased $829,000 ($0.004 per basic and diluted share) and $964,000 ($0.005 per basic and diluted share), respectively, as a result of the guidelines in APBadoption of SFAS No. 25 for measurement of stock-based transactions for employees and, accordingly, no compensation expense has been recognized for the options123R, which costs are included in the accompanying consolidated financial statements for the three years ended April 30, 2006.of operations as follows:
| | | 2008 | | | 2007 | |
| Research and development | | $ | 534,000 | | | $ | 589,000 | |
| Selling, general and administrative | | | 295,000 | | | | 375,000 | |
| Total | | $ | 829,000 | | | $ | 964,000 | |
Had we used aThe fair value of each option grant is estimated using the Black-Scholes option valuation model for measurementand is amortized as compensation expense on a straight-line basis over the requisite service period of stock-based transactions for employees under SFAS No. 123 and amortized the expense overaward, which is generally the vesting period pro forma information would(typically 2 to 4 years). The use of a valuation model requires us to make certain estimates and assumptions with respect to selected model inputs. The expected volatility is based on the daily historical volatility of our stock covering the estimated expected term. The expected term of options granted prior to the adoption of SFAS No. 123R (adopted May 1, 2006) was based on the average estimated expected life of the options granted during the fiscal year. The expected term of options granted subsequent to the adoption of SFAS No. 123R through our quarter ended October 31, 2007 was based on the expected time to exercise using the “simplified” method allowable under the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107. Effective November 1, 2007, the expected term reflects actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options and is applied to all option grants subsequent to October 31, 2007. The risk-free interest rate is based on U.S. Treasury notes with terms within the contractual life of the option at the time of grant. The expected dividend yield assumption is based on our expectation of future dividend payouts. We have never declared or paid any cash dividends on our common stock and currently do not anticipate paying such cash dividends. In addition, SFAS No. 123R requires forfeitures to be as follows:
| | | 2006 | | 2005 | | 2004 | |
| Net loss, as reported | | $ | (17,061,000 | ) | $ | (15,452,000 | ) | $ | (14,345,000 | ) |
| Stock-based employee compensation cost that would have been included in the determination of net loss if the fair value based method had been applied to all awards | | | (1,755,000 | ) | | (2,828,000 | ) | | (2,541,000 | ) |
| Pro forma net loss as if the fair value based method had been applied to all awards | | $ | (18,816,000 | ) | $ | (18,280,000 | ) | $ | (16,886,000 | ) |
| Basic and diluted loss per common share, as reported | | $ | (0.10 | ) | $ | (0.11 | ) | $ | (0.11 | ) |
| Basic and diluted loss per common share, pro forma | | $ | (0.11 | ) | $ | (0.13 | ) | $ | (0.13 | ) |
estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The fair value of stock options on the date of grant and the weighted-average assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model for fiscal years ended April 30, 2008, 2007 and 2006, were as follows:
| | | 2006 | | 2005 | | 2004 | |
| Weighted average fair value of stock options granted | | $ | 0.91 | | $ | 0.80 | | $ | 1.59 | |
| Risk-free interest rate | | | 3.88% | | | 3.38% | | | 2.31% | |
| Expected life (in years) | | | 5.49 | | | 4.00 | | | 4.00 | |
| Expected volatility factor | | | 103% | | | 115% | | | 124% | |
| Expected dividend yield | | | - | | | - | | | - | |
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
| | | Year Ended April 30, | |
| | | 2008 | | | 2007 | | | 2006 | |
| Risk-free interest rate | | | 3.77% | | | | 4.83% | | | | 3.88% | |
| Expected life (in years) | | | 6.02 | | | | 6.25 | | | | 5.49 | |
| Expected volatility | | | 82% | | | | 98% | | | | 103% | |
| Expected dividend yield | | | - | | | | - | | | | - | |
As of April 30, 2008, options to purchase up to 14,689,064 shares of our common stock were issued and outstanding under the Option Plans with a weighted average exercise price of $1.24 per share and expire at various dates through March 31, 2018. Options to purchase up to 1,201,811 shares of common stock were available for future grant under the Option Plans as of April 30, 2008.
The following summarizes all stock option transaction activity for fiscal year ended April 30, 2008:
| Stock Options | | Shares | | Weighted Average Exercisable Price | | Weighted Average Remaining Contractual Term (years) | | Aggregate Intrinsic Value | |
| Outstanding, May 1, 2007 | | | 11,537,946 | | $ | 1.54 | | | | | |
| Granted | | | 4,231,894 | | $ | 0.48 | | | | | |
| Exercised | | | (45,000 | ) | $ | 0.60 | | | | | |
| Canceled or expired | | | (1,035,776 | ) | $ | 1.49 | | | | | |
| Outstanding, April 30, 2008 | | | 14,689,064 | | $ | 1.24 | | | 6.09 | | $ | 177,000 | |
| | | | | | | | | | | | | | |
| Exercisable and expected to vest | | | 14,355,394 | | $ | 1.25 | | | 6.02 | | $ | 173,000 | |
| Exercisable, April 30, 2008 | | | 9,990,396 | | $ | 1.51 | | | 4.67 | | $ | 97,000 | |
The weighted-average grant date fair value of options granted during the years ended April 30, 2008, 2007 and 2006 was $0.35, $1.05 and $0.91 per share, respectively. The aggregate intrinsic value of stock options exercised during the years ended April 30, 2008, 2007 and 2006 was $19,000, $38,000 and $55,000, respectively.
Cash proceeds from stock options exercised during the years ended April 30, 2008, 2007 and 2006 totaled $27,000, $59,000 and $122,000, respectively.
We issue shares of common stock that are reserved for issuance under the Option Plans upon the exercise of stock options, and we do not expect to repurchase shares of common stock from any source to satisfy our obligations under our compensation plans.
As of April 30, 2008, the total estimated unrecognized compensation cost related to non-vested stock options was $1,949,000. This cost is expected to be recognized over a weighted average vesting period of 2.25 years based on current assumptions.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock-based compensation expense recorded during eachFOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
As discussed above, results for fiscal year 2006 have not been restated to reflect the effects of implementing SFAS No. 123R. Prior to May 1, 2006, we accounted for our stock option grants in accordance with APB No. 25 and provided the three years inpro forma disclosures required by SFAS No. 123. The following table illustrates the periodseffect on net loss and net loss per share for the year ended April 30, 2006 primarily relatehad we applied the fair value recognition provisions of SFAS No. 123 to our stock option grants issuedgrants:
| Net loss, as reported | | $ | (17,061,000 | ) |
| | | | | |
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards | | | (1,755,000 | ) |
| | | | | |
| Net loss, pro forma | | $ | (18,816,000 | ) |
| Basic and diluted net loss per share: | | | | |
Net loss, as reported | | $ | (0.10 | ) |
| | | | | |
| Net loss, pro forma | | $ | (0.11 | ) |
Periodically, we grant stock options to non-employee consultants. The fair value of these options granted to non-employees are measured utilizing the Black-Scholes option valuation model and are being amortized over the estimated period of service or related vesting period in accordance with the provisions of SFAS No. 123 and EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Stock-based compensation expense recorded during fiscal years 2008, 2007 and 2006 2005 and 2004associated with non-employees amounted to $21,000, $57,000 and $499,000, $231,000, and $271,000, respectively.
In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”), Share-Based Payment (Revised 2004), which requires companies to recognize in the financial statements the fair value of all employee share-based payments, including grants of employee stock options as well as compensatory employee stock purchase plans, for interim periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission adopted a rule amendment that delayed the compliance dates of SFAS No. 123R such that we are now allowed to adopt the new standard no later than May 1, 2006. SFAS No. 123R eliminates the ability to account for share-based compensation using APB No. 25, and the pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition.
We adopted SFAS No. 123R on May 1, 2006, using the “modified-prospective method,” in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123R for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123R that remain unvested on the effective date. We apply the Black-Scholes valuation model in determining the fair value of share-based payments to employees, which will then be amortized on a straight-line basis. Although we have not yet determined the final impact of SFAS No. 123R, we believe the non-cash compensation expense for fiscal year 2007 related to the adoption of SFAS No. 123R may be up to approximately $1,000,000 based on actual shares granted and unvested as of April 30, 2006. However, the actual expense recorded during fiscal year 2007 as a result of the adoption of SFAS No. 123R may differ materially from our estimate as a result of changes in a number of factors that affect the amount of non-cash compensation expense, including the number of options to be granted by our Board of Directors during fiscal year 2007, the price of our common stock on the date of grant, the volatility of our stock price, the estimate of the expected life of options granted and the risk free interest rates as measured at the grant date.
In addition, during February 2006, our Compensation Committee of the Board of Directors approved the Company’sa Stock Bonus Plan that remained in effect through April 30, 2007 to promote the interests of the Company and its stockholders by issuing key employees and consultants a predetermined number of shares of the Company’s common stock upon achievement of various research and clinical goals (“Performance Goals”). Compensation expense associated with shares issued under the Stock Bonus Plan iswas calculated in accordance with APB No. 25 and EITF 96-18. In accordance with APB No. 25 and EITF 96-18, we will recordrecorded compensation expense at each reporting period when it becomesbecame probable that a Performance Goal under the Stock Bonus Plan willwould be achieved and this accrual will bewas carefully assessed at each subsequent reporting period and adjusted accordingly until the Performance Goal iswas actually achieved. Decreases or increases to these accruals will bewere accounted for as cumulative catch-up adjustments under FIN 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Awards Plans. During fiscal yearyears 2007 and 2006, we recorded $304,000 and $83,000, respectively, in compensation expense under the Stock Bonus Plan, of which, $39,000 is included in accrued payroll and related costs in the accompanying consolidated financial statements as of April 30, 2006.Plan.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
Recent Accounting Pronouncements 4. RECOVERY OF NOTE RECEIVABLE- In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (“SFAS No. 151”), Inventory Costs. SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The standard is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We adopted SFAS No. 151 on May 1, 2006, which we do not expect will have a significant impact on our consolidated financial condition and results of operations.
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154 (“SFAS No. 154”), Accounting Changes and Error Corrections. SFAS No. 154 applies to all voluntary changes in accounting principle, and changes the requirements for accounting for and reporting of a change in accounting principle. SFAS No. 154 also requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. We adopted SFAS No. 151 on May 1, 2006, which we do not expect will have a significant impact on our consolidated financial condition and results of operations.
During December 1998, we completed the sale and subsequent leaseback of our two facilities in Tustin, California and recorded an initial note receivable from the buyer of $1,925,000 as part of the consideration. During the quarter ended October 31, 1999, we established a 100% reserve for the note receivable in the amount of $1,887,000 based on our then financial condition and the underlying terms of the note agreement. We reducereduced the reserve as monthly payments arewere received and we recordrecorded the reduction as interest and other income in the accompanying consolidated statements of operations. On December 22, 2005, we entered into a First Amendment to Lease and Agreement of Lease (“First Amendment”) with the landlord to our original lease dated December 24, 1998 and extended the original lease term for seven years, which extends our contractual commitment under the operating lease through December 2017. In addition, the monthly lease payment terms under the original lease, which increase at a rate of 3.35% every two years, have not been modified. In connection with this First Amendment, we entered into a separate agreement with the landlord on December 22, 2005 regarding the immediate payoff of our note receivable in the amount of $1,229,000, after reducing the principal amount by twenty percent (20%), which amount was recorded as recovery of note receivable in the accompanying consolidated statements of operations during fiscal year 2006.
5. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
During fiscal years 2005 and 2006, we entered into five separate note payable agreements with an aggregate original principal amount of approximately $1,299,000 (the “Notes”) with General Electric Capital (“GE”) to finance certain laboratory equipment. The Notes bore interest at various rates ranging from 5.78% to 6.87% per annum with monthly payments ranging from approximately $3,000 to $12,000 over a period of 36 months. In addition, under the terms of the Notes, we paid GE a security deposit equal to 25% of the original principal amount of the Notes that totaled $325,000 in aggregate. The security deposits were due and payable to us at the time the Notes were paid in full.
During January 2008, we paid in full the balance of the Notes, which amount was offset by an applied security deposit in the amount of $175,000. In addition, the remaining security deposit of $150,000 was refunded back to us in January 2008.
Notes Payable consist of the following at April 30, 2008 and April 30, 2007:
| | | April 30, 2008 | | | April 30, 2007 | |
| Note payable dated November 2004; 5.78% per annum; monthly payments of $11,000 | | $ | - | | | $ | 83,000 | |
| Note payable dated December 2004; 5.85% per annum; monthly payments of $12,000 | | | - | | | | 103,000 | |
| Note payable dated June 2005; 6.39% per annum; monthly payments of $8,000 | | | - | | | | 117,000 | |
| Note payable dated November 2005; 6.63% per annum; monthly payments of $3,000 | | | - | | | | 60,000 | |
| Note payable dated March 2006; 6.87% per annum; monthly payments of $6,000 | | | - | | | | 135,000 | |
| | | | - | | | | 498,000 | |
| Less current portion | | | (- | ) | | | (379,000 | ) |
| Notes payable, less current portion | | $ | - | | | $ | 119,000 | |
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
The following represents a rollforward of the allowance of the note receivable for the two years ended April 30, 2006:
| | | 2006 | | 2005 | |
| Allowance balance, beginning | | $ | 1,581,000 | | $ | 1,645,000 | |
| Principal payments received | | | (1,274,000 | ) | | (64,000 | ) |
| Note receivable payoff reduction | | | (307,000 | ) | | - | |
| Allowance balance, ending | | $ | - | | $ | 1,581,000 | |
4. | NOTES PAYABLE AND CAPITAL LEASE OBLIGATION |
During fiscal years 2006 and 2005, we entered into the following note payable agreements with General Electric Capital Corporation (“GE”) to finance certain laboratory equipment. Notes payable consist of the following at April 30, 2006 and April 30, 2005:
| | | April 30, 2006 | | April 30, 2005 | |
Note payable dated November 2004; 5.78% per annum; monthly payments of $11,000 due through December 2007 | | $ | 202,000 | | $ | 314,000 | |
Note payable dated December 2004; 5.85% per annum; monthly payments of $12,000 due through January 2008 | | | 232,000 | | | 354,000 | |
Note payable dated June 2005; 6.39% per annum; monthly payments of $8,000 due through July 2008 | | | 205,000 | | | - | |
Note payable dated November 2005; 6.63% per annum; monthly payments of $3,000 due through December 2008 | | | 92,000 | | | - | |
Note payable dated March 2006; 6.87% per annum; monthly payments of $6,000 due through April 2009 | | | 196,000 | | | - | |
| | | | 927,000 | | | 668,000 | |
| Less current portion | | | (429,000 | ) | | (234,000 | ) |
| Notes payable, less current portion | | $ | 498,000 | | $ | 434,000 | |
Under the terms of the GE note payable agreements, we paid security deposits equal to 25% of the amount financed, which are due and payable to us at the end of the term of each note agreement. As of April 30, 2006 and April 30, 2005, security deposits totaling $325,000 and $183,000, respectively, are included in other long-term assets in the accompanying consolidated financial statements.
Minimum future principal payments on notes payable as of April 30, 2006 are as follows:
| Year ending April 30: | | | |
| 2007 | | | 429,000 | |
| 2008 | | | 379,000 | |
| 2009 | | | 119,000 | |
| Total | | $ | 927,000 | |
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
During December 2005, we financed certain equipment under a capital lease agreement in the amount of $65,000. The agreement bears interest at a rate of 6.30% per annum with payments due monthly in the amount of approximately $1,600 through December 2009.
During April 2008, we financed certain equipment under a capital lease agreement in the amount of $15,000. The agreement bears interest at a rate of 6.56% per annum with payments due monthly in the amount of approximately $400 through April 2011.
The equipment purchased under thethese capital leaseleases is included in property in the accompanying consolidated financial statements as follows at April 30, 2006:2008 as follows:
| Laboratory equipment | | | $ | 13,000 | |
| Furniture, fixtures and office equipment | | $ | 68,000 | | | | 68,000 | |
| Less accumulated depreciation | | | (5,000 | ) | | | (32,000 | ) |
| Net book value | | $ | 63,000 | | | $ | 49,000 | |
Minimum future capital lease payments under the capital lease as of April 30, 20062008 are as follows:
| Year ending April 30: | | | | | | |
| 2007 | | $ | 19,000 | | |
| 2008 | | | 19,000 | | |
| | | | | |
| 2009 | | | 19,000 | | | | 24,000 | |
| 2010 | | | 13,000 | | | | 18,000 | |
| 2011 | | | | 5,000 | |
| Total minimum lease payments | | | 70,000 | | | | 47,000 | |
Amount representing interest | | | (8,000 | ) | | | (3,000 | ) |
| Net present value minimum lease payments | | | 62,000 | | | | 44,000 | |
Less current portion | | | 15,000 | | | | 22,000 | |
| | | $ | 47,000 | | | $ | 22,000 | |
5. | COMMITMENTS AND CONTINGENCIES |
6. COMMITMENTS AND CONTINGENCIES
Operating Leases - In December 1998, we sold and subsequently leased back our two facilities in Tustin, California. The lease has an original lease term of 12 years with two 5-year renewal options and includes scheduled rental increases of 3.35% every two years. On December 22, 2005, we entered into a First Amendment to Lease and Agreement of Lease (“First Amendment”) with the landlord to our original lease dated December 24, 1998 and extended the original lease term for seven additional years to expire on December 31, 2017 while maintaining our two 5-year renewal options that could extend our lease to December 31, 2027. In addition, ourOur monthly lease payments stillwill continue to increase at a rate of 3.35% every two years under the First Amendment. We record rent expense on a straight-line basis and the differences between the amounts paid and the amounts expensed are included in other accruedcurrent liabilities in the accompanying consolidated financial statements. Annual rent expense under the lease agreement totaled $807,000, during fiscal years 2008 and 2007 and $758,000 during fiscal year 2006 and $735,000 during fiscal years 2005 and 2004.2006.
During fiscal year 2004, we entered into an operating lease agreement to lease certain office equipment. The leaseequipment, which has a 5-year term and expires during fiscal year 2009. The remaining annual minimum lease payments are $29,000.$12,000.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
During February 2005, we entered into an operating lease agreement to lease certain office space in Houston, Texas. The lease has a 3-year term and annualexpired in February 2008. During March 2008, we entered into a First Amendment to Lease with the landlord to our original lease agreement to extend the lease term for an additional 3-year term to expire in February 2011. Annual minimum lease payments are $20,000for fiscal years 2009, 2010 and 2011 under the First Amendment to Lease total $23,000, $24,000 and $21,000, respectively, plus a pro rata share of monthly operating expenses. Rent expense under the lease agreement totaled $21,000$24,000 during fiscal year 2008 and $4,000$21,000 during fiscal years 20062007 and 2005, respectively.2006.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
At April 30, 2006,2008, future minimum lease payments and sublease income under all non-cancelable operating leases are as follows:
Year ending April 30: | | Minimum Lease Payments | | Sublease Income | | Net Lease Payments | | | Minimum Lease Payments | |
| 2007 | | $ | 804,000 | | $ | (40,000 | ) | $ | 764,000 | | |
| 2008 | | | 815,000 | | | - | | | 815,000 | | |
| 2009 | | | 793,000 | | | - | | | 793,000 | | | $ | 816,000 | |
| 2010 | | | 796,000 | | | - | | | 796,000 | | | 820,000 | |
| 2011 | | | 805,000 | | | - | | | 805,000 | | | 825,000 | |
| 2012 | | | 823,000 | |
| 2013 | | | 832,000 | |
| Thereafter | | | 5,736,000 | | | - | | | 5,736,000 | | | | 4,082,000 | |
| | | $ | 9,749,000 | | $ | (40,000 | ) | $ | 9,709,000 | | | $ | 8,198,000 | |
Rental Income - We currently sublease portions of our unused space. – Sublease rental income totaled $59,000, $99,000$35,000 and $179,000$59,000 for fiscal years 2007 and 2006, 2005 and 2004, respectively. There was no sublease rental income during fiscal year 2008.
Legal Proceedings - From time to time, we are subject to legal proceeding and disputes during – In the ordinary course of business. Webusiness, we are at times subject to various legal proceedings and disputes. Although we currently are not aware of any such legal proceedingproceedings or claim that we believe will have, individually or in the aggregate, a material adverse effect on our business, prospects, operating results or cash flows.flows, however, we did file or are involved with the following lawsuits:
On August 9, 2002,January 12, 2007, we entered intofiled a private placement with four investors under a Debenture Securities Purchase Agreement (“Debt SPA”), whereby we issued Convertible Debentures (“Convertible Debt”) for gross proceeds of $3,750,000. The Convertible Debt was fully converted into 4,411,764 shares of common stock, of which, 1,594,119 shares of our common stock were issued during fiscal year 2003 and 2,817,645 shares of our common stock were issued during fiscal year 2004.
In accordance with EITF 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments, we initially recordedcomplaint in the convertible debt net of discount of (i) the relative fair valueSuperior Court of the warrants issued inState of California for the amountCounty of $1,321,000 and (ii) the intrinsic value of the embedded conversion feature in the amount of $1,143,000.Orange against Cancer Therapeutics Laboratories (“CTL”). The relative fair value of the warrants was determined in accordance with the Black-Scholes valuation modeloriginal complaint has been amended three times based on the warrant terms.ongoing discovery to include claims against Shanghai MediPharm and its related entities, and Alan Epstein, MD. The debt discount, alonglawsuit alleges claims for breach of contract, interference with contractual relations, declaratory relief, and injunctive relief against the defendants. Peregrine's claims stem from a 1995 license agreement with CTL, and two amendments thereto (collectively referred to as the "License Agreement"). Peregrine claims that CTL breached the License Agreement by, among other things, (i) not sharing with Peregrine all inventions, technology, know-how, patents and other information, derived and/or developed in the People's Republic of China and/or at the CTL laboratory, as was required under the License Agreement; (ii) not splitting revenue appropriately with Peregrine as required under the License Agreement; (iii) utilizing Peregrine's licensed technologies outside of the People's Republic of China; and (iv) failing to enter a sublicense agreement with a Chinese sponsor obligating the Chinese sponsor to comply with the debt issuance costs, were amortizedterms and obligations in the License Agreement. Peregrine further alleges that Medibiotech and Shanghai Medipharm Biotech Co., Ltd. ("Medipharm Entities") interfered with the License Agreement, leading to CTL's breaches. This interference by the Medipharm Entities includes: 1) posturing Shanghai Medipharm as non-cash interest expense on a straight-line basis over the termdesignated sublicensee under the License Agreement, without binding any of the Convertible Debt, which approximated the effective interest method. Upon conversion of the Convertible Debt, the entire unamortized debt discount and debt issuance costs remaining at the date of conversion that was attributedMedipharm Entities to the converted Convertible Debt were immediately recognized as interest expense interms and obligations of an appropriate sublicense agreement called for under the accompanying consolidated statementsLicense Agreement; 2) entering into a license agreement with defendant Epstein ("Epstein License Agreement") instead of operations. During fiscal year 2004, we recognized $1,635,000 in non-cash interest expense associatedCTL; 3) restricting the information CTL was allowed to provide to Peregrine, thereby prohibiting CTL from providing to Peregrine all information required under the License Agreement; and 4) providing compensation to CTL, and its principals, so that CTL would enter agreements that prohibited CTL from performing under the License Agreement. These same monetary inducements also interfered with the Convertible Debt, which amount was included in interest1999 Material Transfer Agreement between Peregrine and other expense inDr. Epstein ("MTA"), and caused Dr. Epstein to breach the accompanying consolidated statements of operations. As of April 30, 2004, all outstanding Convertible Debt was converted into common stock and the associated discount was fully amortized as non-cash interest expense in the accompanying financial statements.MTA. Dr. Epstein has attempted to have our claims against him referred to binding Arbitration. The Superior Court has declined his request.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
UnderOn March 28, 2007, CTL filed a cross-complaint, which it amended on May 30, 2007, alleging that the Debt SPA, each Debenture holder was grantedCompany breached the Agreement, improperly terminated the Agreement, is interfering with CTL’s agreements with various MediPharm entities and is double-licensing the technology licensed to CTL to another party. CTL’s cross-complaint, which seeks $20 million in damages, is in part predicated on the existence of a detachable warrant equalsublicense agreement between CTL and MediPharm. We are challenging the cross-complaint on the basis that not only did CTL fail to 75% ofallege an agreement with which the quotient obtained by dividingCompany interfered, they have been unable to produce the principal amount of the Convertible Debt by the Conversion Price or an aggregate of 3,308,827 warrants. The detachable warrants have a 4-year termalleged sublicense agreement with an exercise price of $0.75 per share. During fiscal year 2006 and 2004, Debenture holders exercised 796,765 and 2,244,120 warrants, respectively, under the Debt SPA for gross proceeds of $598,000 and $1,683,000, respectively, at the exercise price of $0.75 per share. As of April 30, 2006, 267,942 warrants were outstanding under the Debt SPA (Note 10).MediPharm despite our repeated demands.
In connectionOn February 22, 2008, the MediPharm entities filed a cross-complaint alleging, as a third party beneficiary, that that the Company breached the Agreement by double-licensing the technology licensed to CTL to another party, intentionally interfered with a prospective economic advantage, and unjust enrichment. MediPharm’s cross-complaint, which seeks $30 million in damages, is in part predicated on MediPharm being the Convertible Debt, we incurred approximately $363,000 in debt issuance costs, including placement agent fees of $318,000, which was amortized as interest expense on a straight-line basis over“Chinese Sponsor” under the lifeAgreement. We intend to bring pre-trial motions to dispose of the Convertible Debt, which approximates the effective interest method. Upon conversion of the Convertible Debt, the entire unamortized debt issuance costs remaining at the date of conversion that was attributed to the converted Convertible Debt was immediately recognized as interest expense in the accompanying consolidated statements of operations. During fiscal year 2004, we expensed $175,000 in debt issuance costs included in interest and other expense in the accompanying consolidated statements of operations. As of April 30, 2004, the debt issuance costs were completely amortized.MediPharm Cross-Complaint.
7. | LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS |
The discovery phase on the aforementioned cases is still ongoing. Until we complete the discovery phase and our objections are considered, we cannot estimate the magnitude of the claims of the parties against each other or probable outcome of the litigation.
7. LICENSE, RESEARCH AND DEVELOPMENT AGREEMENTS
The following represents a summary of our key collaborations for the development and commercialization of our products in clinical trials, bavituximab and Cotara®. and our products in pre-clinical development. In addition, we do not perform any research and development activities for any unrelated entities.
Tumor Necrosis Therapy (“TNT”)
Cotara® is the trade name of our first TNT-based product currently in clinical trials for the treatment of brain cancer. We acquired the rights to the TNT technology in July 1994 after the merger between Peregrine and Cancer Biologics, Inc. was approved by our stockholders. The assets acquired from Cancer Biologics, Inc. primarily consisted of patent rights to the TNT technology. To date, no product revenues have been generated from our TNT technology.
In October 2004, we entered into a worldwide non-exclusive license agreement with Lonza Biologics (“Lonza”) for intellectual property and materials relating to the expression of recombinant monoclonal antibodies for use in the manufacture of Cotara®. Under the terms of the agreement, we paid an upfront fee of 75,000 pounds sterling ($141,000 U.S.) which amount is included in research and development expense in the accompanying consolidated financial statements in fiscal year 2005, and we will pay a royalty on net sales of any products that we market that utilize the underlying technology. In the event a product is approved and we or Lonza do not manufacture Cotara®, we would owe Lonza 300,000 pounds sterling per year in addition to an increased royalty on net sales.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Anti-PhosphatidylserineFOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
Anti-PhosphatidylSerine (“Anti-PS”) Immunotherapeutics
Bavituximab (formerly known as Tarvacin) is the generic name for our first product in clinical trials under our Anti-PS Immunotherapeutics technology platform. Bavituximab is currently in a Phase I clinical trial for the treatment of solid cancers and also in a Phase Ib clinical trial for the treatment of hepatitis C virus infection. In August 2001, we exclusively in-licensed the worldwide rights to this technology platform from the University of Texas Southwestern Medical Center at Dallas. During November 2003 and October 2004, we entered into two non-exclusive license agreements with Genentech, Inc. to license certain intellectual property rights covering the methods and processes for producing antibodies used in connection with the development of our Anti-PS Immunotherapeutics program. During December 2003, we entered into an exclusive commercial license agreement with an unrelated entity covering the generation of the chimeric monoclonal antibody, bavituximab. In March 2005, we entered into a worldwide non-exclusive license agreement with Lonza Biologics for intellectual property and materials relating to the expression of recombinant monoclonal antibodies for use in the manufacture of bavituximab.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
Under our in-licensing agreements relating to the Anti-PhosphatidylserineAnti-PS Immunotherapeutics technology, we typically pay an up-front license fee, annual maintenance fees, and are obligated to pay future milestone payments based on development progress, plus a royalty on net sales and/or a percentage of sublicense income. Our aggregate future milestone payments under the above in-licensing agreements are $7,100,000$6,850,000 assuming the achievement of all development milestones under the agreements through commercialization of products, of which, we expect to pay up to $100,000 during fiscal year 2007 and $6,600,000$6,400,000 is due upon approval of the first Anti-PhosphatidylserineAnti-PS Immunotherapeutics product. In addition, under one of the agreements, we are required to pay future milestone payments upon the completion of Phase II clinical trial enrollment in the amount of 75,000 pounds sterling, the amount of which will continue as an annual license fee thereafter, plus a royalty on net sales of any products that we market that utilize the underlying technology. In the event we utilize an outside contract manufacturer other than Lonza to manufacture bavituximab for commercial purposes, we would owe Lonza 300,000 pounds sterling per year in addition to an increased royalty on net sales. We do not anticipate making any milestone payments under these agreements for at least the next fiscal year.
During fiscal years 20062008 and 2004,2006, we expensed $50,000 and $450,000, and $100,000, respectively underupon the completion of clinical milestones in accordance with in-licensing agreementagreements covering our Anti-PS Immunotherapeutics technology platform, which is included in research and development expense in the accompanying consolidated financial statements. We did not incur any milestone related expenses during fiscal year 2007.
Other Licenses Covering Products in Pre-Clinical Development
During August 2001, we entered into an exclusive worldwide license for a new pre-clinical compound from the University of Texas Southwestern Medical Center. This new compound, named 2C3, added to our anti-cancer platform technologies in the anti-angiogenesis field. Under this license agreement, we paid an up-front license fee and are obligated to pay annual maintenance fees, future milestone payments based on development progress, plus a royalty on net sales. Our aggregate future milestone payments under this exclusive worldwide license are $450,000 assuming the achievement of all development milestones under the agreement through commercialization of the product. We do not anticipate making any milestone payments under this agreement for at least the next fiscal year.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
In April 1997, in conjunction with the acquisition of Vascular Targeting Technologies, Inc. (formerly known as Peregrine Pharmaceuticals, Inc.), we gained access to certain exclusive licenses for Vascular Targeting Agents (“VTAs”) technologies from various institutions. In conjunction with various licensing agreements covering our VTA technology, we are required to pay combined annual fees of $50,000 plus milestone payments based on the development success of the technologies and a royalty on net sales. Our aggregate future milestone payments under these exclusive licenses are $1,688,000 assuming the achievement of all development milestones under the agreements through commercialization of the product, which are due at various stages of clinical development in accordance with the applicable license. We do not anticipate making any milestone payments for at least the next fiscal year under these agreements.
During February 2000, we entered into an exclusive worldwide licensing transaction with the University of Southern California for its Permeability Enhancing Protein (“PEP”) in exchange for an up-front payment plus future milestone payments and a royalty on net sales based on development success. The PEP technology is classified under our Vasopermeation Enhancing Agent (“VEA”) technology, which is designed to increase the uptake of chemotherapeutic agents into tumors. PEP is designed to be used in conjunction with the VEA technology platform. Our aggregate future milestone payments under our PEP and VEA exclusive worldwide licensing agreements are $115,000 assuming the achievement of all development milestones under the agreement through commercialization of the product. We do not anticipate making any milestone payments for at least the next fiscal year under this agreement.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
During June 2003, September 2004, and November 2004,fiscal year 2007, we entered into various binding term sheetsa research collaboration agreement and a development and commercialization agreement with an unrelated entity regarding the generation and commercialization of up to ninefifteen fully human monoclonal antibodies under our platform technologies to be used as possible future clinical candidates. These agreements incorporate the various binding term sheets we entered into with the unrelated entity during June 2003, September 2004, and November 2004. Under the terms of the binding terms sheets,research collaboration agreement, we paidpay a non-refundable upfront technology access fee for each human antibody project initiatedinitiated. In addition, under the terms of the development and commercialization agreement, we are obligated to pay future milestones payments based on the achievement of development milestones, plus a royalty on net sales. Our aggregate future milestone payments range from $5.75 million to $6.05$6.35 million per fully human antibody generated by the unrelated entity upon the achievement of certain development milestones through commercialization. During fiscal yearsyear 2006, 2005 and 2004, we expensed $185,000 $150,000 and $200,000, respectively, in non-refundable upfront technology access fees under the binding term sheetsresearch collaboration agreement upon the initiation to generate fourone fully human antibodies,monoclonal antibody, the amountsamount of which areis included in research and development expense in the accompanying consolidated financial statements. We did not incur any non-refundable upfront technology access fees during fiscal years 2008 and 2007.
During December 2003, we entered into a research collaboration agreement with an unrelated entity regarding the humanization of one of our Anti-PhosphatidylserineAnti-PS Immunotherapeutic antibodies to be used as a possible future generation clinical candidate. Under the terms of the research collaboration agreement, we are required to pay a non-refundable up-front license fee, antibody development milestone fees, clinical development milestone fees and a royalty on net sales. During January and October 2004, we issued and sold 243,101 and 107,665 shares of our common stock to the unrelated entity, respectively, for payment of the non-refundable up-front license fee of 90,000 pounds sterling and for aggregate antibody development milestone fees of 360,000 pounds sterling. These shares were valued at $802,000 based on the more readily determinable value of the services received or the fair value of the common stock issued, of which, $186,000 and $616,000 was recorded as research and development expense in the accompanying consolidated financial statements during fiscal year 2005 and 2004, respectively. Our minimum aggregate future milestone payments under this agreement are $3,250,000 assuming the achievement of all development milestones under the agreement through commercialization of the product. We do not anticipate making any milestone payments for at least the next fiscal year under this agreement.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
During July 2004, we announced that we entered into a worldwide exclusive licensing agreement for intellectual property related to Phosphatidylserine conjugates and Anti-Phosphatidylserine (Anti-PS)Anti-PS antibodies from The University of Texas M. D. Anderson Cancer Center related to generating an immune response for the treatment of cancer and other indications. Under the terms of the agreement, we paid The University of Texas M. D. Anderson Cancer Center a non-refundable up-front license fee of $150,000, which is included in research and development expense in fiscal year 2005 in the accompanying consolidated financial statements, and we are obligated to pay future milestone fees based on the clinical progress of products that fall under the licensed intellectual property and a royalty on net sales as defined in the agreement. Our aggregate future milestone payments under this licensing agreement are $1,700,000 assuming the achievement of all development milestones under the agreement through commercialization of the product. We do not anticipate making any milestone payments for at least the next fiscal year under this agreement.
PEREGRINE PHARMACEUTICALS, INC.During March 2007, we entered into a worldwide exclusive licensing agreement for intellectual property related to the use of beta-2-glycoprotein I as an anti-angiogenesis agent from The University of Texas M.D. Anderson Cancer Center. Under the terms of the agreement, we paid The University of Texas M.D. Anderson Cancer Center a non-refundable up-front fee of $150,000, which is included in research and development expense in fiscal year 2007 in the accompanying consolidated financial statements. In addition, under the terms of the agreement, we are obligated to pay annual maintenance fees, clinical development milestone fees and a royalty on net sales. Our aggregate future clinical development milestone payments under this licensing agreement are $1,425,000 assuming the achievement of all development milestones under the agreement through commercialization of the product. We do not anticipate making any milestone payments for at least the next fiscal year under this agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
Out-Licensing CollaborationsDuring June 2007, we entered into an exclusive license agreement with The Regents of the University of California regarding the use of certain Anti-PS antibodies to be used as a possible future generation clinical candidate. Under the terms of the agreement, we paid a non-refundable up-front license fee of $25,000, which is included in research and development expense in fiscal year 2008 in the accompanying consolidated financial statements. In addition, under the terms of the agreement, we are obligated to pay an annual maintenance fee, clinical development milestone fees and a royalty on net sales. Our aggregate future clinical development milestone payments under the license agreement are $735,000 assuming the achievement of all developmental milestones under the agreement through commercialization of the product. We do not anticipate making any milestone payments for at least the next fiscal year under this agreement.
Out-Licensing Collaborations
In addition to our in-licensing collaborations, the following represents a summary of our key out-licensing collaborations.
During September 1995, we entered into an agreement with Cancer Therapeutics, Inc., a California corporation, whereby we granted to Cancer Therapeutics Laboratories, Inc. (“CTL”) the exclusive right to sublicense TNT to a major pharmaceutical company solely in the People’s Republic of China. In addition, weWe are entitled to receive 50% of the distributed profits received by Cancer Therapeutics, Inc. from the Chinese pharmaceutical company. Cancer Therapeutics, Inc. has the right to 20% of the distributed profits under the agreement with the Chinese pharmaceutical company. During March 2001, we extended the exclusive licensing period granted to Cancer Therapeutics, which now expires on December 31, 2016. In exchange for this extension, Cancer Therapeutics, Inc. agreed to pay us ten percent (10%) of all other consideration received by Cancer Therapeutics, Inc., from the Chinese pharmaceutical company, excluding research funding. During January 2007, we filed a lawsuit alleging breach of contract against CTL alleging various breaches of contract under the agreement. The lawsuit is currently in the discovery phase as further discussed in Part I, Item 3 under “Legal Proceedings” of this Annual Report. Through fiscal year ended April 30, 2006,2008, we have not received any amounts under the agreement.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
During October 2000, we entered into a licensing agreement with Merck KGaA to out-license a segment of our TNT technology for use in the application of cytokine fusion proteins. During January 2003, we entered into an amendment to the license agreement, whereby we received an extension to the royalty period from six years to ten years from the date of the first commercial sale. Under the terms of agreement, we would receive a royalty on net sales if a product is approved under the agreement. Merck KGaA has not publicly disclosed the development status of its program.program to Peregrine.
During February 2001,2007, we completed a licensing dealentered into an amended and restated license agreement with SuperGen, Inc. (“SuperGen”) revising the original licensing deal completed with SuperGen in February 2001 to license a segment of our VTA technology, specifically related to certain conjugates Vascular Endothelial Growth Factor (“VEGF”). Under the terms of the licensingamended and restated license agreement, we will receive an annual license feefees of up to $200,000 per year payable in cash or SuperGen common stock until SuperGen files an Investigational New Drug Application in the United States utilizing the VEGF conjugate technology. In addition, we could receive additional milestoneup to $8.25 million in future payments based on SuperGen’s development success, plus receivethe achievement of all clinical and regulatory milestones combined with a royalty on net sales, of all drugs commercialized by SuperGen utilizingas defined in the VEGF technology.agreement, as amended. We could also receive additional consideration for each clinical candidate that enters a Phase III clinical trial by SuperGen. As of April 30, 2006,2008, SuperGen has not filed an Investigational New Drug Application in the United States utilizing the VEGF conjugate technology.
During December 2002, we granted the exclusive rights for the development of diagnostic and imaging agents in the field of oncology to Schering A.G. under our VTA technology. Under the terms of the agreement, we received an up-front payment of $300,000, that is beingwhich we amortized as license revenue over an estimated period of 48 months of which, $50,000 is included in deferred license revenuethrough December 2006 in accordance with SAB No. 104 in the accompanying consolidated financial statements at April 30, 2006.statements. Under this license agreement, the obligation period was not contractually defined and we exercised judgment in estimating the period of time over which certain deliverables will be provided to enable the licensee to practice the license. The estimated period of 48 months was primarily determined based on the historical experience with Schering A.G. under a separate license agreement. In addition, under the terms of the agreement, we could also receive up to $1.2 million in future milestone payments for each product based on the achievement of all clinical and regulatory milestones combined with a royalty on net sales, as defined in the agreement. Under the same agreement, we granted Schering A.G. an option to obtain certain non-exclusive rights to the VTA technology with predetermined up-front fees and milestone payments as defined in the agreement. Schering A.G. has not publicly disclosed the development status of its program.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
During August 2005, we licensed certain intellectual property rights under our VTA technology to Medarex, Inc., which allowsallowed Medarex, Inc. to develop and commercialize certain monoclonal antibodiesantibody conjugates for the treatment of a wide range of solid tumors. Under the terms ofDuring September 2007, the agreement we could receive up to $5.95 million in future payments based on the achievement of all clinical and regulatory milestones combined with a royalty on net sales, as defined in the agreement.was terminated by Medarex, has not publicly disclosed the development status of its program.
8. STOCKHOLDERS' EQUITY
Adoption of a Stockholder Rights Agreement
On March 16, 2006, our Board of Directors adopted a Stockholder Rights Agreement (“Rights Agreement”) that is designed to strengthen the ability of the Board of Directors to protect the interests of our stockholders against potential abusive or coercive takeover tactics and to enable all stockholders the full and fair value of their investment in the event that an unsolicited attempt is made to acquire Peregrine. The adoption of the Rights Agreement is not intended to prevent an offer the Board of Directors concludes is in the best interest of Peregrine and its stockholders.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
Under the Rights Agreement, the Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each share of our common stock held by shareholders of record as of the close of business on March 27, 2006. Each Right will entitle holders of each share of our common stock to buy one thousandth (1/1,000th)1,000th) of a share of Peregrine’s Series D Participating Preferred Stock, par value $0.001 per share, at an exercise price of $11.00 per share, subject to adjustment. The Rights are neither exercisable nor traded separately from our common stock. The Rights will become exercisable and will detach from the common shares if a person or group acquires 15% or more of our outstanding common stock, without prior approval from our Board of Directors, or announces a tender or exchange offer that would result in that person or group owning 15% or more of our common stock. Each Right, when exercised, entitles the holder (other than the acquiring person or group) to receive common stock of the Company (or in certain circumstances, voting securities of the acquiring person or group) with a value of twice the Rights exercise price upon payment of the exercise price of the Rights.
Peregrine will be entitled to redeem the Rights at $0.001 per Right at any time prior to a person or group achieving the 15% threshold. The Rights will expire on March 16, 2016.
Increased Authorized Shares Of Common Stock
On October 22, 2007, the stockholders of the Company approved an increase in the number of authorized shares of common stock from 250,000,000 to 325,000,000. In November 2007, we filed an amendment to our Certificate of Incorporation with the Secretary of State of Delaware which effected the foregoing increase.
Financing Under Shelf Registration Statements On Form S-3
During January 2007, we filed a registration statement on Form S-3, File Number 333-139975 (“January 2007 Shelf”) which was declared effective by the Securities and Exchange Commission, allowing us to issue, from time to time, in one or more offerings, shares of common stock for proceeds up to $30,000,000.
On June 28, 2007, we entered into a Securities Purchase Agreement with several institutional investors whereby we sold 30,000,000 shares of our common stock in exchange for gross proceeds of $22,500,000 under the January 2007 Shelf. We received net proceeds of $20,859,000 after deducting placement agent fees and estimated costs associated with the offering. As of April 30, 2008, we could raise up to an additional $7,500,000 in gross proceeds under the January 2007 Shelf registration statement.
During fiscal years 2006, 2005,2007 and 2004,2006, we entered into various financing transactions under the following shelf registration statements on Form S-3, which were declared effective by the Securities and Exchange Commission on various dates described in the table below, table, allowing us to issue, from time to time, in one or more offerings the following number of shares of our common stock and warrants to purchase shares of our common stock:
Registration Statement No. | Shelf Effective Date | Number of Shares of Common Stock Registered | Number of Warrants Registered |
| 333-71086 | November 2001 | 10,000,000 | 2,000,000 |
| 333-103965 | March 2003 | 10,000,000 | - |
| 333-109982 | October 2003 | 12,000,000 | - |
| 333-121450 | December 2004 | 12,000,000 | - |
| 333-128322 | September 2005 | 12,000,000 | - |
| 333-132872 | March 2006 | 15,000,000 | - |
| Registration Statement No. | Shelf Effective Date | Number of Shares of Common Stock Registered |
| 333-109982 | October 2003 | 12,000,000 |
| 333-121450 | December 2004 | 12,000,000 |
| 333-128322 | September 2005 | 12,000,000 |
| 333-132872 | March 2006 | 15,000,000 |
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
The following tables summarize the financing transactions we entered into during fiscal years 2004, 2005,2006 and 20062007 under the above shelf registration statements:
FISCAL YEAR 2004 | |
Description of Financing Transaction | | Number of Common Stock Shares Issued | | Number of Warrants Issued | | Net Issuance Value | |
| Common stock purchase agreement dated June 6, 2003 | | | 2,412,448 | | | 150,000 | | $ | 1,971,000 | |
| Common stock purchase agreement dated June 26, 2003 | | | 1,599,997 | | | - | | $ | 1,739,000 | |
| Option granted under the common stock purchase agreement dated June 26, 2003 | | | 1,599,997 | | | - | | $ | 1,786,000 | |
| Common stock purchase agreement dated July 24, 2003 | | | 2,000,000 | | | - | | $ | 2,887,000 | |
| Common stock purchase agreement dated September 18, 2003 | | | 2,800,000 | | | - | | $ | 5,273,000 | |
| Common stock purchase agreement dated November 17, 2003 | | | 2,000,000 | | | - | | $ | 4,256,000 | |
| Common stock purchase agreement dated January 22, 2004 | | | 1,000,000 | | | - | | $ | 2,275,000 | |
| Common stock issued to unrelated entities for research services | | | 243,101 | | | - | | $ | 648,000 | |
| | | | 13,655,543 | | | 150,000 | | $ | 20,835,000 | |
| Fiscal Year 2006 | |
| Description of Financing Transaction | | Number of Common Stock Shares Issued | | | Net Issuance Value | |
| Common stock purchase agreement dated January 31, 2005 | | | 1,582,217 | | | $ | 1,576,000 | |
| Common stock purchase agreement dated May 11, 2005 | | | 3,125,000 | | | $ | 2,989,000 | |
| Common stock purchase agreement dated June 22, 2005 | | | 8,000,000 | | | $ | 6,691,000 | |
| Common stock purchase agreement dated November 23, 2005 | | | 8,000,000 | | | $ | 6,719,000 | |
| Common stock purchase agreement dated April 5, 2006 | | | 4,000,000 | | | $ | 4,919,000 | |
| Common stock issued to unrelated entities for research services | | | 695,820 | | | $ | 907,000 | |
| | | | 25,403,037 | | | $ | 23,801,000 | |
Description of Financing Transaction | | Number of Common Stock Shares Issued | | Number of Warrants Issued | | Net Issuance Value | |
| Common stock purchase agreement dated March 31, 2004 | | | 3,000,000 | | | - | | $ | 3,207,000 | |
| Common stock purchase agreement dated January 31, 2005 | | | 3,000,000 | | | - | | $ | 3,279,000 | |
| Common stock issued to unrelated entities for research services | | | 1,174,682 | | | - | | $ | 1,449,000 | |
| | | | 7,174,682 | | | - | | $ | 7,935,000 | |
Description of Financing Transaction | | Number of Common Stock Shares Issued | | Number of Warrants Issued | | Net Issuance Value | |
| Common stock purchase agreement dated January 31, 2005 | | | 1,582,217 | | | - | | $ | 1,576,000 | |
| Common stock purchase agreement dated May 11, 2005 | | | 3,125,000 | | | - | | $ | 2,989,000 | |
| Common stock purchase agreement dated June 22, 2005 | | | 8,000,000 | | | - | | $ | 6,691,000 | |
| Common stock purchase agreement dated November 23, 2005 | | | 8,000,000 | | | - | | $ | 6,719,000 | |
| Common stock purchase agreement dated April 5, 2006 | | | 4,000,000 | | | - | | $ | 4,919,000 | |
| Common stock issued to unrelated entities for research services | | | 695,820 | | | - | | $ | 907,000 | |
| | | | 25,403,037 | | | - | | $ | 23,801,000 | |
| Fiscal Year 2007 | |
| Description of Financing Transaction | | Number of Common Stock Shares Issued | | | Net Issuance Value | |
| Common stock purchase agreement dated June 16, 2006 | | | 9,285,714 | | | $ | 12,970,000 | |
| Common stock issued to unrelated entities for research services | | | 862,832 | | | $ | 931,000 | |
| | | | 10,148,546 | | | $ | 13,901,000 | |
As of April 30, 2006,2008, an aggregate of 15,179,1805,030,634 shares of common stock were available for issuance under two of the shelf registration statements 333-121450 and 333-132872 noted above.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
On June 16, 2006, we entered into a Common Stock Purchase Agreement whereby we sold 9,285,714 shares of our common stock in exchange for net proceeds of $13,000,000. As of June 30, 2006, an aggregate 5,893,466 shares of common stock were registered and available for issuance under two separate shelf registration statements.
Financing Under Securities Purchase Agreement
In addition to the above financing transactions pursuant to our shelf registration statements, on August 9, 2002, we entered into a private placement with two investors under a Securities Purchase Agreement (“SPA”) and issued an aggregate of 1,923,078 shares of our common stock in exchange for gross proceeds of $1,250,000. In conjunction with the private placement, we issued warrants to purchase up to an aggregate of 1,442,309 shares of our common stock. The warrants have a four year term and are exercisable six months after the date of issuance at an exercise price of $0.71 per share. During fiscal year 2004, the two investors exercised all 1,442,309 warrants in exchange for gross proceeds of $1,024,000 at the exercise price of $0.71 per share.
Also on August 9, 2002, we agreed to sell 3,298,462 shares of our common stock at a negotiated price of $0.65 per share in exchange for gross proceeds of $2,144,000 to one investor. In conjunction with this offering, we issued a four-year warrant to purchase up to 4,648,846 shares of our common stock at an exercise price of $0.71 per share. As of April 30, 2006, warrants to purchase up to 4,648,846 shares our common stock, which expire in August 2006, were outstanding under the SPA.
Shares Of Common Stock Authorized And Reserved For Future Issuance
In accordance with our shares reserved for issuance under our Shelf registration statements, stock option plans and warrant agreements, we have reserved 38,797,53020,921,509 shares of our common stock at April 30, 20062008 for future issuance, calculated as follows:
| | | Number of shares reserved | |
| Shares reserved under two effective shelf registration statements | | | 15,179,180
5,030,634 | |
| Options issued and outstanding | | | 11,307,27914,689,064 | |
| Options available for future grant | | | 5,346,418 | |
Warrants issued and outstanding | | | 6,964,6531,201,811 | |
| Total shares reserved | | | 38,797,53020,921,509 | |
In addition, up to 1,302,0339. WARRANTSshares of common stock could potentially be issued under our 2005 Stock Option Plan for the possible issuance of shares under our Stock Bonus Plan (Note 9).
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
We maintain four equity compensation plans, the 1996 Plan, the 2002 Plan, the 2003 Plan, and the 2005 Plan. The 1996, 2003 and 2005 Plans were approved by our stockholders while the 2002 Plan was not submitted for stockholder approval.
Equity Compensation Plans Approved by Stockholders
We have three incentive stock option plans with outstanding options as of April 30, 2006: the 1996 Plan, the 2003 Plan, and the 2005 Plan. The plans provide for the granting of options to purchase shares of our common stock at prices not less than the fair market value of our common stock at the date of grant and generally expire ten years after the date of grant.
The 1996 Plan originally provided for the issuance of options to purchase up to 4,000,000 shares of our common stock. The number of shares for which options may be granted under the 1996 Plan automatically increases for all subsequent common stock issuances by us in an amount equal to 20% of such subsequent issuances up to a maximum of 10,000,000 options as long as the total shares allocated to the 1996 Plan do not exceed 20% of our authorized stock. As a result of issuances of our common stock subsequent to the adoption of the 1996 Plan, the number of shares for which options may be granted has increased to 10,000,000. Options granted generally vest over a period of four years with a maximum term of ten years. As of April 30, 2006, options to purchase 4,321,328 shares of our common stock were outstanding under the 1996 Plan and 56,437 options were available for grant under the 1996 Plan.
During October 2003, our stockholders approved the 2003 Stock Incentive Plan (“2003 Plan”) for the issuance of options to purchase up to 5,000,000 shares of the Company’s common stock. The 2003 Plan provides for the granting of options to purchase shares of our common stock at prices not less than the fair market value of the stock at the date of grant and which generally expire ten years after the date of grant. As of April 30, 2006, options to purchase 4,745,508 shares of our common stock were outstanding under the 2003 Plan and 254,492 options were available for grant under the 2003 Plan.
During October 2005, our stockholders approved the 2005 Stock Incentive Plan (“2005 Plan”) which provides for the granting of stock options to purchase shares of our common stock at prices not less than the fair market value of our common stock on the date of grant or for the direct issuance of stock as a bonus for services rendered. The 2005 Plan provides for the issuance of up to 5,000,000 shares of common stock. Options granted under the 2005 Plan generally expire ten years after the date of grant. As of April 30, 2006, there were no options outstanding to purchase shares of our common stock under the 2005 Plan and 4,971,048 options were available for grant under the 2005 Plan. In addition, during February 2005, the Compensation Committee of the Board of Directors approved a Stock Bonus Plan that would reward key employees and consultants in shares of the Company’s common stock, which shares would be issued under our 2005 Plan. The total options available for grant of 4,971,048 under the 2005 Plan excludes shares of our common stock reserved for under our Stock Bonus Plan due to the uncertainty of achieving the performance milestones that are required to be achieved before shares of common stock are issued under the Stock Bonus Plan. In the event that all remaining milestones were achieved under the Stock Bonus Plan, we would issue up to 1,302,033 additional shares of common stock under the 2005 Plan during fiscal year 2007 for the achievement of performance milestones.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
Equity Compensation Plans Not Approved by Stockholders
During June 2002, we adopted a broad-based non-qualified stock option plan (“2002 Plan”) for the issuance of up to 3,000,000 options. The 2002 Plan provides for the granting of options to purchase shares of our common stock at prices not less than the fair market value of our common stock at the date of grant and generally expire ten years after the date of grant. As of April 30 2006, options to purchase 2,058,779 shares of our common stock were outstanding under the 2002 Plan and 64,441 options were available for grant under the 2002 Plan.
In addition to the 2002 Plan, during 1999, we granted non-qualified options, which are not part of any compensation plan, to purchase up to an aggregate of 1,500,000 shares of our common stock. As of April 30, 2006, options to purchase 181,664 shares of our common stock were outstanding. The resale of the underlying shares of common stock is registered on a registration statement on Form S-3.
Option activity for all option plans for each of the three years ended April 30, 2006 is as follows:
| | | 2006 | | 2005 | | 2004 | |
| | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | |
| BALANCE, | | | | | | | | | | | | | |
| Beginning of year | | | 11,182,640 | | | $1.61 | | | 11,704,205 | | | $1.48 | | | 9,580,458 | | | $1.16 | |
| | | | | | | | | | | | | | | | | | | | |
| Granted | | | 1,128,481 | | | $1.14 | | | 3,149,829 | | | $1.52 | | | 4,187,947 | | | $2.09 | |
| | | | | | | | | | | | | | | | | | | | |
| Exercised | | | (154,230 | ) | | $0.79 | | | (2,120,806 | ) | | $0.66 | | | (1,131,242 | ) | | $0.61 | |
| | | | | | | | | | | | | | | | | | | | |
| Forfeited or Expired | | | (849,612 | ) | | $1.80 | | | (1,550,588 | ) | | $1.77 | | | (932,958 | ) | | $1.99 | |
| BALANCE, | | | | | | | | | | | | | | | | | | | |
| End of year | | | 11,307,279 | | | $1. 56 | | | 11,182,640 | | | $1.61 | | | 11,704,205 | | | $1.48 | |
Additional information regarding options outstanding as of April 30, 2006 is as follows:
| | | Options Outstanding | Options Exercisable |
Range of Per Share Exercise Prices | Number of Shares Outstanding | Weighted Average Remaining Contractual Life (years) | Weighted Average Per Share Exercise Price | Number of Shares Exercisable | Weighted Average Per Share Exercise Price |
| $ 0.34 - $ 1.05 | 2,470,284 | 5.64 | $ 0.63 | 1,765,078 | $ 0.50 |
| $ 1.06 - $ 1.31 | 2,264,616 | 6.23 | $ 1.20 | 1,766,182 | $ 1.21 |
| $ 1.32 - $ 1.62 | 2,412,351 | 7.34 | $ 1.49 | 1,172,135 | $ 1.51 |
| $ 1.63 - $ 2.19 | 558,900 | 6.76 | $ 1.92 | 359,575 | $ 1.95 |
| $ 2.20 - $ 5.28 | 3,601,128 | 7.15 | $ 2.41 | 3,416,562 | $ 2.42 |
| $ 0.34 - $ 5.28 | 11,307,279 | 6.66 | $ 1.56 | 8,479,532 | $ 1.62 |
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2006 (continued)
As of April 30, 2006,2008, we had no warrants outstanding to purchase up to 6,964,653 shares of our common stock at exercise prices ranging between $0.71issued and $2.50 per share with a weighted average exercise price of $0.86 per share.
Additional information regardingoutstanding. In addition, there were no warrants outstanding as of April 30, 2006, is as follows:
Range of Per Share Exercise Prices | | Number of Warrants Outstanding | | Weighted Average Per Share Exercise Price | | Expiration Date or Date Range |
| $0.71 - $0.75 | | 4,916,788 | | $0.71 | | 8/8/06 |
| $0.86 | | 62,865 | | $0.86 | | 6/8/07 |
| $1.00 | | 1,350,000 | | $1.00 | | 11/16/06 |
| $1.47 - $2.50 | | 635,000 | | $1.72 | | 1/31/07 - 3/31/08 |
| $0.71 - $2.50 | | 6,964,653 | | $0.86 | | 8/6/06 - 3/31/08 |
During fiscal years 2005 and 2004, we granted 350,000year 2008, warrants and 150,000 warrants, respectively, under two separate transactions. There were no warrants granted during fiscal year 2006. The relative fair value of the warrants was determined in accordance with the Black-Scholes valuation model based on the underlying warrant terms. The warrants granted during fiscal year 2005 pertain to services being provided by a non-employee consultant. The warrant has a three year term, an exercise price of $1.47 per share, expires March 31, 2008, and was outstanding at April 30, 2006. We utilized the Black-Scholes valuation model to calculate the fair value of the warrant, which was recorded as stock-based compensation in the accompanying consolidated financial statements. The warrants granted in fiscal year 2004 to purchase up to 150,00053,416 shares of our common stock were issued in connection with theexercised for net proceeds of $46,000. During fiscal year 2007, warrants to purchase 6,266,788 shares of our common stock purchase agreement dated June 6, 2003,were exercised for net proceeds of which, 62,865 warrants were outstanding at April 30, 2006. The warrants have a 4-year term with an exercise price of $0.86 per share and expire in June 2007.
$4,836,000. During fiscal year 2006, warrants to purchase 812,512 shares of our common stock were exercised on a cash basis under various transactions for net proceeds of $611,000 and the issuance of 812,512 shares of our common stock. During fiscal year 2005, warrants to purchase 2,495,414 shares of our common stock were exercised on a combined cash and cashless basis under various transactions for net proceeds of $747,000 and the issuance of 2,419,790 shares of our common stock. During fiscal year 2004, warrants to purchase 4,087,871 shares of our common stock were exercised on a combined cash and cashless basis under various transactions for net proceeds of $2,786,000 and the issuance of 4,063,251 shares of our common stock.$611,000.
During fiscal years 2006 and 2005, 5,764,631 and 324,638 warrants, respectively, to purchase shares of common stock expired unexercised.
During fiscal year 2005, Swartz Private Equity, LLC (“SPE”) exercised 699,000 warrants granted in November 1999 in exchange for gross proceeds of $328,000, the exercise of which is included in the total warrant exercises during fiscal year 2005. The warrant was originally granted on November 19, 1999 in consideration of a commitment by SPE to fund a $35,000,000 equity line financing over a three year term at an exercise price of $0.46875 per share. This agreement was entered into and approved by the previous Board of Directors. Mr. Eric Swartz, a member of our Board of Directors, maintains a 50% ownership in SPE. We utilized the Black-Scholes valuation model to calculate the fair value of the warrant, which was recorded as stock-based compensation expense in the accompanying consolidated financial statements.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
During fiscal years 2008, 2007 and 2006, warrants to purchase 369,449, 275,000 and 5,764,631 shares of common stock, respectively, expired unexercised.
10. SEGMENT REPORTING
Our business is organized into two reportable operating segments. Peregrine is engaged in the research and development of targeted therapeuticsmonoclonal antibody products for the treatment of cancer and viral infections and cancerusing monoclonal antibodies.infections. Avid is engaged in providing contract manufacturing of biologicsservices for Peregrine and related services to biopharmaceutical and biotechnology businesses.outside customers on a fee-for-service basis.
The accounting policies of the operating segments are the same as those described in Note 2. We primarily evaluate the performance of our segments based on net revenues, gross profit or loss (exclusive of research and development expenses, selling, general and administrative expenses, and interest and other income/expense) and long-lived assets. Our segment net revenues shown below are derived from transactions with external customers. Our segment gross profit represents net revenues less cost of sales. Our long-lived assets consist of leasehold improvements, laboratory equipment, and furniture, fixtures and computer equipment and are net of accumulated depreciation.
Segment information for fiscal years 2006, 2005 and 2004 is summarized as follows:
| | | 2006 | | 2005 | | 2004 | | | 2008 | | | 2007 | | | 2006 | |
Net Revenues: | | | | | | | | | | | | | | | | | | | |
| Contract manufacturing and development of biologics | | $ | 3,005,000 | | $ | 4,684,000 | | $ | 3,039,000 | | | $ | 5,897,000 | | | $ | 3,492,000 | | | $ | 3,005,000 | |
| Research and development of biotherapeutics | | | 188,000 | | | 275,000 | | | 275,000 | | |
| Total net revenues | | $ | 3,193,000 | | $ | 4,959,000 | | $ | 3,314,000 | | |
| Products in research and development | | | | 196,000 | | | | 216,000 | | | | 188,000 | |
| Total revenues, net | | | $ | 6,093,000 | | | $ | 3,708,000 | | | $ | 3,193,000 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Gross Profit (Loss): | | | | | | | | | | | | | | | | | | | | | | |
| Contract manufacturing and development of biologics | | $ | (292,000 | ) | $ | 283,000 | | $ | 827,000 | | | $ | 1,093,000 | | | $ | 196,000 | | | $ | (292,000 | ) |
| Research and development of biotherapeutics | | | 188,000 | | | 275,000 | | | 275,000 | | |
| Products in research and development | | | | 196,000 | | | | 216,000 | | | | 188,000 | |
| Total gross profit (loss) | | $ | (104,000 | ) | $ | 558,000 | | $ | 1,102,000 | | | $ | 1,289,000 | | | $ | 412,000 | | | $ | (104,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Research and development expense of biotherapeutics | | | (12,415,000 | ) | | (11,164,000 | ) | | (9,673,000 | ) | |
| Research and development expense | | | | (18,279,000 | ) | | (15,876,000 | ) | | (12,415,000 | ) |
| Selling, general and administrative expense | | | (6,564,000 | ) | | (5,098,000 | ) | | (4,225,000 | ) | | | (7,150,000 | ) | | (6,446,000 | ) | | (6,564,000 | ) |
| Net other income (expense) | | | 2,022,000 | | | 252,000 | | | (1,549,000 | ) | |
| Other income, net | | | | 964,000 | | | | 1,114,000 | | | | 2,022,000 | |
| Net loss | | $ | (17,061,000 | ) | $ | (15,452,000 | ) | $ | (14,345,000 | ) | | $ | (23,176,000 | ) | | $ | (20,796,000 | ) | | $ | (17,061,000 | ) |
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
Net revenues generated from Avid during fiscal years 2006, 2005 and 2004 were primarily from the following customers:
| | 2006 | | 2005 | | 2004 | | 2008 | | 2007 | | 2006 | |
Customer revenues as a % of net revenues: | | | | | | | | | | | | |
| United States (customer A) | 73% | | 51% | | 4% | | 84% | | | 11% | | | 73% | |
| United States (customer B) | 2% | | 15% | | 24% | |
| Germany (one customer) | 10% | | 0% | | 3% | | 7% | | | 51% | | | 10% | |
| Israel (one customer) | 1% | | 32% | | 67% | |
| Australia (one customer) | | | 2% | | | 14% | | | 5% | |
| China (one customer) | | | 0% | | | 10% | | | 0% | |
| Other customers | 14% | | 2% | | 2% | | | 7% | | | 14% | | | 12% | |
| Total customer revenues as a % of net revenues | 100% | | 100% | | 100% | | | 100% | | | 100% | | | 100% | |
Net revenues generated from Peregrine during fiscal years 2006, 20052008, 2007 and 20042006 were primarily from annual license fees received under the license agreement with SuperGen, Inc. (Note 7) combined with the amortized portion of an up-front license feefees received under the December 2003two separate license agreement with Schering A.G. (Note 7).agreements.
Long-lived assets consist of the followingfollowing:
| | | 2008 | | | 2007 | |
| Long-lived Assets, net: | | | | | | |
| Contract manufacturing and development of biologics | | $ | 1,825,000 | | | $ | 1,527,000 | |
| Products in research and development | | | 233,000 | | | | 313,000 | |
| Total long-lived assets, net | | $ | 2,058,000 | | | $ | 1,840,000 | |
11. INCOME TAXES
In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN No. 48”), Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Under FIN No. 48, tax positions are recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained upon examination by the tax authorities. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosures and transition.
We adopted the provisions of FIN No. 48 on May 1, 2007. There were no unrecognized tax benefits as of the date of adoption and as a result of the implementation of FIN No. 48, we did not recognize an increase in the liability for unrecognized tax benefits. In addition, there are no unrecognized tax benefits included in our consolidated balance sheet that would, if recognized, affect our effective tax rate.
It is our policy to recognize interest and penalties related to income tax matters in interest and other expense in our consolidated statement of operations. We did not recognize interest or penalties related to income taxes for the fiscal year ended April 30, 2008, and we did not accrue for interest or penalties as of April 30, 2008.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2008 (continued)
We are primarily subject to U.S. federal and California state jurisdictions. To our knowledge, all tax years remain open to examination by U.S. federal and state authorities.
The adoption of FIN No. 48 did not impact our financial condition, results of operations, or cash flows. At April 30, 2008, we had total deferred tax assets of $3,922,000. Due to uncertainties surrounding our ability to generate future taxable income to realize these tax assets, a full valuation has been established to offset our total deferred tax assets. Additionally, the future utilization of our net operating loss and general business and research and development credit carry forwards to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future. We have not yet performed a Section 382 analysis to determine the limitation of the net operating loss and general business and research and development credit carry forwards. Until this analysis has been performed, we have removed the deferred tax assets for net operating losses of $64,107,000 and general business and research and development credits of $118,000 generated through April 30, 2008 from our deferred tax asset schedule and have recorded a corresponding decrease to our valuation allowance. When this analysis is finalized, we plan to update our unrecognized benefits under FIN No. 48. Due to the existence of the valuation allowance, future changes in our unrecognized tax benefits will not impact our effective tax rate.
At April 30, 2008, we had federal net operating loss carry forwards and tax credit carry forwards of approximately $169,948,000 and $118,000, respectively. The net operating loss carry forwards expire in fiscal years 2009 through 2026. The net operating losses of $2,986,000 applicable to Vascular Targeting Technologies, our wholly-owned subsidiary, can only be offset against future income of that subsidiary. The tax credit carry forwards begin to expire in fiscal year 2009 and are available to offset the future taxes of our subsidiary. We also have state net operating loss carry forwards of approximately $101,589,000 at April 30, 2006 and April 30, 2005:
| | | 2006 | | 2005 | |
Long-lived Assets, net: | | | | | | | |
| Contract manufacturing and development of biologics | | $ | 1,516,000 | | $ | 1,291,000 | |
| Research and development of biotherapeutics | | | 390,000 | | | 347,000 | |
| Total long-lived assets, net | | $ | 1,906,000 | | $ | 1,638,000 | |
2008, which begin to expire in fiscal year 2009.
The provision for income taxes consists of the following for the three years ended April 30, 2006:2008:
| | | 2006 | | 2005 | | 2004 | | | 2008 | | | 2007 | | | 2006 | |
| Provision for federal income taxes at statutory rate | | $ | (5,801,000 | ) | $ | (5,254,000 | ) | $ | (4,877,000 | ) | | $ | (7,880,000 | ) | | $ | (7,071,000 | ) | | $ | (5,801,000 | ) |
| State income taxes, net of federal benefit | | | (995,000 | ) | | (902,000 | ) | | (837,000 | ) | | (1,309,000 | ) | | (1,202,000 | ) | | (995,000 | ) |
| Expiration and adjustment of loss carryforwards | | | 719,000 | | | 4,513,000 | | | 891,000 | | |
| Expiration and adjustment of loss carry forwards | | | 64,484,000 | | | 73,000 | | | 719,000 | |
| Change in valuation allowance | | | 6,048,000 | | | 1,628,000 | | | 6,746,000 | | | (55,510,000 | ) | | 8,132,000 | | | 6,048,000 | |
| Increase of effective tax rate for net state deferred tax asset | | | - | | | - | | | (1,941,000 | ) | | - | | | - | | | - | |
| Other, net | | | 29,000 | | | 15,000 | | | 18,000 | | | | 215,000 | | | | 68,000 | | | | 29,000 | |
| Income tax (expense) benefit | | $ | - | | $ | - | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts for income tax purposes. Significant components of our deferred tax assets at April 30, 20062008 and 20052007 are as follows:
| | | 2006 | | 2005 | |
| | | | | | |
| Net operating loss carryforwards | | $ | 48,147,000 | | $ | 41,628,000 | |
| Stock-based compensation | | | 1,676,000 | | | 1,495,000 | |
| General business and research and development credits | | | 118,000 | | | 118,000 | |
| Deferred revenue | | | 233,000 | | | 226,000 | |
| Accrued liabilities | | | 1,126,000 | | | 1,785,000 | |
| | | | | | | | |
| Total deferred tax assets | | | 51,300,000 | | | 45,252,000 | |
| Less valuation allowance | | | (51,300,000 | ) | | (45,252,000 | ) |
| | | | | | | | |
| Net deferred tax assets | | $ | - | | $ | - | |
At April 30, 2006, we had federal net operating loss carryforwards and tax credit carryforwards of approximately $131,000,000 and $118,000, respectively. The net operating loss carryforwards expire in fiscal years 2007 through 2026. The net operating losses of $2,986,000 applicable to Vascular Targeting Technologies, our wholly-owned subsidiary, can only be offset against future income of that subsidiary. The tax credit carryforwards begin to expire in fiscal year 2008 and are available to offset the future taxes or our subsidiary. We also have state net operating loss carryforwards of approximately $68,200,000 at April 30, 2006, which begin to expire in fiscal year 2007.| | | 2008 | | | 2007 | |
| | | | | | | |
| Net operating loss carry forwards | | $ | - | | | $ | 55,756,000 | |
| Stock-based compensation | | | 1,891,000 | | | | 2,067,000 | |
| General business and research and development credits | | | - | | | | 118,000 | |
| Deferred revenue | | | 875,000 | | | | 424,000 | |
| Accrued liabilities | | | 1,156,000 | | | | 1,067,000 | |
| | | | | | | | | |
| Total deferred tax assets | | | 3,922,000 | | | | 59,432,000 | |
| Less valuation allowance | | | (3,922,000 | ) | | | (59,432,000 | ) |
| | | | | | | | | |
| Net deferred tax assets | | $ | - | | | $ | - | |
Due to ownership changes in our common stock, there may be limitations on our ability to utilize our net operating loss carryforwards in the future.12. BENEFIT PLAN
13. | RELATED PARTY TRANSACTION |
During fiscal years 2005 and 2004, we paid Equiplace Securities, LLC (“Equiplace”) $12,000 and $72,000, respectively, for Avid business development services provided by employees of Equiplace under a Finder’s Agreement. Mr. Swartz, a member of our Board of Directors, owns fifty percent (50%) of Equiplace. The Finder Fee Agreement was canceled on June 30, 2004 and no commissions were paid under the agreement.
During fiscal year 1997, we adopted a 401(k) benefit plan (the “Plan”) for all regular employees who are at least the age of 21 work at least 25 hours per week and have three or more months of continuous service. The Plan provides for employee contributions of up to 100% of their compensation or a maximum of $15,000.$15,500. We made no matching contributions to the Plan since its inception.
On June 16, 2006,30, 2008, we entered intowere awarded a Common Stock Purchase Agreementfive-year contract 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 Transformational Medical Technologies Initiative (TMTI) of the U.S. Department of Defense's Defense Threat Reduction Agency (DTRA). This federal contract is expected to provide us with one institutional investor whereby we sold 9,285,714 sharesup to $22.3 million in funding over a 24-month base period, with $5 million appropriated immediately for the current federal fiscal year ending September 30, 2008. The remainder of our common stockthe $22.3 million in exchange for net proceedsfunding is expected to be appropriated over the remainder of $13,000,000 (Note 8).the two-year base period ending June 29, 2010. Subject to the progress of the program and budgetary considerations in future years, the contract can be extended beyond the base period to cover up to $44.4 million in funding over the five-year contract period. Work under this contract commenced on June 30, 2008.
PEREGRINE PHARMACEUTICALS, INC.INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008 (continued)
16. | SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) |
14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial information for each of the two most recent fiscal years is as follows:
| | | | Quarter Ended | |
| | | Quarter Ended | | | April 30, | | | January 31, | | | October 31, | | | July 31, | | | April 30, | | | January 31, | | | October 31, | | | July 31, | |
| | | April 30, | | | January 31, | | October 31, | | July 31, | | | April 30, | | | January 31, | | October 31, | | July 31, | | | 2008 | | | 2008 | | | 2007 | | | 2007 | | | 2007 | | | 2007 | | | 2006 | | | 2006 | |
| | | 2006 | | | 2006 | | 2005 | | 2005 | | | 2005 | | | 2005 | | 2004 | | 2004 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net revenues | | $ | 901,000 | | | $ | 1,528,000 | | $ | 556,000 | | $ | 208,000 | | | $ | 919,000 | | | $ | 1,353,000 | | $ | 2,183,000 | | $ | 504,000 | | | $ | 901,000 | | | $ | 1,675,000 | | | $ | 1,892,000 | | | $ | 1,625,000 | | | $ | 2,240,000 | | | $ | 363,000 | | | $ | 684,000 | | | $ | 421,000 | |
| Cost of sales | | $ | 1,477,000 | | (a) | $ | 1,088,000 | | $ | 428,000 | | $ | 304,000 | | (b) | $ | 1,136,000 | | (c) | $ | 1,273,000 | | $ | 1,544,000 | | $ | 448,000 | | | $ | 932,000 | (a) | | $ | 1,289,000 | | | $ | 1,402,000 | | | $ | 1,181,000 | | | $ | 2,049,000 | | | $ | 223,000 | | | $ | 494,000 | | | $ | 530,000 | (b) |
| Gross profit (loss) | | $ | (576,000 | ) | | $ | 440,000 | | $ | 128,000 | | $ | (96,000 | ) | | $ | (217,000 | ) | | $ | 80,000 | | $ | 639,000 | | $ | 56,000 | | | $ | (31,000 | ) | | $ | 386,000 | | | $ | 490,000 | | | $ | 444,000 | | | $ | 191,000 | | | $ | 140,000 | | | $ | 190,000 | | | $ | (109,000 | ) |
| Operating expenses | | $ | 4,934,000 | | | $ | 4,922,000 | | $ | 4,814,000 | | $ | 4,309,000 | | | $ | 4,498,000 | | | $ | 3,886,000 | | $ | 4,341,000 | | $ | 3,537,000 | | | $ | 6,266,000 | | | $ | 6,788,000 | | | $ | 7,043,000 | | | $ | 5,332,000 | | | $ | 5,630,000 | | | $ | 5,420,000 | | | $ | 5,590,000 | | | $ | 5,682,000 | |
| Net loss | | $ | (5,038,000 | ) | | $ | (3,113,000 | ) | $ | (4,571,000 | ) | $ | (4,339,000 | ) | | $ | (4,657,000 | ) | | $ | (3,744,000 | ) | $ | (3,638,000 | ) | $ | (3,413,000 | ) | | $ | (6,159,000 | ) | | $ | (6,154,000 | ) | | $ | (6,207,000 | ) | | $ | (4,656,000 | ) | | $ | (5,244,000 | ) | | $ | (5,025,000 | ) | | $ | (5,070,000 | ) | | $ | (5,457,000 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Basic and diluted loss per common share | | $ | (0.02 | ) | | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.03 | ) | | $ | (0.03 | ) | | $ | (0.03 | ) | $ | (0.03 | ) | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.03 | ) | | $ | (0.02 | ) | | $ | (0.02 | ) | | $ | (0.03 | ) | | $ | (0.03 | ) | | $ | (0.03 | ) |
______________
| (a) | Cost of sales for the quarter ended April 30, 20062008 includes the write-off of unusable work-in-process inventory generated during the quarter ended April 30, 2006associated with two customers, which in the amount of $698,000 combined with a contract loss provision associated with one customer in the amount of $184,000.aggregate totaled $381,000. |
| (b) | Cost of sales for the quarter ended July 31, 2005 includes additional costs incurred during the quarter ended July 31, 2005 to provide additional data to support required studies for current customers. |
(c) | Cost of sales for the quarter ended April 30, 20052006 includes the write-off of unusable work-in-process inventory generated during the quarter ended April 30, 2005combined with an estimated contract loss provision associated with one customer, which in the amount of $605,000.aggregate totaled $208,000. |
SCHEDULE II| PEREGRINE PHARMACEUTICALS, INC. | SCHEDULE II |
VALUATION OF QUALIFYING ACCOUNTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 20062008
| | | Balance at | | Charged | | | | Balance | |
| | | Beginning | | to costs and | | | | at end | |
Description | | of period | | expenses | | Deductions | | of period | |
| | | | | | | | | | |
Valuation reserve for note and other receivables for the year ended April 30, 2004 | | $ | 1,704,000 | | $ | - | | $ | (59,000 | ) | $ | 1,645,000 | |
| | | | | | | | | | | | | | |
Valuation reserve for note and other receivables for the year ended April 30, 2005 | | $ | 1,645,000 | | $ | - | | $ | (64,000 | ) | $ | 1,581,000 | |
| | | | | | | | | | | | | | |
Valuation reserve for note and other receivables for the year ended April 30, 2006 | | $ | 1,581,000 | | $ | - | | $ | (1,581,000 | ) | $ | - | |
| | | Balance at | | | Charged | | | | | | Balance | |
| | | Beginning | | | to costs and | | | | | | at end | |
| Description | | of period | | | expenses | | | Deductions | | | of period | |
| | | | | | | | | | | | | |
| Valuation reserve for note and other receivables for the year ended April 30, 2006 | | $ | 1,581,000 | | | $ | - | | | $ | (1,581,000 | ) | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Valuation reserve for note and other receivables for the year ended April 30, 2007 | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Valuation reserve for note and other receivables for the year ended April 30, 2008 | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
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