Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

FORM 10-Q

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

 

For the quarterly period ended January 31, 20172018

 

OR

 

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

 

For the transition period from _______________ to _______________

 

Commission file number: 001-32839

 

PEREGRINE PHARMACEUTICALS,AVID BIOSERVICES, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware 95-3698422

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

incorporation or organization)

Identification No.)

   
14282 Franklin Avenue,2642 Michelle Drive, Suite 200, Tustin, California 92780
(Address of principal executive offices)(Zip Code)

(714) 508-6000508-6100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesý Noo

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check(check one):

Large Accelerated Fileraccelerated filer oAccelerated filer xAccelerated Filer ý
Non- Accelerated FilerNon-accelerated filer oSmaller reporting companyo

(Do not check if a smaller reporting company)
Smaller reporting company o
  Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso     No  ý

 

As of March 10, 2017,7, 2018, there were 297,709,47855,552,233 shares of common stock, $0.001 par value, outstanding.

 

 

   

 

 

PEREGRINE PHARMACEUTICALS,AVID BIOSERVICES, INC.

TABLE OF CONTENTS

 

 PageNo.
PART I - FINANCIAL INFORMATION1
Item 1.Condensed Consolidated Financial Statements.1
Item 2.Management’s Discussion and Analysis of Financial Condition And Results of Operations.18
Item 3.Quantitative and Qualitative Disclosures About Market Risk.2524
Item 4.Controls And Procedures.25
24
PART II - OTHER INFORMATION2624
Item 1.Legal Proceedings.2624
Item 1A.Risk Factors.2624
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.2830
Item 3.Defaults Upon Senior Securities.2830
Item 4.Mine Safety Disclosures.2830
Item 5.Other Information.2830
Item 6.Exhibits.28
31
SIGNATURES2932

 

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

 

 

 

 i 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements.

 

PEREGRINE PHARMACEUTICALS,avid bioservices, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

  

 

JANUARY 31,

2017

  

APRIL 30,

2016

 
   Unaudited   (Note 2) 
ASSETS        
CURRENT ASSETS:        
Cash and cash equivalents $41,528,000  $61,412,000 
Trade and other receivables  5,883,000   2,859,000 
Inventories  33,829,000   16,186,000 
Prepaid expenses and other current assets  1,747,000   1,351,000 
Total current assets  82,987,000   81,808,000 
Property and equipment, net  24,143,000   24,302,000 
Restricted cash  600,000   600,000 
Other assets  3,587,000   2,333,000 
TOTAL ASSETS $111,317,000  $109,043,000 
LIABILITIES AND STOCKHOLDERS’ EQUITY        
CURRENT LIABILITIES:        
Accounts payable $7,696,000  $8,429,000 
Accrued clinical trial and related fees  3,127,000   7,594,000 
Accrued payroll and related costs  5,637,000   5,821,000 
Deferred revenue  26,367,000   10,030,000 
Customer deposits  26,210,000   24,212,000 
Other current liabilities  941,000   1,488,000 
Total current liabilities  69,978,000   57,574,000 
         
Deferred rent, less current portion  1,325,000   1,395,000 
         
Commitments and contingencies        
         
STOCKHOLDERS' EQUITY:        
Preferred stock—$0.001 par value; authorized 5,000,000 shares; 1,647,760 and 1,577,440 issued and outstanding at January 31, 2017 and April 30, 2016, respectively  2,000   2,000 
Common stock—$0.001 par value; authorized 500,000,000 shares; 271,068,464 and 236,930,485 issued and outstanding at January 31, 2017 and April 30, 2016, respectively  271,000   237,000 
Additional paid-in capital  571,904,000   559,111,000 
Accumulated deficit  (532,163,000)  (509,276,000)
Total stockholders’ equity  40,014,000   50,074,000 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $111,317,000  $109,043,000 

  

January 31,

2018

  

April 30,

2017

 
   Unaudited   (Note 2) 
ASSETS        
Current assets:        
Cash and cash equivalents $17,938,000  $46,799,000 
Trade and other receivables  7,967,000   7,742,000 
Inventories  14,218,000   33,099,000 
Prepaid expenses  906,000   1,460,000 
Total current assets  41,029,000   89,100,000 
Property and equipment, net  26,325,000   26,515,000 
Restricted cash  1,150,000   1,150,000 
Other assets  1,353,000   1,347,000 
Total assets $69,857,000  $118,112,000 
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $1,911,000  $5,779,000 
Accrued clinical trial and related fees  5,503,000   4,558,000 
Accrued payroll and related costs  3,876,000   6,084,000 
Deferred revenue  6,633,000   28,500,000 
Customer deposits  17,602,000   17,017,000 
Other current liabilities  749,000   993,000 
Total current liabilities  36,274,000   62,931,000 
         
Deferred rent, less current portion  2,064,000   1,599,000 
         
Commitments and contingencies        
         
Stockholders’ equity:        
Preferred stock—$0.001 par value; authorized 5,000,000 shares; 1,647,760 issued and outstanding at January 31, 2018 and April 30, 2017, respectively  2,000   2,000 
Common stock—$0.001 par value; authorized 500,000,000 shares; 45,257,180 and 44,014,040 issued and outstanding at January 31, 2018 and April 30, 2017, respectively  45,000   44,000 
Additional paid-in capital  593,621,000   590,971,000 
Accumulated deficit  (562,149,000)  (537,435,000)
Total stockholders’ equity  31,519,000   53,582,000 
Total liabilities and stockholders’ equity $69,857,000  $118,112,000 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 1 

 

 

PEREGRINE PHARMACEUTICALS,avid bioservices, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and comprehensive loss (UNAUDITED)

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2018  2017  2018   2017 
              
Contract manufacturing revenue $6,819,000  $10,747,000  $46,678,000  $39,726,000 
Cost of contract manufacturing  10,951,000   7,974,000   47,641,000   26,477,000 
Gross profit (loss)  (4,132,000)  2,773,000   (963,000)  13,249,000 
                 
Operating expenses:                
Selling, general and administrative  4,824,000   4,365,000   12,273,000   13,602,000 
Restructuring charges        1,258,000    
Total operating expenses  4,824,000   4,365,000   13,531,000   13,602,000 
                 
Operating loss  (8,956,000)  (1,592,000)  (14,494,000)  (353,000)
                 
Other income (expense):                
Interest and other income  42,000   25,000   83,000   71,000 
Interest and other expense  (14,000)  (2,000)  (18,000)  (2,000)
                 
Loss from continuing operations $(8,928,000) $(1,569,000) $(14,429,000) $(284,000)
Loss from discontinued operations  (2,076,000)  (6,205,000)  (10,404,000)  (22,603,000)
Net loss $(11,004,000) $(7,774,000) $(24,833,000) $(22,887,000)
                 
Comprehensive loss $(11,004,000) $(7,774,000) $(24,833,000) $(22,887,000)
                 
Series E preferred stock accumulated dividends  (1,442,000)  (1,442,000)  (3,604,000)  (3,558,000)
                 
Net loss attributable to common stockholders $(12,446,000) $(9,216,000) $(28,437,000) $(26,445,000)
                 
Basic and diluted weighted average common shares outstanding(1):  45,225,804   37,258,794   45,032,335   35,486,782 
                 
Basic and diluted net loss per common share attributable to common stockholders(1):                
Continuing operations $(0.23) $(0.08) $(0.40) $(0.11)
Discontinued operations $(0.05) $(0.17) $(0.23) $(0.64)
Net loss per share attributable to common stockholders $(0.28)  (0.25) $(0.63) $(0.75)

(1) All share and per share amounts of our common stock for all prior fiscal year periods presented have been retroactively adjusted to reflect the one-for-seven reverse stock split of our issued and outstanding common stock, which took effect on July 10, 2017 (Note 1).

 

 

 

THREE MONTHS ENDED

JANUARY 31,

  

NINE MONTHS ENDED

JANUARY 31,

 
  2017  2016  2017  2016 
REVENUES:            
Contract manufacturing revenue $10,747,000  $6,672,000  $39,726,000  $25,574,000 
License revenue     37,000      329,000 
     Total revenues  10,747,000   6,709,000   39,726,000   25,903,000 
                 
COSTS AND EXPENSES:                
Cost of contract manufacturing  7,974,000   3,896,000   26,477,000   13,245,000 
Research and development  5,989,000   15,156,000   21,580,000   43,264,000 
Selling, general and administrative  4,581,000   4,524,000   14,625,000   13,839,000 
     Total costs and expenses  18,544,000   23,576,000   62,682,000   70,348,000 
                 
LOSS FROM OPERATIONS  (7,797,000)  (16,867,000)  (22,956,000)  (44,445,000)
                 
OTHER INCOME (EXPENSE):                
Interest and other income  25,000   34,000   71,000   691,000 
Interest and other expense  (2,000)  (14,000)  (2,000)  (14,000)
     Total other income, net  23,000   20,000   69,000   677,000 
                 
NET LOSS $(7,774,000) $(16,847,000) $(22,887,000) $(43,768,000)
                 
comprehensive loss $(7,774,000) $(16,847,000) $(22,887,000) $(43,768,000)
                 
Series E preferred stock accumulated dividends  (1,442,000)  (1,380,000)  (3,558,000)  (3,448,000)
                 
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(9,216,000) $(18,227,000) $(26,445,000) $(47,216,000)
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                
     Basic and Diluted  260,811,553   227,389,225   248,407,470   209,549,670 
                 
BASIC AND DILUTED LOSS PER COMMON SHARE $(0.04) $(0.08) $(0.11) $(0.23)

See accompanying notes to condensed consolidated financial statements.

 

 

 

 2 

 

 

PEREGRINE PHARMACEUTICALS,avid bioservices, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

  

Nine Months Ended

January 31,

 
  2018  2017 
       
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(24,833,000) $(22,887,000)
Adjustments to reconcile net loss to net cash used in operating activities:        
Share-based compensation  1,206,000   2,591,000 
Depreciation and amortization  1,945,000   1,850,000 
Loss on disposal of property and equipment  401,000    
Changes in operating assets and liabilities:        
Trade and other receivables  (225,000)  (3,024,000)
Inventories  18,881,000   (17,643,000)
Prepaid expenses  554,000   (396,000)
Other non-current assets  9,000   233,000 
Accounts payable  (3,895,000)  (1,153,000)
Accrued clinical trial and related fees  945,000   (4,467,000)
Accrued payroll and related expenses  (2,208,000)  (184,000)
Deferred revenue  (21,867,000)  16,337,000 
Customer deposits  585,000   1,998,000 
Other accrued expenses and current liabilities  (64,000)  (801,000)
Deferred rent, less current portion  465,000   (70,000)
         
Net cash used in operating activities  (28,101,000)  (27,616,000)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Property and equipment acquisitions  (2,129,000)  (2,644,000)
(Increase) decrease in other assets  (15,000)  205,000 
         
Net cash used in investing activities  (2,144,000)  (2,439,000)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from issuance of common stock, net of issuance costs of $111,000 and $340,000, respectively  4,193,000   11,604,000 
Proceeds from issuance of Series E preferred stock, net of issuance costs of nil and $58,000, respectively     1,576,000 
Proceeds from issuance of common stock under Employee Stock Purchase Plan  217,000   254,000 
Proceeds from exercise of stock options  398,000    
Dividends paid on Series E preferred stock  (3,244,000)  (3,198,000)
Principal payments on capital lease  (180,000)  (65,000)
Net cash provided by financing activities  1,384,000   10,171,000 
         
NET DECREASE IN CASH AND CASH EQUIVALENTS  (28,861,000)  (19,884,000)
         
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD  46,799,000   61,412,000 
         
CASH AND CASH EQUIVALENTS AT END OF PERIOD $17,938,000  $41,528,000 
         
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Accounts payable for purchase of property and equipment $27,000  $420,000 
Property and equipment acquired under capital lease $  $319,000 

 

  

NINE MONTHS ENDED

JANUARY 31,

 
  2017  2016 
       
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(22,887,000) $(43,768,000)
Adjustments to reconcile net loss to net cash used in operating activities:        
Share-based compensation  2,591,000   3,740,000 
Depreciation and amortization  1,850,000   921,000 
Loss on disposal of property and equipment     14,000 
Changes in operating assets and liabilities:        
Trade and other receivables  (3,024,000)  (4,786,000)
Inventories  (17,643,000)  (7,835,000)
Prepaid expenses and other current assets  (396,000)  (991,000)
Other non-current assets  233,000   (211,000)
Accounts payable  (1,153,000)  (4,289,000)
Accrued clinical trial and related fees  (4,467,000)  3,065,000 
Accrued payroll and related expenses  (184,000)  (109,000)
Deferred revenue  16,337,000   8,788,000 
Customer deposits  1,998,000   11,070,000 
Other accrued expenses and current liabilities  (801,000)  610,000 
Deferred rent, less current portion  (70,000)  (193,000)
Net cash used in operating activities  (27,616,000)  (33,974,000)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Property and equipment acquisitions  (1,280,000)  (7,909,000)
(Increase) decrease in other assets  (1,159,000)  426,000 
Net cash used in investing activities  (2,439,000)  (7,483,000)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from issuance of common stock, net of issuance costs of $340,000 and $633,000, respectively  11,604,000   43,498,000 
Proceeds from issuance of Series E preferred stock, net of issuance costs of $58,000 and $1,000, respectively  1,576,000   59,000 
Proceeds from issuance of common stock under Employee Stock Purchase Plan  254,000   334,000 
Proceeds from exercise of stock options     138,000 
Dividends paid on Series E preferred stock  (3,198,000)  (3,103,000)
Principal payments on capital lease  (65,000)   
Net cash provided by financing activities  10,171,000   40,926,000 
         
NET DECREASE IN CASH AND CASH EQUIVALENTS  (19,884,000)  (531,000)
         
CASH AND CASH EQUIVALENTS, beginning of period  61,412,000   68,001,000 
         
CASH AND CASH EQUIVALENTS, end of period $41,528,000  $67,470,000 
         
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:        
Accounts payable and other liabilities for purchase of property and equipment and other assets $420,000  $1,748,000 
Property and equipment acquired under capital lease $319,000    

See accompanying notes to condensed consolidated financial statements.

 

 

 3 

 

 

PEREGRINE PHARMACEUTICALS,avid bioservices, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE NINEnine MONTHS ENDED JANUARYjanuary 31, 2017 (unaudited)2018 (unaudited)

 

1.       ORGANIZATION AND BUSINESS

 

Business DescriptionWe are a biopharmaceutical company committed to improving the lives of patients by manufacturing pharmaceutical products through our wholly-owned subsidiary Avid Bioservices, Inc. (“Avid”), a contract development and manufacturing organization (“CDMO”) that provides a comprehensive range of services from process development to current Good Manufacturing Practices (“cGMP”) commercial manufacturing focused on biopharmaceutical products derived from mammalian cell culture for biotechnology and through advancing and licensing our novel, development-stage immunotherapy products.pharmaceutical companies.

 

Sale of Research and Development Assets—On February 12, 2018, we entered into an Asset Assignment and Purchase Agreement with a third-party oncology therapeutics company pursuant to which we sold to the third-party oncology therapeutics company the majority of our research and development assets, which included the assignment of certain exclusive licenses related to our former phosphatidylserine (PS)-targeting program (Note 10). As a result of (i) the sale of our PS-targeting program, (ii) the held for sale classification of our R84 technology, (iii) the abandonment of our remaining research and development assets (including our intent to return the exosome technology back to the original licensor), and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business, the operating results from our research and development segment are reported as a loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 2).

Corporate Name Change—Effective January 5, 2018, we changed our name from Peregrine Pharmaceuticals, Inc. to Avid Bioservices, Inc. in connection with the strategic shift in our corporate direction.

Reverse Stock Split—On July 7, 2017, we effected a reverse stock split of our outstanding shares of common stock at a ratio of one-for-seven pursuant to our filed Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware. The reverse stock split took effect with the opening of trading on July 10, 2017. The primary purpose of the reverse stock split, which was approved by our stockholders at our 2016 Annual Meeting on October 13, 2016, was to enable us to regain compliance with the $1.00 minimum bid price requirement for continued listing on The NASDAQ Capital Market. Pursuant to the reverse stock split, every seven shares of our issued and outstanding shares of common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par value per share of our common stock. All share and per share amounts of our common stock included in the accompanying unaudited condensed consolidated financial statements have been retrospectively adjusted to give effect to the reverse stock split for all periods presented, including reclassifying an amount equal to the reduction in par value to additional paid-in capital. No fractional shares were issued in connection with the reverse stock split. Any fractional share of common stock created by the reverse stock split was rounded up to the nearest whole share. The number of authorized shares of our common stock remained unchanged.

The reverse stock split affected all issued and outstanding shares of our common stock, as well as the shares of common stock underlying our stock options, employee stock purchase plan, warrants and the general conversion right with respect to our 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”).

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for a complete set of financial statements. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended April 30, 2016.2017. The condensed consolidated balance sheet at April 30, 20162017 has been derived from audited financial statements at that date. The unaudited financial information for the interim periods presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments. Results of operations for interim periods covered by this Quarterly Report on Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or any other interim period.

 

4

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

The unaudited condensed consolidated financial statements include the accounts of PeregrineAvid Bioservices, Inc., and Avid.its subsidiaries. All intercompany accounts and transactions among the consolidated entities have been eliminated in the unaudited condensed consolidated financial statements.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts, as well as disclosures of commitments and contingencies in the financial statements and accompanying notes. Actual results could differ materially from those estimates and assumptions.

 

Liquidity and Financial ConditionDiscontinued Operations

 

AtAs of January 31, 2017,2018, our research and development segment met all the conditions to be classified as a discontinued operation (Note 1). Accordingly, the operating results of our research and development segment are reported as a loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. For additional information, see Note 10, “Sale of Research and Development Assets”.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that we had $41,528,000 in cash and cash equivalents. are unable to continue as a going concern.

We have expended substantial funds on our contract manufacturing business and, historically, on the research and development of ourpharmaceutical product candidates, and funding the operations of Avid.candidates. As a result, we have historically experienced losses and negative cash flows from operations since our inception and, although we have discontinued our research and development segment (Note 1), we expect negative cash flows from operations to continue until at leastfor the fiscal year ending April 30, 2018 before we believeforeseeable future until we can generate sufficient revenue from Avid’s contract manufacturing services to achieve profitability. Therefore, unless and until we are able to generate sufficient revenue, from Avid’s contract manufacturing services or from the sale or licensing of our product candidates under development, we expect such losses to continue through at leastduring the remainder of fiscal year ending April 30, 2018.2018 and in the foreseeable future.

 

Our ability to continue to fund our operations is highly dependent on the amount of cash on hand and our ability to generate sufficient revenue to cover our operations. At January 31, 2018, we had $17,938,000 in cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, (i) raising additional capital in the equity markets, (ii) generating additional revenue from Avid, or (iii) licensing or partnering our product candidates in development.

Historically, we have funded a significant portion of our operations through the issuance of equity. During the nine months ended January 31, 2017,and during February 2018, we raised $11,944,000$23,163,000 in aggregate gross proceeds from the sale of shares of our common stock and raisedpursuant to an additional $1,634,000underwritten public offering (Note 13). In addition, we expect to receive an aggregate of $8,000,000 in aggregate gross proceedsupfront payments over the next six (6) months from the recent sale of sharescertain of our 10.5% Series E Convertible Preferred Stock (the “Series E Preferred Stock”)research and development assets (Note 6)10). Subsequent to January 31, 2017 and through March 13, 2017, we raised an additional $13,341,000 in aggregate gross proceeds from the sale of shares of our common stock (Note 11). As of March 13, 2017, $77,970,000 remained available to us under our effective shelf registration statement, which allows us from time to time to offer and sell shares of our common stock, in one or more offerings, either individually or in combination.

 

4

PEREGRINE PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JANUARY 31, 2017 (unaudited) (continued)

In the event we are unable to secure sufficient business to support our operations beyond the next twelve months, we may need to raise additional capital in the future. Our ability to raise additional capital in the equity markets to fund our obligations in future periods is dependent on a number of factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties, including but not limited to, negative economic conditions, adverse market conditions, and adverse financial results, and negative research and development results. Furthermore, our ability to raise additional capital in the equity markets has been significantly impacted by the decline in the market price of our common stock following our announcement in February 2016 that we were discontinuing the Phase III SUNRISE trial. As a result, we have experienced a substantial decline in the amount of additional capital that we have been able to raise from the sale of shares of our common stock as compared to recent fiscal years. If the market price of our common stock does not improve significantly, we may not be able to rely on the sale of shares of our common stock to fund our operations to the extent we have in prior years. If we are unable to either (i) raise sufficient capital in the equity markets (ii)or generate additional revenue, from Avid, or (iii) license or partner our products in development, or any combination thereof, we may need to delay, scale back,further restructure, or eliminate some or allcease, our research and development efforts, or restructure our operations, which may include delaying the planned expansion of our contract manufacturing business.operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.

As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that our accompanying unaudited condensed consolidated financial statements are issued.

Reclassification

Certain prior year amounts related to other assets have been reclassified to property and equipment in our accompanying condensed consolidated balance sheet for the fiscal year ended April 30, 2017 and in our accompanying unaudited condensed consolidated statement of cash flows for the nine months ended January 31, 2017 to conform to the current period presentation. This reclassification had no effect on previously reported net loss.

5

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

In addition, certain amounts related to corporate overhead costs that were allocated to the research and development segment have been reclassified from research and development expense to selling, general and administrative expense in our accompanying unaudited condensed consolidated statements of operations and comprehensive loss for all periods presented (Note 10). This reclassification had no effect on previously reported net loss.

Restructuring

Restructuring charges consist of one-time termination benefits, including severance and other employee related costs related to a workforce reduction pursuant to a restructuring plan we implemented in August 2017 (Note 9). One-time termination benefits are expensed at the date we notified the employee, unless the employee was required to provide future service, in which case the benefits are expensed ratably over the future service period.

 

Cash and Cash Equivalents

 

We consider all short-term investments readily convertible to cash with an initial maturity of three months or less to be cash equivalents.

 

Restricted Cash

 

Under the terms of twothree separate operating leases related to our facilities, we are required to maintain, as collateral, letters of credit during the terms of such leases. At January 31, 20172018 and April 30, 2016, we had2017, restricted cash of $600,000, in aggregate,$1,150,000 was pledged as collateral under these letters of credit.

 

Concentrations of Credit Risk and Customer Base

 

Financial instruments that potentially subject us to a significant concentration of credit risk consist of cash and cash equivalents, restricted cash and trade receivables. We maintain our cash and restricted cash balances primarily with one major commercial bank and our deposits held with the bank exceed the amount of government insurance limits provided on our deposits. We are exposed to credit risk in the event of default by the major commercial bank holding our cash and restricted cash balances to the extent of the cash and restricted cash amounts recorded on the accompanying interim unaudited condensed consolidated balance sheet.

 

Our trade receivables from amounts billed for contract manufacturing services provided by Avid have historically been derived from a small customer base. Most contracts require up-front payments and installment payments during the service period. We perform periodic evaluations of the financial condition of our customers and generally do not require collateral, but we can terminate any contract if a material default occurs. At January 31, 20172018 and April 30, 2016,2017, approximately 98%94% and 93%, respectively, of our trade receivables were due from four customers.

 

In addition, contract manufacturing revenue generated by Avid has historically been derived from a small customer base (Note 9). Thesebase. Historically, these customers typically dohave not enterentered into long-term contracts because their need for drug supply depends on a variety of factors, including the drug’sproduct’s stage of development, the timing of regulatory filings and approvals, the product needs of their collaborators, if applicable, their financial resources and the market demand with respect to commercial drugs, demandproducts. During the three and nine months ended January 31, 2018, approximately, 53% and 78%, respectively, of our contract manufacturing revenue was derived from our two largest customers.

Based on our current commitments for the drug in the market. Ourmanufacturing services from our two largest customers, we expect our future results of operations couldto be adversely affected if revenueuntil we are able to further expand and diversify our customer base.

Comprehensive Loss

Comprehensive loss is defined as the change in equity during a period from any onetransactions and other events and circumstances from non-owner sources. Comprehensive loss is equal to our net loss for all periods presented.

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avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

Impairment

Long-lived assets are reviewed for impairment in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. Long-lived assets are reported at the lower of carrying amount or fair value less cost to sell. For the nine months ended January 31, 2018 and 2017, there were no indicators of impairment of the value of our primarylong-lived assets.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:

·Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.
·Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets or liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.
·Level 3 – Unobservable inputs that are supported by little or no market activity and significant to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation techniques and assumptions.

As of January 31, 2018 and April 30, 2017, we do not have any Level 2 or Level 3 financial assets or liabilities and our cash equivalents, which are primarily invested in money market funds with one major commercial bank, are carried at fair value based on quoted market prices for identical securities (Level 1 input). In addition, there were no transfers between any Levels of the fair value hierarchy during the three and nine months ended January 31, 2018 and 2017.

Customer Deposits

Customer deposits primarily represent advance billings and/or payments received for services or raw materials from our third-party customers is significantly reduced or eliminated.prior to the initiation of contract manufacturing services.

 

Revenue Recognition

 

We currently derive revenue from our contract manufacturing services provided by Avid.to our third-party customers. We recognize revenue in accordance with the authoritative guidance for revenue recognition when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery (or passage of title) has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. We also comply with the authoritative guidance for revenue recognition regarding arrangements with multiple elements.

 

5

PEREGRINE PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JANUARY 31, 2017 (unaudited) (continued)

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer or licensing partner.customer. When deliverables are separable, consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units, which may require the use of significant judgement. Deliverables are considered separate units of accounting if (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

 

Arrangement consideration is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (“VSOE”) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, we use our best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under any agreement.

 

Contract Manufacturing Revenue

7

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

Revenue associated with contract manufacturing services provided by Avid is recognized when all four of the aforementioned revenue recognition criteria have been met. For arrangements that include multiple elements, we follow the authoritative guidance for revenue recognition regarding arrangements with multiple deliverables, as described above.

 

On occasion, we receive requests from customers to hold product that we have manufactured by Avid on a “bill-and-hold” basis. Revenue is recognized for suchthese “bill-and-hold” arrangements in accordance with the authoritative guidance, which requires, among other things, the existence of a valid business purpose for the arrangement; the “bill-and-hold” arrangement is at the request of the customer; title and risk of ownership must pass to the customer; the product is complete and ready for shipment; a fixeddelivery date that is reasonable and consistent with the customer’s business practices; the product has been separated from our inventory; and no further performance obligations by us exist.

 

In addition, we also follow the authoritative guidance when reporting revenue as gross when we act as a principal versus reporting revenue as net when we act as an agent. For transactions in which we act as a principal, have discretion to choose suppliers, bear credit and inventory risk and perform a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.

 

Any amounts received prior to satisfying our revenue recognition criteria are recorded as deferred revenue or customer deposits in the accompanying unaudited condensed consolidated financial statements. We also record a provision for estimated contract losses, if any, in the period in which they are determined.

 

Impairment

Long-lived assets are reviewed for impairment in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. Long-lived assets are reported at the lower of carrying amount or fair value less cost to sell. For the nine months ended January 31, 2017 and 2016, there was no impairment of the value of our long-lived assets.

6

PEREGRINE PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JANUARY 31, 2017 (unaudited) (continued)

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:

·Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.
·Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets or liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.
·Level 3 – Unobservable inputs that are supported by little or no market activity and significant to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation techniques and assumptions.

As of January 31, 2017 and April 30, 2016, we do not have any Level 2 or Level 3 financial assets or liabilities and our cash equivalents, which are primarily invested in money market funds with one major commercial bank, are carried at fair value based on quoted market prices for identical securities (Level 1 input).

Customer Deposits

Customer deposits primarily represent advance billings and/or payments received from Avid’s third-party customers prior to the initiation of contract manufacturing services.

Research and Development Expenses

Research and development expenses primarily include (i) payroll and related costs, including share-based compensation associated with research and development personnel, (ii) costs related to clinical trials and preclinical 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) expenses for research services provided by universities and contract laboratories, including sponsored research funding, and (v) other research and development expenses. Research and development expenses are charged to expense as incurred when these expenditures relate to our research and development efforts and have no alternative future uses.

Clinical trial costs are a significant component of our research and development expenses. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the ongoing development of our product candidates. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flow. Expenses related to clinical trials are accrued based on our estimates and/or representations from third parties (including clinical research organizations) regarding services performed. If the contracted amounts are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), we modify our accruals accordingly on a prospective basis. Revisions in the scope of a contract are charged to expense in the period in which the facts that give rise to the revision become reasonably certain. There were no material adjustments for a change in estimate to research and development expenses in the accompanying unaudited condensed consolidated financial statements for the three and nine months ended January 31, 2017 and 2016.

Under certain research and development agreements, we are obligated to make certain advance payments, including nonrefundable amounts, for goods or services that will be used or rendered for future research and development activities and are deferred and capitalized as prepaid research and development expenses. These advance payments are recognized as an expense in the period the related goods are delivered or the related services are performed. We assess our prepaid research and development expenses for impairment when events or changes in circumstances indicate that the carrying amount of the prepaid expense may not be recoverable or provide future economic benefit.

In addition, under certain in-licensing agreements associated with the research and development of our product candidates, we are obligated to pay certain milestone payments based on potential clinical development and regulatory milestones. These milestone payments have no alternative future uses (in other research and development projects or otherwise) and therefore have no separate economic values and are expensed as research and development costs at the time the costs are incurred. We have no in-licensed product candidates that have alternative future uses in research and development projects or otherwise.

7

PEREGRINE PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JANUARY 31, 2017 (unaudited) (continued)

Share-based Compensation

 

We account for stock options and other share-based awards granted under our equity compensation plans in accordance with the authoritative guidance for share-based compensation. The estimated fair value of share-based payments to employees in exchange for services is measured at the grant date, using a fair value based method, such as a Black-Scholes option valuation model, and is recognized as expense on a straight-line basis over the requisite service periods. The fair value of modifications to share-based awards, if any, is generally estimated using a Black-Scholes option valuation model, unless a lattice model is required. Share-basedForfeitures are recognized as a reduction of share-based compensation expense recognized during the period is based on the value of the portion of the share-based payment that is ultimately expected to vest during the period.as they occur. As of January 31, 2017,2018, there were no outstanding share-based awards with market or performance conditions.

 

Periodically,Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from the maximum federal statutory rate of 35% to 21%. The Tax Act states that the 21% U.S. federal corporate tax rate is effective for tax years beginning on or after January 1, 2018. However, existing tax law, which was not amended under the Tax Act, governs when a change in tax rate is effective. Existing tax law provides that if the taxable year includes the effective date of any rate change (unless the change is the first date of the taxable year), taxes should be calculated by applying a blended rate to the taxable income for the year. Section 15 of the Internal Revenue Code stipulates that our blended federal rate is 29.73% for fiscal year 2018. We have not yet determined the impact the rate reduction will have on our gross deferred tax asset and liabilities and offsetting valuation allowance. However, we grant stock optionshave a full allowance against the deferred tax asset and other share-based awardsas a result there was no impact to non-employee consultants, which we accountincome tax expense for in accordancethe quarter ended January 31, 2018.

In conjunction with the authoritative guidancetax law changes, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for share-based compensation. The cost of non-employee services received in exchange for share-based awards are measured based on either the fair valuecertain income tax effects of the consideration received or the fair valueTax Act. The ultimate impact, which is expected to be recorded by April 30, 2018, may differ from any provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the share-based award issued, whichever is more reliably measurable. In addition, guidance requires share-based compensation related to unvested optionstax Act, and awards issued to non-employees tothe fact that we cannot definitively predict what our deferred tax balance will ultimately be recalculated at the endas of each reporting period based upon the fair market value on that date until the share-based award has vested, and any cumulative catch-up adjustment to share-based compensation resulting from the re-measurement is recognized in the current period (Note 7).April 30, 2018.

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avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

 

Basic and Dilutive Net Loss Per Common Share

 

Basic net loss per common share is computed by dividing our net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period excluding the dilutive effects of stock options, shares of common stock expected to be issued under our Employee Stock Purchase Plan (the “ESPP”), warrants, and Series E Preferred Stock outstanding during the period. Diluted net loss per common share is computed by dividing our net loss attributable to common stockholders by the sum of the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effects of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Net loss attributable to common stockholders represents our net loss plus Series E Preferred Stock accumulated dividends. Series E Preferred Stock accumulated dividends include dividends declared for the period (regardless of whether or not the dividends have been paid) and dividends accumulated for the period (regardless of whether or not the dividends have been declared).

 

The potential dilutive effect of stock options, shares of common stock expected to be issued under our ESPP, and warrants outstanding during the period are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive effect of our Series E Preferred Stock outstanding during the period was calculated using the if-converted method assuming the conversion of Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but are excluded if their effect is anti-dilutive. However, because the impact of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per common share amounts for the three and nine months ended January 31, 20172018 and 2016.2017.

 

The calculation of weighted average diluted shares outstanding for the three and nine-month periodsnine months ended January 31, 20172018 and 20162017 excludes the dilutive effect of the following weighted average outstanding stock options and shares of common stock expected to be issued under our ESPP as their impact are anti-dilutive during periods of net loss:

 

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2017  2016  2017  2016 
             
Stock Options     2,012,239      2,189,915 
ESPP  36,384   16,932   193,627   61,817 
Total  36,384   2,029,171   193,627   2,251,732 

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PEREGRINE PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JANUARY 31, 2017 (unaudited) (continued)

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2018  2017  2018  2017 
             
Stock Options  115,425      78,427    
ESPP  1,202   5,198   466   27,661 
Total  116,627   5,198   78,893   27,661 

 

The calculation of weighted average diluted shares outstanding for the three and nine-month periodsnine months ended January 31, 20172018 and 20162017 also excludes the following weighted average outstanding stock options, warrants, shares of common stock expected to be issued under our ESPP, and Series E Preferred Stock (assuming the if-converted method), as their exercise prices price, purchase price and/or conversion price were greater than the average market price of our common stock during the respective periods, resulting in an anti-dilutive effect:

 

 

Three Months Ended

January 31,

 

Nine Months Ended

January 31,

  

Three Months Ended

January 31,

 

Nine Months Ended

January 31,

 
 2017  2016  2017  2016  2018  2017  2018  2017 
                  
Stock Options  29,617,509   19,129,031   29,095,476   15,800,281   3,214,694   4,231,073   3,663,102   4,156,497 
Warrants  273,280   273,280   273,280   273,280   39,040   39,040   39,040   39,040 
Series E Preferred Stock  13,851,483   13,260,355   13,636,759   13,249,024   1,978,783   1,978,784   1,978,783   1,948,109 
Total  43,742,272   32,662,666   43,005,515   29,322,585   5,232,517   6,248,897   5,680,925   6,143,646 

 

Subsequent to January 31, 2017 and through March 13, 2017,During February 2018, we sold an aggregate of 26,581,59610,294,445 shares of our common stock in connection with an underwritten public offering (Note 11)13), which are not included in the calculation of basic and dilutive net loss per common share for the three and nine months ended January 31, 2017.

Pending Adoption of Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606):Revenue from Contracts with Customers, which amends the guidance in former ASC 605, Revenue Recognition, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. ASU No. 2014-09 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU No. 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, and entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. In August 2015, the FASB issued ASU No. 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date of ASU No. 2014-09 by one year, but permits entities to adopt one year earlier if they choose (i.e., the original effective date). As such, ASU No. 2014-09 will be effective for annual reporting periods ending after December 15, 2017, which will be our fiscal year 2019 beginning May 1, 2018.In March, April, May and December 2016, the FASB issued ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20, respectively, which provide further revenue recognition guidance related to principal versus agent considerations, performance obligations and licensing, and narrow-scope improvements and practical expedients.We are currently in the process of evaluating the impact of adoption of ASU No. 2014-09, as amended by ASU No. 2016-08,ASU No. 2016-10, ASU No. 2016-12 and ASU No. 2016-20, on our consolidated financial statements and related disclosures, including which transition method will be elected.

In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40):Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU No. 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). ASU No. 2014-15 provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations in the financial statement footnotes. ASU No. 2014-15 is effective for annual reporting periods ending after December 15, 2016, which will be our fiscal year ending April 30, 2017, and to annual and interim periods thereafter. Early adoption is permitted. We have not yet determined the effect that the adoption of this guidance will have on the disclosures included in our consolidated financial statements as our analysis regarding our ability to continue as a going concern will be performed in conjunction with the preparation of our Annual Report on Form 10-K for the fiscal year ending April 30, 2017.

 

 

 

 9 

 

 

PEREGRINE PHARMACEUTICALS, INC.avid bioservices, inc.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE NINE MONTHS ENDED JANUARY 31, 20172018 (unaudited) (continued)(CONTINUED)

 

In July 2015, the FASB issued ASU No.

Recently Adopted Accounting Pronouncements

Effective May 1, 2017, we adopted Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330):Simplifying the Measurement of Inventory.  ASU 2015-11 requires that for entities that measure inventory using the first-in, first-out method, inventory should be measured at the lower of cost and net realizable value.value for entities that measure inventory using the first-in, first-out method. ASU 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  The adoption of ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, which will bedid not have a material impact on our fiscal year 2018 beginningcondensed consolidated financial statements.

Effective May 1, 2017, and interim periods within those fiscal years. The amendments should be applied prospectively with earlier application permitted as of the beginning of an interim or annual reporting period. We are currently in the process of evaluating the impact of adoption ofwe adopted ASU No. 2015-11 on our consolidated financial statements and related disclosures.

In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740):Balance Sheet Classification of Deferred Taxes. Under existing standards, deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net long-term asset or liability. To simplify presentation, the new guidance will require that all deferred tax assets and liabilities, along with related valuation allowances, be classified as long-term on the balance sheet. As a result, each tax-paying jurisdiction will now only have one net long-term deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. ASU No. 2015-17 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, which will beDue to the full valuation allowance on our fiscal year 2018 beginning May 1, 2017. We do not expectU.S. deferred tax assets, the adoption of ASU No. 2015-17 todid not have a material impact on our condensed consolidated financial statements.

Effective May 1, 2017, we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 changes certain aspects of accounting for share-based payments to employees and involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Specifically, ASU 2016-09 requires that all income tax effects of share-based awards be recognized as income tax expense or benefit in the reporting period in which they occur. Additionally, ASU 2016-09 amends existing guidance to allow forfeitures of share-based awards to be recognized as they occur. Previous guidance required that share-based compensation expense include an estimate of forfeitures. Upon adoption of ASU 2016-09, we made a policy election to recognize forfeitures as they occur. The adoption of ASU 2016-09 did not have a material impact on our condensed consolidated financial statements.

Pending Adoption of Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606):Revenue from Contracts with Customers, which, along with subsequent amendments issued in 2015 and 2016, will replace substantially all current US GAAP revenue recognition guidance. ASU 2014-09, as amended, is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services utilizing a new five-step revenue recognition model. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09, as amended, is effective for our annual reporting period beginning May 1, 2018. The new guidance permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach where the new standard is applied in the financial statements starting with the year of adoption. Under both approaches, cumulative impact of the adoption is reflected as an adjustment to retained earnings (accumulated deficit) as of the earliest date presented in accordance with the new standard. We are continuing to assess the impact of the new guidance on our accounting policies and related disclosures.procedures and are evaluating the new requirements as applied to existing manufacturing contracts. While we continue to assess the impact of the new guidance, we believe the adoption of ASU 2014-09 will modify the way we analyze contracts. We have identified our revenue streams and based on our preliminary assessment, we believe the most significant impact may relate to the recognition of contract manufacturing revenue over a period of time rather than at a point in time. We plan to adopt ASU 2014-09, as amended, on May 1, 2018, on a modified retrospective basis.

 

In February 2016, the FASB issued ASU No. 2016-02,Leases (Topic 842). ASU No. 2016-2 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU No. 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU No. 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, which will be our fiscal year 2020 beginning May 1, 2019. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of ASU No. 2016-02 on our condensed consolidated financial statements and related disclosures.

 

In March 2016, FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718). ASU No. 2016-09 changes certain aspects of accounting for share-based payments to employees and involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Specifically, ASU No. 2016-09 requires that all income tax effects of share-based awards be recognized as income tax expense or benefit in the reporting period in which they occur. Additionally, ASU No. 2016-09 amends existing guidance to allow forfeitures of share-based awards to be recognized as they occur. Previous guidance required that share-based compensation expense include an estimate of forfeitures. ASU No. 2016-09 is effective for annual and interim periods beginning after December 15, 2016, which will be our fiscal year

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avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 beginning May 1, 2017.  Early adoption is permitted.  We are currently evaluating the impact the adoption of ASU No. 2016-09 will have on our consolidated financial statements and related disclosures.(unaudited) (CONTINUED)

 

In November 2016, FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230):Restricted Cash, which addresses diversity in practice related to the classification and presentation of changes in restricted cash on the statement of cash flows. ASU No. 2016-18 will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU No. 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, which will be our fiscal year 2019 beginning May 1, 2018. Early adoption is permitted. We are currently evaluating the impactdo not expect the adoption of ASU No. 2016-18 willto have a material impact on our condensed consolidated financial statements and related disclosures.

 

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PEREGRINE PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JANUARY 31,In May 2017, (unaudited) (continued)

the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718):Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, which will be our fiscal year 2019 beginning May 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-09 to have a material impact on our condensed consolidated financial statements and related disclosures.

 

3.       Trade and other RECEIVABLEs

 

Trade receivables are recorded at the invoiced amount net of an allowance for doubtful accounts, if necessary. Other receivables are reported at amounts expected to be collected net of an allowance for doubtful accounts, if necessary. Trade and other receivables consist of the following:

 

 

January 31,

2017

 

April 30,

2016

  

January 31,

2018

 

April 30,

2017

 
Trade receivables(1) $5,645,000  $2,494,000  $7,967,000  $7,274,000 
Other receivables  238,000   365,000      468,000 
Total trade and other receivables $5,883,000  $2,859,000  $7,967,000  $7,742,000 

______________

(1)            Represents amounts billed for contract manufacturing services provided by Avid.services.

 

We continually monitor our allowance for doubtful accounts for all receivables. We apply judgment in assessing the ultimate realization of our receivables and we estimate an allowance for doubtful accounts based on various factors, such as, the aging of accounts receivable balances, historical experience, and the financial condition of our customers. Based on our analysis of our receivables as of January 31, 20172018 and April 30, 2016,2017, we determined that no allowance for doubtful accounts was necessary with respect to our trade and other receivables.necessary.

 

4.       PROPERTY AND EQUIPMENT

 

Property and equipment is recorded at cost, less accumulated depreciation and amortization. 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. Construction-in-progress, which represents direct costs related to the construction of various equipment and leasehold improvements associated with our manufacturing facilities, are not depreciated until the asset is completed and placed into service. No interest was incurred or capitalized as construction-in-progress as of January 31, 2018.

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avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

 

Property and equipment, net, consists of the following:

 

 

January 31,

2017

 

April 30,

2016

  

January 31,

2018

 

April 30,

2017

 
Leasehold improvements $20,048,000  $19,610,000  $20,579,000  $20,098,000 
Laboratory equipment  10,740,000   10,257,000   10,683,000   10,777,000 
Furniture, fixtures, office equipment and software  4,684,000   4,045,000   4,688,000   4,499,000 
Construction-in-progress  2,558,000   2,841,000 
Total property and equipment  35,472,000   33,912,000   38,508,000   38,215,000 
Less accumulated depreciation and amortization  (11,329,000)  (9,610,000)  (12,183,000)  (11,700,000)
Total property and equipment, net $24,143,000  $24,302,000  $26,325,000  $26,515,000 

 

Depreciation and amortization expense for the three and nine months ended January 31, 2018 was $645,000 and $1,945,000, respectively. Depreciation and amortization expense for the three and nine months ended January 31, 2017 was $631,000 and $1,850,000, respectively. Depreciation and amortization expense for the three and nine months ended January 31, 2016 was $464,000 and $921,000, respectively.

 

5.       INVENTORIES

 

Inventories are recorded at the lower of cost or market (net realizable value) and primarily include raw materials, work-in-process (comprised of raw materials, direct labor and overhead costs (work-in-process) associated with in-process manufacturing services), and finished goods (representing manufacturing services completed and ready for shipment) associated with contract manufacturing services. Overhead costs allocated to work-in-process inventory are based on the normal capacity of our wholly-owned subsidiary, Avid.production facilities and do not include costs from abnormally low production or idle capacity, which are expensed directly to cost of contract manufacturing in the period incurred. During the three and nine months ended January 31, 2018, we expensed $5,344,000 and $11,182,000, respectively, in idle capacity costs directly to cost of contract manufacturing in the accompanying condensed consolidated financial statements. No idle capacity costs were incurred during the same prior year periods. Cost is determined by the first-in, first-out method. Inventories consist of the following:

 

  

January 31,

2017

  

April 30,

2016

 
Raw materials $13,263,000  $10,911,000 
Work-in-process  20,566,000   5,275,000 
Total inventories $33,829,000  $16,186,000 

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PEREGRINE PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JANUARY 31, 2017 (unaudited) (continued)

  

January 31,

2018

  

April 30,

2017

 
Raw materials $8,799,000  $11,304,000 
Work-in-process  5,419,000   13,755,000 
Finished goods     8,040,000 
Total inventories $14,218,000  $33,099,000 

 

6.       STOCKHOLDERS’ EQUITY

Sales of Common Stock and Preferred Stock

 

Our ability to continue to fund our operations is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity.

 

On January 12, 2018, we filed a universal shelf registration statement with the SEC on Form S-3, File number 333-222548 (“January 2018 Shelf”), which was declared effective by the SEC on January 25, 2018, under which we may issue, from time to time, in one or more offerings, offer and sale either individually or in combination up to $125,000,000 of our securities, including common stock, preferred stock, debt securities and warrants. As of January 31, 2018, we had not issued any of our securities under the January 2018 Shelf. Subsequent to January 31, 2018, we issued securities under the January 2018 Shelf as further discussed in Note 13, “Subsequent Events”.

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avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

Sale of Common Stock

During the nine months ended January 31, 2017, we issued shares of our common stock under the following agreements:

 

AMI Sales Agreement - On August 7, 2015, we entered into an At Market Issuance Sales Agreement (“AMI Sales Agreement”) with MLV & Co. LLC (“MLV”), pursuant to which we maywere able to sell shares of our common stock through MLV, as agent, for aggregate gross proceeds of up to $30,000,000, in registered transactions from our shelf registration statement on Form S-3 (File No. 333-201245), which was declared effective by the SEC on January 15, 2015 (“January 2015 Shelf”).2015. Sales of our common stock through MLV may bewere made by any method that iswas deemed an “at the market offering” as defined in Rule 415 of the Securities Act. We paypaid MLV a commission equal to 2.5% of the gross proceeds from the sale of our common stock pursuant to the AMI Sales Agreement. During the nine monthsquarter ended JanuaryJuly 31, 2017, we sold 23,167,3491,051,258 shares of our common stock at market prices under the AMI Sales Agreement, for aggregate gross proceeds of $8,028,000$4,304,000 before deducting commissions and other issuance costs of $228,000.$111,000. As of JanuaryJuly 31, 2017, aggregatewe had raised the full amount of gross proceeds of up to $14,525,000 remained available to us under the AMI Sales Agreement.

 

Equity Distribution Agreement - On August 7, 2015, we entered into an Equity Distribution Agreement, with Noble International Investments, Inc., doing business as Noble Life Science Partners, a division of Noble Financial Capital Markets (“Noble”), pursuant to which we may sell shares of our common stock through Noble, as agent, for aggregate gross proceeds of up to $20,000,000, in registered transactions from our January 2015 Shelf. Sales of our common stock through Noble may be made by any method that is deemed an “at the market offering” as defined in Rule 415 of the Securities Act. We pay Noble a commission equal to 2.5% of the gross proceeds from the sale of our common stock pursuant to the Equity Distribution Agreement. During the nine months ended January 31, 2017, we sold 10,082,597 shares of our common stock at market prices under the Equity Distribution Agreement for aggregate gross proceeds of $3,916,000 before deducting commissions and other issuance costs of $112,000. As of January 31, 2017, aggregate gross proceeds of up to $9,115,000 remained available to us under the Equity Distribution Agreement.

Sale of Series E Preferred Stock

Series E AMI Sales Agreement - On June 13, 2014, we entered into an At Market Issuance Sales Agreement (“Series E AMI Sales Agreement”) with MLV, pursuant to which we may issue and sell shares of our Series E Preferred Stock through MLV, as agent, for aggregate gross proceeds of up to $30,000,000, in registered transactions from our shelf registration statement on Form S-3 (File No. 333-193113), which was declared effective by the SEC on January 16, 2014. Sales of our Series E Preferred Stock through MLV may be made by any method that is deemed an “at the market offering” as defined in Rule 415 of the Securities Act. We paid MLV a commission of up to 5% of the gross proceeds from the sale of our Series E Preferred Stock pursuant to the Series E AMI Sales Agreement. During the nine months ended January 31, 2017, we sold 70,320 shares of our Series E Preferred Stock at market prices under the Series E AMI Sales Agreement for aggregate gross proceeds of $1,634,000 before deducting commissions and other issuance costs of $58,000. During January 2017, the underlying registration statement on Form S-3 (File No. 333-193113) expired, and therefore, we do not plan to issue and sell any additional shares of our Series E Preferred Stock under the Series E AMI Sales Agreement.

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PEREGRINE PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JANUARY 31, 2017 (unaudited) (continued)

Series E Preferred Stock DividendsDividend

 

The following table summarizes the Series E Preferred Stock quarterly dividend payments foractivity during the nine months ended January 31, 2017:2018:

 

Declaration

Date

 

Dividend

Per

Share

  

Annualized

Percentage

Rate

  

Liquidation

Preference

  

Total

Dividends

Paid

  

Accrual

Period

  

Record

Date

 

Payment

Date

 
6/2/2016 $0.65625   10.50%  $25.00  $1,036,000   4/1/2016 – 6/30/2016  6/17/2016 7/1/2016 
9/6/2016 $0.65625   10.50%  $25.00  $1,081,000   7/1/2016 – 9/30/2016  9/16/2016 10/3/2016 
12/6/2016 $0.65625   10.50%  $25.00  $1,081,000   10/1/2016 – 12/31/2016  12/16/2016 1/3/2017 

Declaration

Date

 

Record

Date

 

Payment

Date

 

Dividends

Paid

  

Dividend

Per Share

 
6/6/2017 6/19/2017 7/3/2017 $1,081,000  $0.65625 
9/5/2017 9/18/2017 10/2/2017 $1,081,000  $0.65625 
12/7/2017 12/18/2017 1/2/2018 $1,081,000  $0.65625 
             

 

Shares of Common Stock Authorized and Reserved for Future Issuance

 

We are authorized to issue up to 500,000,000 shares of our common stock. As of January 31, 2017, 271,068,4642018, 45,257,180 shares of our common stock were issued and outstanding. In addition, our common stock outstanding as of January 31, 20172018 excluded the following shares of our common stock reserved for future issuance:

 

·39,500,0775,433,646 shares of common stock reserved for issuance under outstanding option grants and available for issuance under our stock incentive plans;
·10,520,6261,303,770 shares of common stock reserved for and available for issuance under our Employee Stock Purchase Plan;ESPP;
·273,28039,040 shares of common stock issuable upon exercise of outstanding warrants; and
·47,785,0406,826,435 shares of common stock issuable upon conversion of our outstanding Series E Preferred Stock(1).

_____________

(1(1))The Series E Preferred Stock is convertible into a number of shares of our common stock determined by dividing the liquidation preference of $25.00 per share by the conversion price, currently $3.00$21.00 per share. If all of our outstanding Series E Preferred Stock were converted at the $3.00$21.00 per share conversion price, the holders of our Series E Preferred Stock would receive an aggregate of 13,731,3331,961,619 shares of our common stock. However, we have reserved the maximum number of shares of our common stock that could be issued upon a change of control event assuming our shares of common stock are acquired for consideration of $0.855$5.985 per share or less. In this scenario, each outstanding share of our Series E Preferred Stock could be converted into 294.18 shares of our common stock, representing the Share Cap.

 

7.       equity compensation plans

 

Stock Incentive Plans

 

As of January 31, 2017,2018, we had an aggregate of 39,500,0775,433,646 shares of our common stock reserved for issuance under our stock incentive plans, of which, 29,467,8703,989,356 shares were subject to outstanding options and 10,032,2071,444,290 shares were available for future grants of share-based awards.

The following summarizes our stock option transaction activity for the nine months ended January 31, 2017:

Stock Options Shares  

Weighted Average

Exercisable Price

 
Outstanding, May 1, 2016  23,751,261  $1.48 
Granted  7,050,631  $0.49 
Exercised      
Canceled or expired  (1,334,022) $1.18 
Outstanding, January 31, 2017  29,467,870  $1.26 

 

 

 

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PEREGRINE PHARMACEUTICALS, INC.avid bioservices, inc.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE NINE MONTHS ENDED JANUARY 31, 20172018 (unaudited) (continued)(CONTINUED)

The following summarizes our stock option transaction activity for the nine months ended January 31, 2018:

Stock Options Shares  

Weighted Average

Exercisable Price

 
Outstanding, May 1, 2017  4,081,548  $8.77 
Granted  679,497  $4.17 
Exercised  (117,019)  $3.40 
Canceled or expired  (654,670)  $8.42 
Outstanding, January 31, 2018  3,989,356  $8.70 

 

Employee Stock Purchase Plan (ESPP)

 

We have reserved a total of 15,000,0002,142,857 shares of our common stock to be purchased under our ESPP, of which 10,520,6261,303,770 shares remained available to purchase at January 31, 2017. The2018, and are subject to adjustment as provided in the ESPP allows eligible employees on a voluntary basis to purchase shares of our commonfor stock directly from us.splits, stock dividends, recapitalizations and other similar events. Under the ESPP, we sell shares to participants at a price equal to the lesser of 85% of the fair market value of our common stock at the (i) beginning of a six-month offering period, or (ii) end of the six-month offering period. The ESPP provides for two six-month offering periods each year; the first offering period begins on the first trading day on or after each NovemberMay 1; the second offering period begins on the first trading day on or after each MayNovember 1. During the nine months ended January 31, 2017, 888,0332018, 55,966 shares of our common stock were purchased under the ESPP at a purchase price of $0.29$3.87 per share.

 

Share-Based Compensation

 

Total share-based compensation expense related to share-based awards issued under our equity compensation plans is included in the accompanying unaudited condensed consolidated statements of operations as follows:

 

 

Three Months Ended

January 31,

 

Nine Months Ended

January 31,

  

Three Months Ended

January 31,

 

Nine Months Ended

January 31,

 
 2017  2016  2017  2016  2018  2017  2018  2017 
Cost of contract manufacturing $23,000  $20,000  $89,000  $42,000  $139,000  $23,000  $277,000  $89,000 
Research and development  436,000   580,000   1,252,000   1,620,000 
Selling, general and administrative  410,000   683,000   1,250,000   2,078,000   259,000   389,000   589,000   1,183,000 
Discontinued operations  14,000   457,000   340,000   1,319,000 
Total $869,000  $1,283,000  $2,591,000  $3,740,000  $412,000  $869,000  $1,206,000  $2,591,000 
                                
Share-based compensation from:                                
Stock options $815,000  $1,208,000  $2,369,000  $3,555,000  $374,000  $815,000  $1,070,000  $2,369,000 
ESPP  54,000   75,000   222,000   185,000   38,000   54,000   136,000   222,000 
 $869,000  $1,283,000  $2,591,000  $3,740,000  $412,000  $869,000  $1,206,000  $2,591,000 

 

As of January 31, 2017,2018, the total estimated unrecognized compensation cost related to non-vested employee stock options was $3,032,000.$2,605,000. This cost is expected to be recognized over a weighted average vesting period of 1.562.67 years based on current assumptions.

 

8.       WARRANTS

 

No warrants were issued or exercised during the three and nine months ended January 31, 2017.2018. As of January 31, 2017,2018, warrants to purchase 273,28039,040 shares of our common stock at an exercise price of $2.47$17.29 were outstanding and are exercisable through August 30, 2018.

9.       SEGMENT REPORTING

Our business is organized into two reportable operating segments and both operate in the U.S. Peregrine is engaged in the research and development of monoclonal antibodies for the treatment of cancer. Avid is engaged in providing contract manufacturing services for third-party customers on a fee-for-service basis while also supporting our internal drug development efforts.

The accounting policies of the operating segments are the same as those described in Note 2. We evaluate the performance of our contract manufacturing services segment based on gross profit or loss from third-party customers. However, our products in the research and development segment are not evaluated based on gross profit or loss, but rather based on scientific progress of the technologies. As such, gross profit or loss is only provided for our contract manufacturing services segment in the below table. All revenues shown below are derived from transactions with third-party customers.

 

 

 

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PEREGRINE PHARMACEUTICALS, INC.avid bioservices, inc.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE NINE MONTHS ENDED JANUARY 31, 20172018 (unaudited) (continued)(CONTINUED)

 

Segment information is summarized as follows:

9.       RESTRUCTURING

 

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2017  2016  2017  2016 
Contract manufacturing services revenue $10,747,000  $6,672,000  $39,726,000  $25,574,000 
Cost of contract manufacturing services  7,974,000   3,896,000   26,477,000   13,245,000 
                 
Gross profit  2,773,000   2,776,000   13,249,000   12,329,000 
                 
Revenue from products in research and development     37,000      329,000 
Research and development expense  (5,989,000)  (15,156,000)  (21,580,000)  (43,264,000)
Selling, general and administrative expense  (4,581,000)  (4,524,000)  (14,625,000)  (13,839,000)
Other income (expense), net  23,000   20,000   69,000   677,000 
Net loss $(7,774,000) $(16,847,000) $(22,887,000) $(43,768,000)

Revenue generatedOn August 9, 2017, our Board of Directors approved, and our management implemented, a restructuring plan intended to reduce operating costs and improve cost efficiencies while we pursued strategic options for our research and development assets and focus our efforts on growing our CDMO business. Under this restructuring plan, which we completed in October 2017, we reduced our overall workforce by 57 employees. As a result, during the quarter ended October 31, 2017, we incurred an aggregate of $1,588,000 in restructuring costs consisting of one-time termination benefits, including severance, and other employee-related costs, of which $330,000 related to our research and development segment and $1,258,000 related to our contract manufacturing services segment. The restructuring costs associated with our research and development segment are included in loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for the nine months ended January 31, 2018 (Note 10). The restructuring costs associated with our contract manufacturing services segment was derivedare included in operating expenses in the accompanying unaudited condensed consolidated financial statements for the nine months ended January 31, 2018. All restructuring costs were paid as of January 31, 2018.

10.       Sale of research and development assets

Asset Assignment and Purchase Agreement

On February 12, 2018, we entered into an Asset Assignment and Purchase Agreement (the “Purchase Agreement”) with a third-party oncology therapeutics company (the “Buyer”) pursuant to which we sold to the Buyer the majority of our research and development assets, which included the assignment of certain exclusive licenses related to our former PS-targeting program, as well as certain other licenses and assets useful and/or necessary for the potential commercialization of bavituximab. 

Pursuant to the Purchase Agreement, we expect to receive an aggregate of $8 million from the Buyer, payable in three installments over a limited numberperiod of customers.approximately six and one-half months following the date of the Purchase Agreement, the first of which is due by March 14, 2018. We are also eligible to receive up to an additional $95 million in the event that the Buyer achieves certain development, regulatory and commercialization milestones with respect to bavituximab. In addition, we are eligible to receive royalties on net sales that are upward tiering into the mid-teens in the event that the Buyer commercializes and sells products utilizing bavituximab or the other transferred assets. The percentages below represent revenue derivedBuyer is responsible for all future research, development and commercialization of bavituximab, including all related intellectual property costs and all other future liabilities and obligations arising out of the ownership of the transferred assets (i.e., we remain obligated for all liabilities associated with the research and development assets associated with the Purchase Agreement incurred or arising prior to February 13, 2018). In addition, as part of the transaction, we and the Buyer agreed to diligently work in good faith to negotiate and enter into, within 90 days after the date of the Purchase Agreement, an agreement for us to provide future contract development and manufacturing activities to the Buyer in support of bavituximab.

Discontinued Operations

As a result of (i) the sale of our PS-targeting program, (ii) the held for sale classification of our R84 technology, (iii) the abandonment of our remaining research and development assets (including our intent to return the exosome technology back to the original licensor), and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business that will have a major effect on our operations and financial results as we will no longer incur costs associated with research and development, the operating results from each customerour research and development segment are reported as a percentage of total contract manufacturing services revenue:

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
Customer 2017  2016  2017  2016 
Halozyme Therapeutics, Inc.  29%   64%   62%   68% 
Customer A  56      27      25      28    
Customer B  12      –      11      –    
Other customers  3      9      2      4    
Total  100%   100%   100%   100% 

In addition, duringloss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 1). Accordingly, the accompanying unaudited condensed consolidated financial statements for the three and nine months ended January 31, 2018 and 2017 and 2016, contract manufacturing services revenue was derived solely from U.S. based customers.

Revenue generated from our products inreflect the operations of our research and development segment duringas a discontinued operation. The results of operations presented below include certain allocations that management believes fairly reflect the nine months ended January 31, 2016 was primarilyutilization of services to the research and development segment. The allocations do not include amounts related to license revenue recognized under certain agreements with an unrelated entity.

Our long-lived assets are located ingeneral corporate administrative expenses or interest expense. Therefore, the U.S.results of operations from the research and consistdevelopment segment do not necessarily reflect what the results of leasehold improvements, laboratory equipment, furnitureoperations would have been had the research and fixtures, office equipment and software and are net of accumulated depreciation. Long-lived assets bydevelopment segment consist of the following:operated as a stand-alone segment.

  

January 31,

2017

  

April 30,

2016

 
Long-lived Assets, net:        
Contract manufacturing services $22,763,000  $22,783,000 
Products in research and development  1,380,000   1,519,000 
Total $24,143,000  $24,302,000 

 

 

 

 15 

 

  

PEREGRINE PHARMACEUTICALS, INC.avid bioservices, inc.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR THE NINE MONTHS ENDED JANUARY 31, 20172018 (unaudited) (continued)(CONTINUED)

 

10.       commitments and contingencies

Operating Leases – Our corporate offices, research and development, and manufacturing facilities are all located in close proximity in Tustin, California. The following table summarizes our five separate lease agreements as of January 31, 2017:

Lease

#

  

Lease

Execution Date

 

Approximate

Square Footage

Leased

  # of Buildings Occupied  

Initial

Lease Term

Expiration Date

 

# of Options

to Extend

Lease

  Extended
Lease Term Expiration
Date(1)
 1  December 1998  48,000   2  12/31/27  2  12/31/37
 2  May 2010  13,000   1  12/31/17  1  12/31/22
 3  July 2014  42,000   1  7/31/21  2  7/31/31
 4  April 2016  26,000   1  8/31/23  2  8/31/35
 5  April 2016  25,000   1  8/31/23  2  8/31/35

______________

(1)Extended lease term expiration date assumes we execute all available option(s) to extend lease in accordance with the terms of the lease agreement.

During November 2016, we entered into a lease amendment to Lease #1 (per the above table) that extends the lease term through December 31, 2027 while also maintaining our two 5-year renewal options that could extend the lease term to December 31, 2037. There were no other changes to the terms of the lease agreements included in the above table as disclosed in Note 3 to the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016.

 

The following schedule representstable summarizes the results of discontinued operations for the three and nine months ended January 31, 2018 and 2017:

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2018  2017  2018  2017 
Operating expenses:                
Research and development $374,000  $5,912,000  $7,590,000  $21,347,000 
Selling, general and administrative  1,315,000   293,000   2,097,000   1,256,000 
Restructuring charges        330,000    
                 
Total operating expenses  1,689,000   6,205,000   10,017,000   22,603,000 
                 
Other expense  387,000      387,000    
Loss from discontinued operations $2,076,000  $6,205,000  $10,404,000  $22,603,000 

We will complete the accounting for the Purchase Agreement during the fourth quarter of our future minimum lease payments under all non-cancelablecurrent fiscal year ending April 30, 2018. In addition, we expect to use a portion of our net operating leaseslosses to offset the taxable gain from the Purchase Agreement, if any, which could result in a partial release of our valuation allowance.

Assets Held for Sale

The carrying value of the assets and liabilities deemed a component of the discontinued research and development segment were not classified as “assets held for sale” in the accompanying unaudited condensed consolidated balance sheets at January 31, 2018 and April 30, 2017 since there were no related assets reported as of the respective balance sheet dates and the Buyer did not assume any liabilities under the Purchase Agreement.

11.       SEGMENT REPORTING

Changes in our Organizational Structure

Historically, our business had been organized into two reportable operating segments: (i) our research and development segment, and (ii) our contract manufacturing services segment. However, as a result of the aforementioned discontinued operation (Note 10),management has determined that the Company now operates in only one operating segment. Accordingly, effective January 31, 2017:2018, we reported our financial results for one reportable segment to reflect this new organizational structure.The accounting policies of our one reportable segment are the same as those described in Note 2.In addition, the financial results of our discontinued research and development segment are reflected as a loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 10).

 

Fiscal Year Ending April 30,:  Minimum Lease Payments 
 2017 (remaining three months)  $575,000 
 2018   2,243,000 
 2019   2,086,000 
 2020   2,083,000 
 2021   2,138,000 
 Thereafter   7,936,000 
    $17,061,000 

12.       commitments and contingencies

 

Legal Proceedings – In the ordinary course of business, we are at times subject to various legal proceedings and disputes. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  Such provisions are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case.

 

16

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

On October 10, 2013, a derivative and class action complaint, captionedMichaeli v. Steven W. King, et al., C.A. No. 8994-VCL, was filed in the Court of Chancery of the State of Delaware (the “Court”), purportedly on behalf of the Company, which was named a nominal defendant, against certain of our executive officers and our three former non-employee directors (collectively, the “Defendants”). On December 1, 2015, the plaintiffs filed an amended and supplemental derivative and class action complaint (the “Amended Complaint”). The Amended Complaint allegesalleged that the Defendants breached their respective fiduciary duties in connection with certain purportedly improper compensation decisions made by our Boardboard of Directorsdirectors during the past four fiscal years ended April 30, 2015 including: (i) the grant of a stock option to Mr. King on May 4, 2012; (ii) the non-routine broad-based stock option grant to our directors, executives, all other employees and certain consultants on December 27, 2012; and (iii) the payment, during the past four fiscal years ended April 30, 2015, of compensation to our non-employee directors. In addition, the complaint alleges that our directors breached their fiduciary duty of candor by filing and seeking stockholder action on the basis of an allegedly materially false and misleading proxy statement for our 2013 annual meeting of stockholders. The plaintiffs are seeking, among other things, rescission of a portion ofOn May 15, 2017, the stock option grant to Mr. King on May 4, 2012 and the stock options granted to the Defendants on December 27, 2012, as well as disgorgement of any excessive compensation paid to our non-employee directors during the four fiscal years ended April 30, 2015 and other monetary relief for our benefit. The parties having recently agreed in principle to settle the Amended Complaint, are currently negotiating a stipulation of settlement, which will then be subject to the final approval by the Court. We do not expect to incur a loss associatedfiled with this matter should the Court approvea Stipulation and Agreement of Compromise, Settlement and Release (the “Settlement”) setting forth the terms of the proposed settlement.settlement of the claims in the Amended Complaint. At a hearing on July 27, 2017, the Court issued an order approving the Settlement, which provided, among other things, that the three former non-employee directors agreed to pay or cause to be paid $1,500,000 to us, which amount is included as a reduction to selling, general and administrative expense in the accompanying unaudited condensed consolidated financial statements for the nine months ended January 31, 2018. We received such payment in full in August 2017.

 

16

PEREGRINE PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED JANUARY 31, 2017 (unaudited) (continued)

11.13.       SUBSEQUENT EVENTS

 

Sale of Research and Development Assets

On February 12, 2018, we sold the majority of our research and development assets to a third-party oncology therapeutics company (Note 10).

Public Offering of Common Stock

 

AMI SalesOn February 14, 2018, we entered into an underwriting agreement (the “Underwriting Agreement”) with Wells Fargo Securities, LLC, as representative for the underwriters identified therein (collectively, the “Underwriters”), relating to the issuance and sale in an underwritten public offering of 9,000,000 shares of our common stock, par value $0.001 per share, at a public offering price of $2.25 per share (the “Offering”). In addition, pursuant to the Underwriting Agreement, - Subsequent we also granted the Underwriters a 30-day option to January 31, 2017purchase up to an additional 1,350,000 shares of our Common Stock under this Offering at the public offering price of $2.25 per share less the underwriting discounts and through March 13, 2017,commissions to cover over-allotments, if any (the “Overallotment Option”).

On February 20, 2018, we completed the Offering pursuant to which we sold 15,308,30010,294,445 shares of common stockour Common Stock, including 1,294,445 shares sold pursuant to the Underwriter’s Overallotment Option at market prices under the AMI Sales Agreement (Note 6) forpublic offering price of $2.25 per share. The aggregate gross proceeds we received from the Offering, including the shares sold pursuant to the Overallotment Option, was $23,163,000, before deducting underwriting discounts and commissions and other offering related expenses. We intend to use the net proceeds from the offering for the expansion of $7,335,000.our contract manufacturing business and for general corporate purposes.

The Offering was made pursuant to a prospectus supplement filed with the SEC on February 14, 2018 under our January 2018 Shelf (Note 6). As of March 13, 2017,12, 2018, aggregate gross proceeds of up to $7,190,000$101,837,000 remained available to us under the AMI Sales Agreement.

Equity Distribution Agreement - Subsequent to January 31, 2017 and through March 13, 2017, we sold 11,273,296 shares of common stock at market prices under the Equity Distribution Agreement (Note 6) for aggregate gross proceeds of $6,006,000. As of March 13, 2017, aggregate gross proceeds of up to $3,109,000 remained available to us under the Equity Distribution Agreement.2018 Shelf.

 

Series E Preferred Stock Dividend

 

On March 9, 2017,7, 2018, our Board of Directors declared a quarterly cash dividend of $0.65625 per share on our Series E Preferred Stock. The dividend payment is equivalent to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference, accruing from January 1, 20172018 through March 31, 2017.2018. The cash dividend is payable on April 3, 20172, 2018 to holders of the Series E Preferred Stock of record on March 20, 2017.

Operating Lease Amendment

In February 2017, we entered into a lease amendment to our Lease #3 (Note 10) (the “Lease Amendment”), pursuant to which we secured approximately 42,000 square feet of additional vacant warehouse space (the “Expansion Space”) within the same building as our existing Myford biomanufacturing facility. The purpose of the Expansion Space is to expand our biomanufacturing capacity, which we believe will further support the growth of our contract manufacturing business. Under the Lease Amendment, our Myford biomanufacturing facility now encompasses approximately 84,000 square feet. The Lease Amendment also extends the initial lease term to January 31, 2027 and maintains our two 5-year renewal options that could extend the lease term to January 31, 2037. Our monthly base rent for the Expansion Space is approximately $74,000 and increases 3% annually. In addition, with respect to the Expansion Space, the Lease Amendment provides for eight (8) months of free rent and a tenant improvement allowance of $1,269,000, as defined in the Lease Amendment.19, 2018.

 

 

 

 

 17 

 

 

Item 2.Management’s Discussion and Analysis of Financial Condition And Results of Operations.

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which represent our projections, estimates, expectations or beliefs concerning among other things, financial items that relate to management’s future plans or objectives or to our future economic and financial performance.  In some cases, you can identify these statements by terminology such as “may”, “should”, “plans”, “believe”, “will”, “anticipate”, “estimate”, “expect” “project”, or “intend”, including their opposites or similar phrases or expressions. You should be aware that these statements are projections or estimates as to future events and are subject to a number of factors that may tend to influence the accuracy of the statements. These forward-looking statements should not be regarded as a representation by us or any other person that our events or plans will be achieved. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in Part II, Section 1A of this Quarterly Report on Form 10-Q, Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2016,2017, and the reports we file from time to time with the Securities and Exchange Commission (“SEC”) after the date of this Quarterly Report. Actual results may differ materially from any forward looking statement.

 

Overview

 

We areAvid Bioservices, Inc., (“Avid”), formerly known as Peregrine Pharmaceuticals, Inc., is a biopharmaceutical companycontract development and manufacturing organization (“CDMO”) committed to improving the lives of patients by manufacturing and delivering high quality pharmaceutical products. We provide a comprehensive range of services from process development to current Good Manufacturing Practices (“cGMP”) commercial manufacturing focused on biopharmaceutical products throughderived from mammalian cell culture. With 25 years of experience producing monoclonal antibodies and recombinant proteins in batch, fed-batch and perfusion modes, our contractservices include cGMP clinical and commercial product manufacturing, businessbulk packaging, stability testing and through advancingregulatory strategy, submission and licensing our novel, development-stage immunotherapy products.support. We also provide a variety of process development services, including cell line development and optimization, cell culture and feed optimization, analytical methods development and product characterization. 

 

Avid Bioservices, Inc. (“Avid”) is our contractWe have experience in performing process development and manufacturing organization (“CDMO”) and a wholly-owned subsidiary of Peregrine Pharmaceuticals, Inc. (“Peregrine”). In June 2016, we announced a new corporate strategy to achieve sustained profitability within two (2) years, and at the same time, refocus our internal clinical development efforts on small, early stage clinical trials designed to drive partnering interestbiologics since 1993 in our investigational products.

Avid—Our CDMO

Our contract manufacturing business provides fully-integrated cGMP services from cell line development to commercialFranklin biomanufacturing for third-party customers while also supportingfacility, or Franklin Facility, located at our internal drug development business. This integration, we believe, offers considerable time and cost efficiencies for our internal drug development business.

headquarters in Tustin, California. In March 2016, we formally commissionedexpanded our manufacturing capacity through the launch of our Myford biomanufacturing facility, or Myford Facility, which more than doubled our manufacturing capacity. The 42,000 square foot facility, which is our second manufacturingbiomanufacturing facility, is designed to utilizeincludes multiple single-use equipmentbioreactors up to the 2,000-liter manufacturing scalescale. The Myford Facility was designed to accommodate a fully disposable biomanufacturing process for products in late stage clinical development to commercial. This facility is currently being utilized to manufacture process validation runs for several of our third-party customers that may lead to future commercial production. The facilityMyford Facility is located adjacent to our current headquarters in Tustin, California.Franklin Facility.

 

As we look to expand our CDMO capacity and capabilities, we are planning to construct a third manufacturing facility to further increase our manufacturing capacity. To support this planned expansion, inIn February 2017, we leased an additional 42,000 square feet of vacant warehouse space within the same building as our existing Myford Facility to build a third biomanufacturing facility.facility to support future revenue growth as demand warrants. The proximity of our new leasedthis space will allow us to utilize existing manufacturing infrastructure that we believe should enhance our manufacturing efficiencies while reducingand reduce the overall cost and timeframe to construct this new manufacturingthird biomanufacturing facility. Previously,

In addition, we leasedhave a nearby 25,000 square foot building that was originally designatedstrong regulatory track record consisting of a 15-year inspection history with no significant impact on our business. We have been audited by several regulatory agencies, including the U.S. Food and Drug Administration (“FDA”), the European Medicines Agency, the Brazilian Health Surveillance Agency (“ANVISA”), the Canadian Health Authority and the California Department of Health. In addition, between 2005 and 2017, we completed six successful pre-approval inspections. We also completed four FDA inspections between 2013 to the most recently completed inspection in February 2018, none of which resulted in any Form 483 observations by the FDA. We have also been audited and qualified by large and small, domestic and foreign, pharmaceutical and biotechnology companies interested in the production of biologic material for the new manufacturing facility that will now be utilized as a central warehouse for all manufacturing operations. As a result of securing this newly-leased optimal location, we now anticipate that the new manufacturing facility will be constructedclinical and ready for manufacturing activities by mid calendar year 2018, provided we can raise sufficient additional capital to support this expansion.commercial use.

 

 

 

 18 

 


Peregrine—Our Drug Development Business Transition

 

Our drug development business is focused on developing therapeutics designed to fight cancer by reversingIn the immunosuppressive environment that many tumors establish in order to proliferate. By doing so, these therapeutics allow the immune system to recognize and destroy tumor cells. Bavituximab is our lead immunotherapy candidate and we currently have a clinical collaboration with the National Comprehensive Cancer Network® (“NCCN”), as well as a preclinical collaboration with Memorial Sloan Kettering Cancer Center, which are both evaluating the potentialfall of bavituximab in combination with immune stimulating therapies.

Bavituximab is a monoclonal antibody that targets and binds to phosphatidylserine (“PS”), a highly immunosuppressive molecule that is usually located inside the membrane of healthy cells, but then “flips” and becomes exposed on the outside of cells in the tumor microenvironment, causing the tumor to evade immune detection. Bavituximab targets and binds to PS to block this immunosuppressive pathway and simultaneously activates adaptive immunity, thereby enabling the immune system to recognize and fight the tumor.

Clinical Development Strategy

In June 2016,2017, we announced a clinical development strategy focused on conducting small, early stage studies of bavituximab in combination with immune stimulating therapies. These trials may be conducted independently, in conjunction with our collaborators, or through investigator sponsored trials (“ISTs”). The goal of these trials will beintent to generate compelling clinical and translational data demonstrating bavituximab’s immunotherapeutic mechanism of action in a combination treatment setting. Additionally, we are currently conducting an extensive review and analysis of the available clinical data from the Phase III SUNRISE trial discussed below and testing the numerous collected samples for potential biomarkers in order to determine if certain subgroups or patients with other characteristics benefited more from bavituximab. We believe such information will be important in helping guide the bavituximab clinical program, including our collaboration with AstraZeneca. In keeping with this strategy, we are evaluating options to advance clinical development in the most efficient and cost-effective way.

We believe this strategy will allow us to (i) continuecease our research and development activities while avoiding costly, later stage clinical trials, thereby allowing usand to achieve profitability sooner, and (ii) generate additional data that we believe, if positive, could generate future potential value, including attracting potential licensing partners.

Collaboration with AstraZeneca Combining Bavituximab and Durvalumab (MEDI4736)

In August 2015, we entered intotransition our first clinical collaboration with AstraZenecabusiness to evaluate the combination of bavituximab and durvalumab (MEDI4736), an anti-PD-L1 monoclonal antibody, with chemotherapy in a planned Phase I/Ib trial in multiple solid tumors. In October 2015, we expanded our clinical collaboration with AstraZeneca to evaluate the combination of bavituximab and durvalumab in a Phase II study in patients with previously-treated squamous or non-squamous non-small cell lung cancer (“NSCLC”). However, as discussed above, our collaboration with AstraZeneca is currently pending the resultsdedicated CDMO. As part of our review and analysis of the available clinical data from the Phase III SUNRISE trial.

NCCN Collaboration

In January 2016,transition efforts, we announced that we entered into a research collaboration with NCCN, a not-for-profit alliance of 27 of the world’s leading cancer centers, to expand the clinical research and development of bavituximab for the treatment of a range of tumors. Under this research collaboration, we intend to fund ISTs and correlative studies with bavituximab at NCCN member institutions and their affiliate community hospitals through a $2 million research grant to NCCN’s Oncology Research Program.  NCCN will be responsible for oversight and monitoring of all clinical studies under the research grant. In September 2016, NCCN announced that investigators athave completed the following NCCN-affiliated institutions were recipients of the grant awards:initiatives:

 

1.·Moffitt Cancer Center—A Phase I TrialIn August 2017, we instituted a number of Sorafenibstrategic actions, including the reduction of our research and Bavituximab Plus Stereotactic Body Radiation Therapy for Unresectable Hepatitis C Associated Hepatocellular Carcinoma. This protocol is approveddevelopment workforce, designed to reduce costs and patient screening is expected soon.better position ourselves to achieve overall profitability;
2.·Massachusetts General Hospital Cancer Center—Phase I/II Clinical TrialIn September 2017, we named Roger J. Lias, Ph.D., who has more than 20 years of Bavituximab with Radiation and Temozolomide for Patients with Newly Diagnosed Glioblastoma. This trial is on track to be initiatedmanagement experience in the coming months.biologics CDMO industry, as the president of our contract manufacturing subsidiary. Dr. Lias was thereafter appointed our President and Chief Executive Officer in December 2017 as we transitioned to a dedicated CDMO;
3.·In October and November 2017, we appointed a total of six new independent members to our board of directors, each of whom has relevant CDMO industry experience;
·In November 2017, we named Tracy Kinjerski as our Vice President of Business Operations, who will focus on executing new business development initiatives with the objective of growing our commercial customer base;
·On January 5, 2018, we formally changed our corporate name to Avid Bioservices, Inc. and adopted the new ticker symbol “CDMO” on The Sidney Kimmel Comprehensive Cancer Center at Johns Hopkins—Phase II StudyNASDAQ Capital Market to align with the new end-market focus and strategic positioning of Pembrolizumabour business;
·By January 31, 2018, we classified our R84 technology as held for sale and Bavituximab for Progressive Recurrent/Metastatic Squamous Cell Carcinoma ofwe abandoned our remaining research and development assets (including our intent to return the Headexosome technology back to the original licensor); and Neck. This trial is on track
·On February 12, 2018, we sold our PS-targeting program pursuant to be initiatedan Asset Assignment and Purchase Agreement (as described in Note 10 to the coming months.accompanying unaudited condensed consolidated financial statements).

 

Strategic Objectives

Now that we have completed the transition of our business to a dedicated CDMO, we have established the following near-term strategic objectives:

·Continue to invest in manufacturing facilities and infrastructure to maximize our facility utilization and support our customers’ clinical and commercial development and manufacturing requirements;
·Broaden our sales force by hiring sales representatives to execute our business development initiatives in key markets; and
·Expand and diversify our customer base by securing additional customers to support our future potential revenue growth beyond fiscal year 2018.

 

 

 

 19

Phase III SUNRISE Trial

In December 2013, we initiated a randomized, double-blind, placebo-controlled Phase III trial evaluating bavituximab plus docetaxel versus docetaxel plus placebo, for the treatment of previously-treated NSCLC (the “Phase III SUNRISE trial”).

In February 2016, we announced that we were discontinuing the Phase III SUNRISE trial based on the recommendation of the study’s Independent Data Monitoring Committee following a pre-specified interim analysis performed after 33% of targeted overall events (patient deaths) in the study were reached. Results of the analysis demonstrated that the patients treated in the bavituximab plus docetaxel treatment arm did not show a sufficient improvement in overall survival as compared to the patients treated in the docetaxel plus placebo treatment arm to warrant continuation of the study. Patient enrollment was discontinued and existing patients in the trial were given the choice to continue chemotherapy and/or bavituximab, as appropriate. Clinical trial data from the study will continue to be collected until trial completion.

In October 2016, we announced interim top-line results at the European Society for Medical Oncology (“ESMO”) 2016 Congress. The top-line results were based on a data cut-off after 70% (330/473) of the targeted overall survival (“OS”) events had been reached and demonstrated the addition of bavituximab to docetaxel did not result in improvement of the study’s primary endpoint of OS in the intent-to-treat population. Median OS for the bavituximab plus docetaxel group was 10.7 months as compared to 10.8 months for the placebo plus docetaxel control group (HR = 1.110; p = 0.382).  Median progression free survival (“PFS”) for the bavituximab-containing group was 4.1 months compared to 3.9 months for the control group (HR = 0.97; p = 0.803).  Objective response rates based on independent central review were currently 13% and 11% (p = 0.53) for the bavituximab-containing and control groups, respectively.  Additionally, the safety profile of the combination of bavituximab with docetaxel group was similar to placebo plus docetaxel group.

In addition, we are currently conducting an extensive review of the available data and testing the numerous collected samples for potential biomarkers in order to understand what subgroups or other patient characteristics may have impacted the performance of the study. At the ESMO 2016 Congress, we presented data that showed that certain levels of the serum protein beta-2 glycoprotein-1 (β2GP1) may be useful for identifying patients who are more likely to benefit from a bavituximab-containing therapeutic regimen. Numerous other potential biomarkers are currently being analyzed with the goal of developing a multi-marker signature that can potentially identify patients that are likely to receive significant clinical benefit from a bavituximab-containing therapeutic regimen. We believe such information will be important in supporting our clinical strategy as discussed above.

20 

 

 

Results of Operations

 

The following table compares the unaudited condensed consolidated statements of operations from our continuing operations for the three and nine-month periodsnine months ended January 31, 20172018 and 2016. This table provides you with an overview of the changes in the condensed consolidated statements of operations for the comparative periods, which are further discussed below.2017.

 

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2017  2016  $ Change  2017  2016  $ Change 
REVENUES:                  
Contract manufacturing revenue $10,747,000  $6,672,000  $4,075,000  $39,726,000  $25,574,000  $14,152,000 
License revenue     37,000   (37,000)     329,000   (329,000)
Total revenues  10,747,000   6,709,000   4,038,000   39,726,000   25,903,000   13,823,000 
                         
COSTS AND EXPENSES:                        
Cost of contract manufacturing  7,974,000   3,896,000   4,078,000   26,477,000   13,245,000   13,232,000 
Research and development  5,989,000   15,156,000   (9,167,000)  21,580,000   43,264,000   (21,684,000)
Selling, general and administrative  4,581,000   4,524,000   57,000   14,625,000   13,839,000   786,000 
                         
Total costs and expenses  18,544,000   23,576,000   (5,032,000)  62,682,000   70,348,000   (7,666,000)
                         
LOSS FROM OPERATIONS  (7,797,000)  (16,867,000)  9,070,000   (22,956,000)  (44,445,000)  21,489,000 
                         
OTHER INCOME (EXPENSE):                        
Interest and other income  25,000   34,000   (9,000)  71,000   691,000   (620,000)
Interest and other expense  (2,000)  (14,000)  12,000   (2,000)  (14,000)  12,000 
Total other income, net  23,000   20,000   3,000   69,000   677,000   (608,000)
                         
NET LOSS $(7,774,000) $(16,847,000) $9,073,000  $(22,887,000) $(43,768,000) $20,881,000 

Results of operations for interim periods covered by this Quarterly Report on Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or for any other period.

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2018  2017  $ Change  2018  2017  $ Change 
Contract manufacturing revenue $6,819,000  $10,747,000  $(3,928,000) $46,678,000  $39,726,000  $6,952,000 
Cost of contract manufacturing  10,951,000   7,974,000   2,977,000   47,641,000   26,477,000   21,164,000 
Gross profit (loss)  (4,132,000)  2,773,000   (6,905,000)  (963,000)  13,249,000   (14,212,000)
                         
Operating expenses:                        
Selling, general & administrative  4,824,000   4,365,000   459,000   12,273,000   13,602,000   (1,329,000)
Restructuring charges           1,258,000      1,258,000 
                         
Total operating expenses  4,824,000   4,365,000   459,000   13,531,000   13,602,000   (71,000)
                         
Operating loss  (8,956,000)  (1,592,000)  (7,364,000)  (14,494,000)  (353,000)  (14,141,000)
                         
Other income (expense)                        
Interest and other income  42,000   25,000   17,000   83,000   71,000   12,000 
Interest and other expense  (14,000)  (2,000)  (12,000)  (18,000)  (2,000)  (16,000)
                         
Loss from continuing operations $(8,928,000) $(1,569,000) $(7,359,000) $(14,429,000) $(284,000) $(14,145,000)

 

Contract Manufacturing Revenue

 

Three and Nine Months:  The increasesdecrease in contract manufacturing revenue of $4,075,000 (61%) and $14,152,000 (55%$3,928,000 (37%) during the three and nine-month periodsmonths ended January 31, 2017, respectively,2018 compared to the same periodsperiod in the prior year werewas primarily due to an increasea decrease in the number of manufacturing runs completed and shipped in the current year three and nine-month periodsperiod compared to the same period in the prior year, which can primarily be attributed to a decrease in manufacturing demand from our second largest customer.

Nine Months: The increase in contract manufacturing revenue of $6,952,000 (17%) during the nine months ended January 31, 2018 compared to the same period in the prior year can primarily be attributed to revenue associated with several manufacturing runs in the aggregate amount of $9,924,000 used to support the process validation of a customer product, which product was ready for shipment in fiscal year 2017, but was deferred to fiscal year 2018 due to an increaseda shipping delay. This increase was offset partially offset by a decrease in manufacturing demand for contract manufacturing services combined with increased utilization offrom our manufacturing capacity associated with our Myford biomanufacturing facility, which became fully operational in March 2016.

Based on our current commitments for manufacturing services from Avid’s third-party customers and the anticipated completion of in-process third-party customer manufacturing runs,two largest customers. Excluding any future potential new business, we expect contract manufacturing revenue for the full fiscal year ending April 30, 20172018 to increasedecline in comparison to fiscal year 2016.2017. Part of this decline is due to lower anticipated commitments from Halozyme, Inc., our largest customer, based on its most recent committed forecast (covering the three quarters ending September 30, 2018). As we seek to expand and diversify our customer base, we have secured five new customers since January 2017. These new customers are predominately in an earlier stage of development and, therefore, we expect that contract manufacturing revenue from these new customers during fiscal year 2018 will only partially offset the anticipated decrease in revenue from our other existing customers.

 

License RevenueTherefore, based on our current commitments for manufacturing services and the anticipated completion of in-process manufacturing runs, we continue to expect contract manufacturing for the fiscal year ending April 30, 2018 to range from $50 to $55 million.

NineGross Profit (Loss)

Three Months: The decrease in license revenue of $329,000 duringDuring the ninethree months ended January 31, 20172018, gross margins declined to a negative 61% primarily driven by idle capacity costs in the current period, compared to gross margins of 26% for the same period in the prior year was directly related to revenue recognized in the prior yearthree-month period, in accordance with the terms of our existing license agreements. Based on our existing licensing agreements,during which we do not expect license revenue to be a significant source of revenue for the current fiscal year.

Cost of Contract Manufacturing

Three and Nine Months: The increases inincurred no idle capacity costs. Included within cost of contract manufacturing are idle capacity costs of $4,078,000 (105%) and $13,232,000 (100%) during$5,344,000, which negatively impacted gross margin by 78 percentage points for the three and nine-month periodsmonths ended January 31, 2017, respectively, compared2018. This current period decline was further impacted by higher manufacturing costs associated with lower facility utilization in addition to the same periods in the prior year were primarily due to the current year three and nine-month period increases in contract manufacturing revenue. In addition, we saw a decline in our gross margin for the current year three and nine-month periods, which was primarily attributed to the mix of products manufactured for and services provided to our customers and the variability of manufacturing costs from product to product.

 

 

 

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Research and Development Expenses

Research and development expenses primarily include (i) payroll and related costs and share-based compensation expense (non-cash), associated with research and development personnel, (ii) costs related to clinical trials and preclinical testing, (iii) costs to develop and manufacture our product candidates, including raw materials and supplies, product testing, depreciation, and facility related expenses, (iv) expenses for research services provided by universities and contract laboratories, including sponsored research funding, and (v) other research and development expenses. Research and development expenses are charged to expense as incurred when these expenditures relate to our research and development efforts and have no alternative future uses.

Three Months: The decrease in research and development expenses of $9,167,000 (60%) during the three months ended January 31, 2017 compared to the same prior year period was primarily related to the following decreases associated with our PS-targeting platform:

·Decrease in third-party clinical trial costs of $5,077,000 primarily attributed to a decrease in costs related to our discontinued Phase III SUNRISE trial (as discussed above) and previously planned Phase II trials in breast and lung cancers; and

·Decrease in manufacturing costs of $4,123,000 primarily related to internal and external costs and expenses incurred in the prior year associated with preparing bavituximab for commercial production.

Nine Months: The decrease in research and development expenses of $21,684,000 (50%) duringDuring the nine months ended January 31, 20172018, gross margins declined to a negative 2%, primarily driven by idle capacity costs in the current period compared to 33% for the same prior year nine-month period, during which we incurred no idle capacity costs. Included within cost of contract manufacturing are idle capacity costs of $11,182,000 which negatively impacted gross margin by 24 percentage points for the nine months ended January 31, 2018. This current period decline was primarily relatedfurther impacted by higher manufacturing costs associated with lower facility utilization in addition to the following decreases associated with our PS-targeting platform:

·Decrease in third-party clinical trial costs of $12,351,000 related to the clinical development of bavituximab related to our discontinued Phase III SUNRISE trial (as discussed above) and previously planned Phase II trials in breast and lung cancers;

·Decrease in payroll and related expenses of $2,100,000 related to a reduction of research and development personnel combined with the reassignment of certain personnel to our contract manufacturing operations;

·Decrease in manufacturing costs of $5,922,000 primarily related to internal and external costs and expenses incurred in the prior year associated with preparing bavituximab for commercial production; and

·Decreases in facility-related expenses and share-based compensation expense (non-cash) of $575,000 and $359,000, respectively.

In addition, during June 2016, we announced a clinical development strategy focused on conducting small, early stage studiesvariability of bavituximab in combination with immune stimulating therapies. These trials may be conducted independently, in conjunction with our collaborators, or through ISTs. The goal of these trials will bemanufacturing costs from product to generate compelling clinical and translational biomarker data that demonstrate the ability of treatment combinations featuring bavituximab to modify immune activity within the tumor microenvironment to support cancer killing. We plan to leverage these data, if positive, to attract partnering interest in our PS-targeting platform. Based on our current strategy, we expect research and development expenses for the current fiscal year to decrease at least 50% or more in comparison to our fiscal year ended April 30, 2016.product.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative (“SG&A”) expenses consist primarily of payroll and related expenses and share-based compensation expense (non-cash), for personnel in executive, finance, accounting, business development, legal, human resources, information technology, and other internal support functions. In addition, SG&A expenses include corporate and patent legal fees, audit and accounting fees, investor relation expenses, non-employee director fees, insurance expense,facility related expenses, and other expenses relating to our general management, administration, and business development activities.

 

NineThree Months: The increase in SG&A expenses of $786,000 (6%$459,000 (11%) during the three months ended January 31, 2018 compared to the same prior year period was primarily due to a current year three-month period increases in legal and other related fees associated with a settlement agreement we entered into with certain investors during November 2018 regarding the composition of our board of directors and legal and advisory fees associated with the recent sale of our PS-targeting program (as described in Note 10 to the accompanying unaudited condensed consolidated financial statements).

Nine Months: The decrease in SG&A expenses of $1,329,000 (10%) during the nine months ended January 31, 2017,2018 compared to the same period in the prior year period was primarily due to current yearnine-month period increasesdecreases in payroll and related expensescosts and facility related expenses,non-employee director fees. The current period decrease in non-employee directors fees is attributed to the settlement terms of a derivative and class action complaint approved by the Court of Chancery of the State of Delaware on July 27, 2017, pursuant to which our former non-employee directors agreed to pay or cause to be paid $1,500,000 to us (as described in Note 12 to the accompanying unaudited condensed consolidated financial statements), which non-recurring amount was applied against non-employee director fees during the quarter ended July 31, 2017. This decrease during the nine months ended January 31, 2018 was offset by current year period decreasesincreases in share-based compensation expense (non-cash)facility related expenses, legal fees, investor relation fees, audit and accounting fees and other general corporate expenses. We expect SG&A expenses

Restructuring Charges

Restructuring charges of $1,588,000 incurred during the quarter ended October, 31, 2017 were directly related to a restructuring plan we implemented in August 2017, pursuant to which we reduced our overall workforce by 57 employees in order to reduce operating costs and improve cost efficiencies while we pursued the license or sale of our research and development assets and focus our efforts on growing our CDMO business (as described in Note 9 to the accompanying unaudited condensed consolidated financial statements). Of the total restructuring charges incurred, $330,000 was related to our research and development segment and $1,258,000 related to our contract manufacturing services segment. The restructuring costs associated with our research and development segment are included in loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for the remaindernine months ended January 31, 2018. The costs incurred under this restructuring plan, which was completed in October 2017, consisted of one-time termination benefits, including severance, and other employee related costs. We did not incur any restructuring charges during the current fiscal year ending April 30, 2017three and nine months ended January 31, 2017.

Discontinued Operations

As a result of (i) the sale of our PS-targeting program (as described in Note 10 to remain in-linethe accompanying unaudited condensed consolidated financial statements), (ii) the held for sale classification of our R84 technology, (iii) the abandonment of our remaining research and development assets (including our intent to return the exosome technology back to the original licensor), and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business that will have a major effect on our operations and financial results as we will no longer incur costs associated with research and development, the operating results from our current nine-month period.research and development segment are reported as a loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented.

 

 

 

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Interest and Other Income

Nine Months: The decrease in interest and other income of $620,000 (90%) during the nine months ended January 31, 2017 compared to the same period in the prior year was directly related to the receipt in the prior year of a $600,000 settlement payment from a former third-party vendor in accordance with the terms of the confidential settlement and release agreement entered into during the fiscal quarter ended October 31, 2015.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our consolidated financial position and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We review our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which 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. During the three and nine-month periodsnine months ended January 31, 2017,2018, there were no significant changes in our critical accounting policies as previously disclosed by us in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2016.2017, other than those related to discontinued operations as described in Note 2, “Summary of Significant Accounting Policies” in the accompanying notes to the unaudited condensed consolidated financial statements.

 

Liquidity and Capital Resources

 

At January 31, 2017, we had $41,528,000 in cash and cash equivalents. We have expended substantial funds on our contract manufacturing business and, historically, on the research and development of ourpharmaceutical product candidates, and funding the operations of Avid.candidates. As a result, we have historically experienced losses and negative cash flows from operations since our inception and, although we have discontinued our research and development segment (as described in Note 1 to the accompanying unaudited condensed consolidated financial statements), we expect negative cash flows from operations to continue until at leastfor the fiscal year ending April 30, 2018 before we believeforeseeable future until we can generate sufficient revenue from Avid’s contract manufacturing services to achieve profitability. Therefore, unless and until we are able to generate sufficient revenue, from Avid’s contract manufacturing services or from the sale or licensing of our product candidates under development, we expect such losses to continue through at leastduring the remainder of fiscal year ending April 30, 2018.2018 and in the foreseeable future.

 

Our ability to continue to fund our operations is highly dependent on the amount of cash on hand and our ability to generate sufficient revenue to cover our operations. At January 31, 2018, we had $17,938,000 in cash and cash equivalents and in February 2018, we raised $23,163,000 in gross proceeds from the sale of our common stock pursuant to an underwritten public offering (as described in Note 13 to the accompanying unaudited condensed consolidated financial statements). At February 28, 2018, our cash and cash equivalents balance increased to $41,688,000.

Although it is difficult to predict all of our future liquidity requirements, we believe that our cash and cash equivalents on hand combined with the remaining projected cash receipts from manufacturing services under our abilitycurrent backlog and the aggregate of $8,000,000 in upfront payments we expect to raise additional capital to support our future operations through one or more methods, including but not limited to, (i) raising additional capital inreceive over the equity markets, (ii) generating additional revenuenext six (6) months from Avid, or (iii) licensing or partnering our product candidates in development.

Historically, we have funded a significant portionthe recent sale of our operations through the issuance of equity. During the nine months ended January 31, 2017, we raised $11,944,000 in aggregate gross proceeds from the sale of shares of our common stock and raised an additional $1,634,000 in aggregate gross proceeds from the sale of shares of our 10.5% Series E Convertible Preferred Stock (the “Series E Preferred Stock”)PS-targeting program (as described in Note 610 to the accompanying unaudited condensed consolidated financial statements). Subsequent will be sufficient to January 31, 2017 andfund our operations through March 13, 2017, we raised an2019 without securing any new business or raising any additional $13,341,000capital. In addition, in aggregate gross proceeds from the sale of shares of our common stock (as described in Note 11event a customer timely cancels its commitments prior to the accompanying unaudited condensed consolidated financial statements). Asinitiation of March 13, 2017, $77,970,000 remained availablemanufacturing services, we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments, which would have a negative impact on our effective shelf registration statement, which allows us from timeliquidity, our reported backlog and revenue guidance. As such, we expect our current backlog (as further discussed in the “Backlog” section below) to timebe insufficient to offer and sell shares ofcover our common stock, in oneoperating costs over the near term unless we are able to generate new business or more offerings, either individually or in combination.further restructure our operations.

 

In the event we are unable to secure sufficient business to support our operations, we may need to raise additional capital in the future. Our ability to raise additional capital in the equity markets to fund our obligations in future periods is dependent on a number of factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties, including but not limited to, negative economic conditions, adverse market conditions, and adverse financial results, and negative research and development results. Furthermore, our ability to raise additional capital in the equity markets has been significantly impacted by the decline in the market price of our common stock following our announcement in February 2016 that we were discontinuing the Phase III SUNRISE trial. As a result, we have experienced a substantial decline in the amount of additional capital that we have been able to raise from the sale of shares of our common stock as compared to recent fiscal years. If the market price of our common stock does not improve significantly, we may not be able to rely on the sale of shares of our common stock to fund our operations to the extent we have in prior years. If we are unable to either (i) raise sufficient capital in the equity markets (ii)or generate additional revenue, from Avid, or (iii) license or partner our products in development, or any combination thereof, we may need to delay, scale back,further restructure, or eliminate some or allcease, our research and development efforts, or restructure our operations, which may include delaying the planned expansion of our contract manufacturing business.operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.

 

 

 

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With respect toAs a result, we have concluded that there is substantial doubt about our ability to generate additional contract manufacturing revenue, Avid currently hascontinue as a revenue backlog of $70 million under signed contracts from existing customers covering manufacturing services, most of which is expected to be completed duringgoing concern within one year after the fourth quarter of fiscal year 2017 and into fiscal year 2018.

Although it is difficult to predict all of our future liquidity requirements, we believedate that our cash and cash equivalents as of January 31, 2017 combined with the additional proceeds raised subsequent to January 31, 2017, and the projected cash receipts from manufacturing services provided by Avid for its third-party customers under committed contracts will be sufficient to fund our operations through at least December 2017, which estimate assumes we raise no additional capital from the capital markets or other potential sources.

If weaccompanying unaudited condensed consolidated financial statements are unable to either (i) raise sufficient capital in the equity markets, (ii) generate additional revenue from Avid, or (iii) license or partner our products in development, or any combination thereof, we may need to delay, scale back, or eliminate some or all our research and development efforts, or restructure our operations, which may include delaying the planned expansion of our contract manufacturing business. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.issued.

 

Significant components of the changes in cash flows from operating, investing, and financing activities for the nine months ended January 31, 20172018 compared to the same prior year period are as follows:

 

Net Cash Used In Operating Activities. Net cash used in operating activities represents our (i) net loss, as reported, (ii) less non-cash operating expenses, and (iii) net changes in the timing of cash flows as reflected by the changes in operating assets and liabilities, as described in the below table:

 

 Nine Months Ended January 31,  Nine Months Ended January 31, 
 2017  2016  2018  2017 
Net loss, as reported $(22,887,000) $(43,768,000) $(24,833,000) $(22,887,000)
Less non-cash operating expenses:
                
Share-based compensation  2,591,000   3,740,000   1,206,000   2,591,000 
Depreciation and amortization  1,850,000   921,000   1,945,000   1,850,000 
Loss on disposal of property and equipment     14,000   401,000    
Net cash used in operating activities before changes in operating assets and liabilities $(18,446,000) $(39,093,000) $(21,281,000) $(18,446,000)
Net change in operating assets and liabilities $(9,170,000) $5,119,000  $(6,820,000) $(9,170,000)
Net cash used in operating activities $(27,616,000) $(33,974,000) $(28,101,000) $(27,616,000)

 

Net cash used in operating activities decreased $6,358,000increased $485,000 to $27,616,000$28,101,000 for the nine months ended January 31, 20172018 compared to net cash used in operating activities of $33,974,000$27,616,000 for the nine months ended January 31, 2016.2017. This decreaseincrease in net cash used in operating activities was due to a decreasean increase of $2,835,000 in our net loss reported for the current nine-month period after deducting non-cash operating expenses of $20,647,000, as described in the above table, offset by a net change in operating assets and liabilities of $14,289,000$2,350,000 primarily due to the timing of cash receipts and expenditures.expenditures associated with deferred revenue, customer deposits, inventories, trade and other receivables, accounts payable, and accrued clinical trial and related fees.

Net Cash Used In Investing Activities. Net cash used in investing activities for the nine months ended January 31, 2018 and 2017, was $2,144,000 and 2016, was $2,439,000, and $7,483,000, respectively.

Net cash used in investing activities during the nine months ended January 31, 2017respectively, which amounts primarily consisted of property and equipment acquisitions of $1,280,000 related to our manufacturing operations combined with an increase in other assets of $1,159,000 primarily related to deposits and/or progress payments for certain equipment to support the growth of our manufacturing operations.

Net cash used in investing activities during the nine months ended January 31, 2016 consisted of property and equipment acquisitions of $7,909,000 offset by a decrease in other assets of $426,000. Property and equipment acquisitions during the nine months ended January 31, 2016 primarily related to costs associated with the construction of our Myford facility to support Avid’s projected revenue growth and to support the manufacturing of our product candidates. The construction of the Myford facility was completed and we placed the facility into service during our fiscal year ended April 30, 2016. The decrease in other assets was primarily due to the transfer of progress payments incurred during our fiscal year ended April 30, 2015 to property and equipment related to our manufacturing operations.

 

Net Cash Provided By Financing Activities. Net cash provided by financing activities for the nine months ended January 31, 2018 and 2017, was $1,384,000 and 2016, was $10,171,000, and $40,926,000, respectively.

 

Net cash provided by financing activities during the nine months ended January 31, 2018 consisted of (i) $4,193,000 in net proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement, (ii) $217,000 in net proceeds from the purchase of shares of our common stock under our Employee Stock Purchase Plan (“ESPP”), and (iii) $398,000 in net proceeds from stock option exercises, which amounts were offset by dividends paid on our issued and outstanding Series E Preferred Stock of $3,244,000 and principal payments on a capital lease of $180,000.

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Net cash provided by financing activities during the nine months ended January 31, 2017 consisted of (i) $7,800,000 in net proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement, (ii) $3,804,000 in net proceeds from the sale of shares of our common stock under an Equity Distribution Agreement, (iii) $1,576,000 in net proceeds from the sale of shares of our Series E Preferred Stock under a separate At Market Issuance Sales Agreement, and (iv) $254,000 in net proceeds from the purchase of shares of our common stock under our Employee Stock Purchase Plan (“ESPP”),ESPP, which amounts were offset by dividends paid on our issued and outstanding Series E Preferred Stock of $3,198,000 and principal payments on a capital lease of $65,000.

 

Net cash provided by financing activities during the nine months endedBacklog

Our backlog represents, as of a point in time, future contract manufacturing revenue from work not yet completed under signed contracts. As of January 31, 2016 consisted2018, our backlog was approximately $39 million, the majority of (i) $19,999,000which, we expect to recognize over the next twelve (12) months, compared to approximately $70 million as of January 31, 2017. In addition, in net proceeds from the saleevent a customer timely cancels its commitments prior to the initiation of sharesmanufacturing services, we may be required to refund some or all of our common stockthe amounts paid to us in advance under those canceled commitments, which would have a Common Stock Purchase Agreement, (ii) $18,402,000 in net proceeds from the sale of shares of our common stock under two separate At Market Issuance Sales Agreements, (iii) $5,097,000 in net proceeds from the sale of shares of our common stock under an Equity Distribution Agreement, (iv) $334,000 in net proceeds from the purchase of shares under our ESPP, (iv) $138,000 in net proceeds from stock option exercises, and (v) $59,000 in net proceeds from the sale of shares of our Series E Preferred Stock under a separate At Market Issuance Sales Agreement, which amounts were offset by dividends paidnegative impact on our issuedliquidity, our reported backlog and outstanding Series E Preferred Stock of $3,103,000.our future revenue.

 

Contractual Obligations

 

Except as set forth below, during the nine months ended January 31, 2017, there were no material changes in our contractual obligations and commitments, as described in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2016.

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During November 2016, we entered into an amendment to one of our operating lease agreements, pursuant to which the term of the lease was extended from December 31, 2017 to December 31, 2027 (as described in Note 10 to the accompanying unaudited condensed consolidated financial statements). Pursuant to this amendment, our future minimum lease payments for this lease will increase from $832,000 to $9,414,000, of which, $899,000 will be paid within one year, $1,608,000 will be paid within one to three years, $1,661,000 will be paid within three to five years and $5,246,000 will paid thereafter.

 

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

 

Our cash and cash equivalents are primarily invested in money market funds with one major commercial bank with the primary objective to preserve our principal balance. Our deposits held with this bank exceed the amount of government insurance limits provided on our deposits and, therefore, we are exposed to credit risk in the event of default by the major commercial bank holding our cash balances. However, these deposits may be redeemed upon demand and, therefore, bear minimal risk. In addition, while changes in U.S. interest rates would affect the interest earned on our cash balances at January 31, 2017,2018, such changes would not have a material adverse effect on our financial position or results of operations based on historical movements in interest rates.

 

Item 4.Controls And Procedures.

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2017,2018, the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of January 31, 2017.2018.

 

There were no significant changes in our internal control over financial reporting, during the quarter ended January 31, 2017,2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1.Legal Proceedings.

 

There have been no material developments in the legal proceedings disclosedThe information required by this Item is incorporated by reference to Note 12, “Commitments and Contingencies,” in Part I, Item 3 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2016, except as follows.

Michaeli v. Steven W. King, et al.

The parties, having recently agreed in principle to settle the Amended Complaint, are currently negotiating a stipulation of settlement, which will then be subject to the final approval by the Court of Chancery of the State of Delaware.1, “Financial Information.”

 

Item 1A.Risk Factors.

 

There have been no material changes to the risk factors included in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2016,2017, except for the following risk factors:

 

If we cannot obtainsecure additional funding, our product development efforts may be further reduced or discontinued andbusiness, we may not be ablehave to expandraise additional capital or further restructure, or cease, our contract manufacturing business.operations.

 

At January 31, 2017, we had $41,528,000 in cash and cash equivalents. We have expended substantial funds on our contract manufacturing business and, historically, on the research and development of ourpharmaceutical product candidates, and funding the operations of Avid.candidates. As a result, we have historically experienced losses and negative cash flows from operations since our inception and, although we have discontinued our research and development segment (as described in Note 1 to the accompanying unaudited condensed consolidated financial statements), we expect negative cash flows from operations to continue until at leastfor the fiscal year ending April 30, 2018 before we believeforeseeable future until we can generate sufficient revenue from Avid’s contract manufacturing services to achieve profitability. Therefore, unless and until we are able to generate sufficient revenue, from Avid’s contract manufacturing services or from the sale or licensing of our product candidates under development, we expect such losses to continue through at leastduring the remainder of fiscal year ending April 30, 2018.

Our ability to continue to fund our operations is highly dependent on the amount of cash2018 and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, (i) raising additional capital in the equity markets, (ii) generating additional revenue from Avid, or (iii) licensing or partnering our product candidates in development.

Historically, we have funded a significant portion of our operations through the issuance of equity. During the nine months ended January 31, 2017, we raised $11,944,000 in aggregate gross proceeds from the sale of shares of our common stock and raised an additional $1,634,000 in aggregate gross proceeds from the sale of shares of our 10.5% Series E Convertible Preferred Stock (the “Series E Preferred Stock”) (as described in Note 6 to the accompanying unaudited condensed consolidated financial statements). Subsequent to January 31, 2017 and through March 13, 2017, we raised an additional $13,341,000 in aggregate gross proceeds from the sale of shares of our common stock (as described in Note 11 to the accompanying unaudited condensed consolidated financial statements). As of March 13, 2017, $77,970,000 remained available to us under our effective shelf registration statement, which allows us from time to time to offer and sell shares of our common stock, in one or more offerings, either individually or in combination.foreseeable future.

 

 

 

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Our ability to fund our operations is dependent on the amount of cash on hand and our ability to generate sufficient revenue to cover our operations. At January 31, 2018, we had $17,938,000 in cash and cash equivalents and in February 2018, we raised $23,163,000 in gross proceeds from the sale of our common stock pursuant to an underwritten public offering (as described in Note 13 to the accompanying unaudited condensed consolidated financial statements). At February 28, 2018, our cash and cash equivalents balance increased to $41,688,000.

Although it is difficult to predict all of our future liquidity requirements, we believe that our cash and cash equivalents on hand combined with the remaining projected cash receipts from manufacturing services under our current backlog and the aggregate of $8,000,000 in upfront payments we expect to receive over the next six (6) months from the recent sale of our PS-targeting program (as described in Note 10 to the accompanying unaudited condensed consolidated financial statements) will be sufficient to fund our operations through March 2019 without securing any new business or raising any additional capital. In addition, in the event a customer timely cancels its commitments prior to the initiation of manufacturing services, we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments, which would have a negative impact on our liquidity, our reported backlog and revenue guidance. As such, we expect our current backlog (as further discussed in the above “Backlog” section) to be insufficient to cover our operating costs over the near term unless we are able to generate new business or further restructure our operations.

In the event we are unable to secure sufficient business to support our operations, we may need to raise additional capital in the future. Our ability to raise additional capital in the equity markets to fund our obligations in future periods is dependent on a number of factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties, including but not limited to, negative economic conditions, adverse market conditions, and adverse financial results, and negative research and development results. Furthermore, our ability to raise additional capital in the equity markets has been significantly impacted by the decline in the market price of our common stock following our announcement in February 2016 that we were discontinuing the Phase III SUNRISE trial. As a result, we have experienced a substantial decline in the amount of additional capital that we have been able to raise from the sale of shares of our common stock as compared to recent fiscal years. If the market price of our common stock does not improve significantly, we may not be able to rely on the sale of shares of our common stock to fund our operations to the extent we have in prior years. If we are unable to either (i) raise sufficient capital in the equity markets (ii)or generate additional revenue, from Avid, or (iii) license or partner our products in development, or any combination thereof, we may need to delay, scale back,further restructure, or eliminate some or allcease, our research and development efforts, or restructure our operations, which may include delaying the planned expansion of our contract manufacturing business.operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.

 

With respect toAs a result, we have concluded that there is substantial doubt about our ability to generate additional contractcontinue as a going concern within one year after the date that our accompanying unaudited condensed consolidated financial statements are issued.

Our operating results will be adversely affected if we are unable to maximize our facility capacity utilization.

We have recently experienced idle manufacturing revenue, Avid currently has a revenue backlog of $70 million under signed contractscapacity due primarily to unexpected declines in commitments from existing customers, coveringand we may continue to experience such idle manufacturing services, mostcapacity unless commitments from these existing customers return to historical levels and/or we secure new customers. Our operating results are significantly influenced by our capacity utilization and, as such, if we are unable to utilize our facilities to capacity, our margins could be adversely affected, and our results of which is expectedoperations and financial condition will continue to be completed duringadversely affected. Further, while we continue to expand our manufacturing infrastructure, our revenue volume may be insufficient to ensure the remaindereconomical operation of the current fiscal year and fiscal year 2018.any such expanded capacity, in which case our results of operations could be adversely affected.

 

Although it is difficult to predict allWe have had significant losses, anticipate future losses and may never achieve profitability. 

We have incurred net losses in most fiscal years since we began operations in 1981, including net losses of our future liquidity requirements, we believe that our cash$28,159,000 and cash equivalents as$55,652,000 for the fiscal years ended April 30, 2017 and 2016, respectively. As of January 31, 2017 combined2018, we had an accumulated deficit of $562,149,000. In addition, we expect negative cash flows from operations to continue for the foreseeable future until we can generate sufficient revenue to achieve profitability. Further, if we fail to generate sufficient revenue, we may never achieve profitability.

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We depend on spending and demand from our customers for our contract manufacturing and development services and any reduction in spending or demand could have a material adverse effect on our business.

The amount that our customers spend on the development and manufacturing of their products or product candidates, particularly the amount our customers choose to spend on outsourcing these services to us, substantially impacts our revenue and profitability. The outcomes of our customers’ research, development and marketing also significantly influence the amount that our customers choose to spend on our services and offerings. Our customers determine the amounts that they will spend on our services based upon, among other things, the clinical and market success of their products, available resources, access to capital and their need to develop new products, which, in turn, depend upon a number of other factors, including their competitors’ research, development and product initiatives and the anticipated market for any new products, as well as clinical and reimbursement scenarios for specific products and therapeutic areas. Further, increasing consolidation in the pharmaceutical industry may impact such spending, particularly in the event that any of our customers choose to develop or acquire integrated manufacturing operations. Any reduction in customer spending on biologics development and related services as a result of these and other factors could have a material adverse effect on our business, results of operations and financial condition.

The consumers of the products we manufacture for our customers may significantly influence our business, results of operations and financial condition. 

We depend on, and have no control over, consumer demand for the products we manufacture for our customers. Consumer demand for our customers’ products could be adversely affected by, among other things, delays in health regulatory approval, the inability of our customers to demonstrate the efficacy and safety of their products, the loss of patent and other intellectual property rights protection, the emergence of competing or alternative products, including generic drugs, the degree to which private and government payment subsidies for a particular product offset the cost to consumers and changes in the marketing strategies for such products. If the products we manufacture for our customers do not gain market acceptance, our revenues and profitability may be adversely affected. 

We believe that continued changes to the healthcare industry, including ongoing healthcare reform, adverse changes in government or private funding of healthcare products and services, legislation or regulations governing the privacy of patient information or patient access to care, or the delivery, pricing or reimbursement of pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry participants to purchase fewer services from us or influence the price that others are willing to pay for our services. Changes in the healthcare industry’s pricing, selling, inventory, distribution or supply policies or practices could also significantly reduce our revenue and profitability. 

If production volumes of key products that we manufacture for our customers continue to decline, results of operations and financial condition may continue to be adversely affected.

We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy. 

Earlier in fiscal year 2018, we announced our intent to transition to a dedicated contract manufacturer and, in connection with such transition, pursue strategic options to license or divest our research and development assets. As a result of this transition, during the additional proceeds raised subsequent to Januaryquarter ended October 31, 2017, we reduced our overall workforce as part of a series of strategic actions to reduce costs and better position us to achieve potential profitability. Now that we have completed our transition to a dedicated contract manufacturer, we intend to grow our business operations as demand increases and increase the projected cash receipts fromnumber of our employees to accommodate such potential growth, which may cause us to experience periods of rapid growth and expansion. This potential future growth could create a strain on our organizational, administrative and operational infrastructure, including manufacturing services provided by Avid for its third-party customers under committed contractsoperations, quality control, technical support and other administrative functions. Our ability to manage our growth properly will be sufficientrequire us to fundcontinue to improve our operations through at least December 2017, which estimate assumes we raise no additional capital from the capital markets or other potential sources.operational, financial and management controls. 

 

As our commercial operations and sales volume grow, we will need to continue to increase our capacity for manufacturing, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. We may also need to purchase additional equipment, some of which can take several months or more to procure, set up and validate, and increase our manufacturing, maintenance, software and computing capacity to meet increased demand. These increases in scale, expansion of personnel, purchase of equipment or process enhancements may not be successfully implemented.  

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If we are unable to either (i) raise sufficient capital inprotect the equity markets, (ii) generate additional revenue from Avid, or (iii) license or partnerconfidentiality of our products in development, or any combination thereof,customers’ proprietary information, we may needbe subject to delay, scale back,claims.

Many of the formulations used and processes developed by us in manufacturing our customers’ products are subject to trade secret protection, patents or eliminate someother intellectual property protections owned or alllicensed by such customer. While we make significant efforts to protect our researchcustomers’ proprietary and development efforts, or restructureconfidential information, including requiring our operations, which may include delaying the planned expansionemployees to enter into agreements protecting such information, if any of our contract manufacturing business. In addition, evenemployees breaches the non-disclosure provisions in such agreements, or if our customers make claims that their proprietary information has been disclosed, our reputation may suffer damage and we are ablemay become subject to raise additional capital, itlegal proceedings that could require us to incur significant expenses and divert our management’s time, attention and resources. 

Our services and our customers’ products may infringe on or misappropriate the intellectual property rights of third parties.

Any claims that our services infringe the rights of third parties, including claims arising from any of our customer engagements, regardless of their merit or resolution, could be costly and may divert the efforts and attention of our management and technical personnel. We may not prevail in such proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If such proceedings result in an adverse outcome, we could be required, among other things, to pay substantial damages, discontinue the use of the infringing technology, expend significant resources to develop non-infringing technology, license such technology from the third party claiming infringement (which license may not be available on commercially reasonable terms or at a price all) and/or on terms that are favorable to us.

If we fail to meetcease the continued listing standardsmanufacture, use or sale of NASDAQ, our common stock may be delisted,the infringing processes or offerings, any of which could have a material adverse effect on our business. 

In addition, our customers’ products may be subject to claims of intellectual property infringement and such claims could materially affect our business if their products cease to be manufactured and they have to discontinue the liquidityuse of the infringing technology which we may provide. Any of the foregoing could affect our ability to compete or could have a material adverse effect on our business, financial condition and results of operations. 

If we do not enhance our existing or introduce new service offerings in a timely manner, our offerings may become obsolete or uncompetitive over time, customers may not buy our offerings and our revenue and profitability may decline. 

Demand for our manufacturing services may change in ways that we may not anticipate due to evolving industry standards and customer needs that are increasingly sophisticated and varied, as well as the introduction by others of new offerings and technologies that provide alternatives to our offerings. In the event we are unable to offer or enhance our service offerings or expand our manufacturing infrastructure to accommodate requests from our customers and potential customers, our offerings may become obsolete or uncompetitive over time, in which case our revenue and operating results would suffer. For example, if we are unable to respond to changes in the nature or extent of the technological or other needs of our common stock.customers through enhancing our offerings, our competition may develop offerings that are more competitive than ours and we could find it more difficult to renew or expand existing agreements or obtain new agreements. Potential innovations intended to facilitate enhanced or new offerings generally will require a substantial capital investment before we can determine their commercial viability, and we may not have financial resources sufficient to fund all desired innovations. Even if we succeed in creating enhanced or new offerings, however, they may still fail to result in commercially successful offerings or may not produce revenue in excess of our costs of development, and they may be rendered obsolete by changing customer preferences or the introduction by our competitors of offerings embodying new technologies or features. Finally, the marketplace may not accept our innovations due to, among other things, existing patterns of clinical practice, the need for regulatory clearance and/or uncertainty over market access or government or third-party reimbursement.

 

We operate in a highly competitive market and competition may adversely affect our business. 

We operate in a market that is highly competitive. Our common stock is currently traded on The NASDAQ Capital Market. As previously reported, on April 12, 2016competition in the contract manufacturing market includes full-service contract manufacturers and large pharmaceutical companies offering third-party manufacturing services to fill their excess capacity. We may also compete with the internal operations of those pharmaceutical companies that choose to source their product offerings internally. Additionally, several large pharmaceutical companies have recently sought to divest portions of their manufacturing capacity, and any such divested businesses may compete with us in the future. In addition, most of our competitors may have substantially greater financial, marketing, technical or other resources than we receiveddo. Moreover, additional competition may emerge, particularly in lower-cost jurisdictions such as India and China, which could, among other things, result in a letter fromdecrease in the staff of the Listing Qualifications Department (the “Staff”) of The NASDAQ Stock Market LLC (“NASDAQ”) notifying us that, for the previous 30 consecutive business days, the bid pricefees paid for our common stock had closed below the minimum $1.00 per share requirement for continued listing on The NASDAQ Capital Market under NASDAQ’s Listing Rule 5550(a)(2),services, which requires a minimum bid pricemay adversely affect our results of $1.00 per share (the “Minimum Bid Price Requirement”). In accordance with NASDAQ Listing Rule 5810(c)(3)(A), we were automatically afforded an initial “compliance period” of 180 calendar days following the date of the notification, or until October 10, 2016, to regain compliance with the Minimum Bid Price Requirement. Although we did not regain compliance with the Minimum Bid Price Requirement by October 10, 2016, we received a letter from the Staff on October 11, 2016 notifying us that, pursuant to Listing Rule 5810(c)(3)(A)(ii), we were eligible for an additional “compliance period” of 180 calendar days, or until April 10, 2017, to regain compliance with the Minimum Bid Price Requirement. The Staff’s determination in the October 11, 2016 notification letter was based on us meeting as of the last day of the initial “compliance period” the continued listing requirement for market value of publicly held sharesoperations and all other applicable requirements for initial listing on The NASDAQ Capital Market with the exception of the Minimum Bid Price Requirement, and our written notice to NASDAQ of our intention to regain compliance by effecting a reverse stock split, if necessary. We may achieve compliance during this additional 180-day “compliance period” if the closing bid price of our common stock is at least $1.00 per share for a minimum of 10 consecutive business days, but generally no more than 20 consecutive business days, before April 10, 2017.financial condition.  

 

 

 

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AlthoughWe rely on third parties to supply most of the necessary raw materials and supplies for the products we manufacture on behalf of our stockholders approved, atcustomers and our Annual Meetinginability to obtain such raw materials or supplies may adversely impact our business, results of Stockholdersoperations and financial condition. 

Our operations require various raw materials, including proprietary media, resins, buffers, filters, in addition to numerous additional raw materials supplied primarily by third parties. We or our customers specify the raw materials and other items required to manufacture their product and, in some cases, specify the suppliers from whom we must purchase these raw materials. In certain instances, the raw materials and other items can only be supplied by a limited number of suppliers or in limited quantities. If third-party suppliers do not supply raw materials or other items on October 13, 2016, an amendmenta timely basis, it may cause a manufacturing run to be delayed or canceled which would adversely impact our results of operations and financial condition. 

Furthermore, third-party suppliers may fail to provide us with raw materials and other items that meet the qualifications and specifications required by us or our customers. If third-party suppliers are not able to provide us with raw materials that meet our or our customers’ specifications on a timely basis, we may be unable to manufacture their product or it could prevent us from delivering products to our Certificatecustomers within required timeframes. Any such delay in delivering our products may create liability for us to our customers for breach of Incorporation,contract or cause us to experience order cancellations and loss of customers. In the event that we manufacture products with inferior quality components and raw materials, we may become subject to product liability claims caused by defective raw materials or components from a third-party supplier or from a customer, or our customer may be required to recall its products from the market. 

If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages. 

Our contract manufacturing operations involve, and our prior activities with respect to our recently sold research and development assets involved, the controlled use of hazardous materials and chemicals. We are subject to federal, state and local laws and regulations in the U.S. governing the use, manufacture, storage, handling and disposal of hazardous materials and chemicals. Although we believe that our procedures for using, handling, storing and disposing of these materials comply with legally prescribed standards, we may incur significant additional costs to comply with applicable laws in the future. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials or chemicals. As a result of any such contamination or injury, we may incur liability or local, city, state or federal authorities may curtail the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our contract manufacturing operations, which could materially harm our business, financial condition and results of operations.  

We are subject to product liability claims. 

Our contract manufacturing services expose us to an inherent risk of liability, as the antibodies or other substances we manufacture, 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. However, these indemnification agreements may not adequately protect us against potential claims relating to such contract manufacturing services or protect us from being named in a possible lawsuit. Although we have procured insurance coverage, we may not be able to maintain our existing coverage or obtain additional coverage on commercially reasonable terms, or at all, or such insurance may not provide adequate coverage against all potential claims to which we might be exposed. Additionally, any lawsuits in which we may be named could be costly to defend and could result in significant liabilities, adverse publicity and diversion of our management’s time, attention and resources. A partially successful or completely uninsured claim against us could materially harm our business, financial condition and results of operations.

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If we lose qualified management, including manufacturing or scientific personnel or are unable to attract and retain such personnel, we may be unable to successfully manufacture our customers’ products.

Our success is dependent, in part, upon a limited number of key executive officers, each of whom is an at-will employee. For example, because of his extensive understanding of our contract manufacturing operations and technologies, the loss of Roger J. Lias, Ph.D, our President and Chief Executive Officer, would adversely affect our contract manufacturing operations during the six- to twelve-month period that we estimate it would take to find a qualified replacement. 

We also believe that our future success will depend largely upon our ability to attract and retain highly-skilled manufacturing and process development personnel. We face intense competition in our recruiting activities, including competition from larger companies with greater resources. The loss of certain key employees or our inability to attract and retain other qualified employees could negatively affect our operations and financial performance. 

U.S. federal income tax reform could adversely affect us and our stockholders. 

The Tax Cuts and Jobs Act, or TCJA, significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, effectuates the migration from a “worldwide” system of taxation to a territorial system and modifies or repeals many business deductions and credits. We continue to examine the impact the TCJA may have on our business. While we continue to evaluate the effect a reverse splitof the TCJA on our business, including our projection of minimal cash taxes and our net operating losses, the impact of such tax reform on holders of our common stock atis uncertain and may be adverse.   

We may face additional liabilities associated with our prior research and development activities. 

We recently sold the majority of our research and development assets, including our development-stage immunotherapy product, bavituximab. As a ratio of up to 1-for-7 as a means to regain compliance,result, we have determined that it isare no longer pursuing our prior research and development activities, including the clinical development associated therewith. We may still face unknown liabilities associated with these prior activities. For example, in the best interestcourse of our stockholdersprior development of our product candidate, bavituximab, we contracted with third parties to conduct a series of clinical trials and although we maintain product liability insurance for clinical studies in the amount of $10,000,000 per occurrence or $10,000,000 in the aggregate on a claims-made basis, as well as country-specific coverage where required for clinical sites located in foreign countries, our coverage may not be adequate in the event we face a product liability claim due to an adverse effect resulting from any of such trials. Any liabilities arising from our prior research and development activities that are not covered by our insurance coverage could negatively impact our financial position and results of operations. 

We may be subject to various litigation claims and legal proceedings. 

We, as well as certain of our directors and officers, may be subject to claims or lawsuits during the reverse split priorordinary course of business. Regardless of the outcome, these lawsuits may result in significant legal fees and expenses and could divert management’s time and other resources. If the claims contained in these lawsuits are successfully asserted against us, we could be liable for damages and be required to April 10, 2017. If we do not regain compliance with the Minimum Bid Price Requirement by April 10, 2017, the Staff will provide written notificationalter or cease certain of our business practices. Any of these outcomes could cause our business, financial performance and cash position to us thatbe negatively impacted.

A significant number of shares of our common stock are issuable pursuant to outstanding options and convertible securities, and we may issue additional shares of common stock in the future. Sales or conversions of these shares will be delisted (the “Staff Delisting Determination”). Indilute the event we receive such a notice, we planinterests of other security holders and may depress the price of our common stock. 

As of January 31, 2018, 5,433,646 shares of common stock reserved for issuance under outstanding option grants and available for issuance under our stock incentive plans and outstanding warrants to request, within seven (7) dayspurchase up to 39,040 shares of common stock. Additionally, as of January 31, 2018, there were 1,303,770 shares of common stock reserved for and available for issuance under our ESPP and up to 6,826,435 shares of common stock issuable upon conversion of our outstanding Series E Preferred Stock. The issuance of additional shares of common stock upon the exercise or conversion, as applicable, of any of the Staff’s Delisting Determination notification, as required by applicable NASDAQ rules,foregoing securities, or the perception that such issuances may occur, would have a hearing beforedilutive impact on other stockholders and could have a material negative effect on the NASDAQ Hearings Panel (“Panel”) to review the Staff Delisting Determination, which will stay any delisting action pending the issuance of a written Panel decision. The hearing before the Panel will likely be scheduled, to the extent practicable, within forty-five (45) daysmarket price of our request for a hearing. In connection with the hearing, we will present our plan to regain compliance with the Minimum Bid Price Requirement along with a request that the Panel grant an exception to the Minimum Bid Price Requirement for an additional limited time period, not to exceed 180 days from the date of the Staff Delisting Determination per Listing Rule 5815(c)(1)(A). We continue to pursue several paths to regain compliance with the Minimum Bid Price Requirement, including, among other things, the previously approved reversecommon stock.

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Our highly volatile stock split which,price may be effected at any time until our 2017 annual meeting of stockholders. There can be no assurance that, if we are granted a hearing before the Panel to appeal a Staff Delisting Determination, the Panel will provide us additional time to pursue our plan to regain compliance. If our common stock is delisted,adversely affect the liquidity of our common stock. 

The market price of our common stock wouldhas generally been highly volatile and is likely to continue to be adversely affected andhighly volatile. For instance, the market price of our common stock could decrease.has ranged from $1.97 to $14.00 per share over the last three fiscal years ended April 30, 2017 (as adjusted to reflect the 1-for-7 reverse stock split of our issued and outstanding common stock that took effect on July 10, 2017).

In addition, the market price of our common stock may be significantly impacted by many factors, including, but not limited to: 

 

·our loss of a significant customer;
·uncertainties about our ability to continue to fund our operations beyond the next twelve months;
·significant changes in our financial results or that of our competitors, including our ability to continue as a going concern;
·our ability to meet revenue projections;
·the offering and sale of shares of our common stock, either sold at market prices or at a discount under an equity transaction;
·significant changes in our capital structure;
·published reports by securities analysts;
·announcements of partnering transactions, licensing agreements, joint ventures, strategic alliances, and any other transaction that involves the development, sale or use of our technologies or competitive technologies;
·regulatory developments, including possible delays, and product safety concerns;
·outcomes of significant litigation, disputes and other legal or regulatory proceedings;
·general stock trends in the biotechnology and pharmaceutical industry sectors;
·public concerns as to the safety and effectiveness of the products we manufacture;
·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.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3.Defaults Upon Senior Securities.

 

None

 

Item 4.MINE SAFETY DISCLOSURES.

 

Not applicable

 

Item 5.Other Information.

 

None

 



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Item 6.Exhibits.

 

(a)Exhibits:

 

3.1Certificate of Incorporation of Avid Bioservices, Inc., a Delaware corporation, as amended through January 5, 2018. *
4.1Form of Indenture (Incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on January 12, 2018). **
10.1Settlement Agreement, dated November 27, 2017, by and among Avid Bioservices, Inc., Ronin Trading, LLC, Ronin Capital, LLC, SWIM Partners LP, SW Investment Management LLC, John S. Stafford, III, Stephen White and Roger Farley (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on November 28, 2017). **
10.2Severance Agreement and Mutual General Release between Steven W. King and Avid Bioservices, Inc. dated December 22, 2017. *
31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.*

31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended. *

32Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350. *

101.INSXBRL Taxonomy Extension Instance Document. *

101.SCHXBRL Taxonomy Extension Schema Document. *

101.CALXBRL Taxonomy Extension Calculation Linkbase Document. *

101.DEFXBRL Taxonomy Extension Definition Linkbase Document. *

101.LABXBRL Taxonomy Extension Label Linkbase Document. *

101.PRE

XBRL Presentation Extension Linkbase Document. *

__________

*Filed herewith.
**Previously filed.

 

*          Filed herewith.

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 PEREGRINE PHARMACEUTICALS,AVID BIOSERVICES, INC.
  
Date:March 13, 201712, 2018By:By: /s/ Steven W. King/s/ Roger J. Lias, Ph.D.
  Steven W. King
Roger J. Lias, Ph.D.
President and Chief Executive Officer
  
  
  
Date:March 13, 201712, 2018By:By: /s//s/ Paul J. Lytle
  

Paul J. Lytle


Chief Financial Officer

(signed both as an officer duly authorized to sign on behalf of the Registrant and principal financial officer and chief accounting officer)

 

 

 

 

 

 

 

 

 

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