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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 0-17085
PEREGRINE PHARMACEUTICALS, INC.
(Exact name of Registrant as specified in its charter)
Delaware 95-3698422
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
14272 Franklin Avenue, Suite 100, Tustin, California 92780-7017
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (714) 508-6000
NOT APPLICABLE
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED,
SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ].
APPLICABLE ONLY TO CORPORATE ISSUERS:
(INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES
OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.)
118,396,749 shares of common stock
as of September 10, 2002
PEREGRINE PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 31, 2002
TABLE OF CONTENTS
THE TERMS "WE", "US", "OUR," AND "THE COMPANY" AS USED IN THIS FORM ON 10-Q
REFERS TO PEREGRINE PHARMACEUTICALS, INC. AND ITS WHOLLY-OWNED SUBSIDIARIES,
AVID BIOSERVICES, INC. AND VASCULAR TARGETING TECHNOLOGIES, INC.
PART I FINANCIAL INFORMATION PAGE
Item 1. Our Financial Statements:
Consolidated Balance Sheets at July 31, 2002 and April 30, 2002 ... 1
Consolidated Statements of Operations for the three months ended
July 31, 2002 and 2001 ............................................ 3
Consolidated Statement of Stockholders' Equity for the three
months ended July 31, 2002 ........................................ 4
Consolidated Statements of Cash Flows for the three months ended
July 31, 2002 and 2001 ............................................ 5
Notes to Consolidated Financial Statements ........................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ......................................... 12
Company Overview .................................................. 12
Risk Factors of Our Company ....................................... 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........ 17
PART II OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 17
Item 2. Changes in Securities and Use of Proceeds ......................... 17
Item 3. Defaults Upon Senior Securities ................................... 17
Item 4. Submission of Matters to a Vote of Security Holders ............... 17
Item 5. Other Information ................................................. 17
Item 6. Exhibits and Reports on Form 8-K .................................. 18
Signatures ........................................................ 19
Certifications .................................................... 20
i
PART I FINANCIAL INFORMATION
----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AT JULY 31, 2002 AND APRIL 30, 2002
- -----------------------------------------------------------------------------------------------
JULY 31, APRIL 30,
2002 2002
------------ ------------
UNAUDITED
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,408,000 $ 6,072,000
Trade and other receivables, net of allowance for doubtful
accounts of $81,000 (July) and $80,000 (April) 617,000 328,000
Inventory 77,000 6,000
Prepaid expenses and other current assets 500,000 384,000
------------ ------------
Total current assets 3,602,000 6,790,000
PROPERTY:
Leasehold improvements 273,000 267,000
Laboratory equipment 1,965,000 1,803,000
Furniture, fixtures and computer equipment 750,000 698,000
------------ ------------
2,988,000 2,768,000
Less accumulated depreciation and amortization (1,946,000) (1,853,000)
------------ ------------
Property, net 1,042,000 915,000
OTHER ASSETS:
Note receivable, net of allowance of $1,690,000 (July) and
$1,705,000 (April) - -
Other, net 126,000 161,000
------------ ------------
Total other assets 126,000 161,000
------------ ------------
TOTAL ASSETS $ 4,770,000 $ 7,866,000
============ ============
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AT JULY 31, 2002 AND APRIL 30, 2002 (CONTINUED)
- ----------------------------------------------------------------------------------------------------
JULY 31, APRIL 30,
2002 2002
-------------- --------------
UNAUDITED
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,462,000 $ 1,070,000
Accrued clinical trial site fees 544,000 607,000
Accrued legal and accounting fees 243,000 303,000
Accrued royalties and license fees 184,000 189,000
Accrued payroll and related costs 494,000 374,000
Notes payable, current portion 66,000 2,000
Other current liabilities 223,000 208,000
Deferred revenue 171,000 30,000
-------------- --------------
Total current liabilities 3,387,000 2,783,000
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY:
Common stock-$.001 par value; authorized 150,000,000 shares;
outstanding - 110,275,209 (July); 110,275,209 (April) 110,000 110,000
Additional paid-in capital 134,221,000 134,221,000
Deferred stock compensation (650,000) (801,000)
Accumulated deficit (132,298,000) (128,447,000)
-------------- --------------
Total stockholders' equity 1,383,000 5,083,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,770,000 $ 7,866,000
============== ==============
See accompanying notes to consolidated financial statements
2
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2002 AND 2001 (UNAUDITED)
- ----------------------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31,
2002 2001
-------------- --------------
REVENUES:
Contract manufacturing revenue $ 474,000 $ -
License revenue - 3,125,000
-------------- --------------
Total revenues 474,000 3,125,000
COSTS AND EXPENSES:
Cost of contract manufacturing 320,000 -
Research and development 3,353,000 2,041,000
Selling, general and administrative 710,000 466,000
-------------- --------------
Total costs and expenses 4,383,000 2,507,000
-------------- --------------
INCOME (LOSS) FROM OPERATIONS (3,909,000) 618,000
OTHER INCOME (EXPENSE):
Interest and other income 59,000 102,000
Interest expense (1,000) (1,000)
-------------- --------------
NET INCOME (LOSS) $ (3,851,000) $ 719,000
============== ==============
BASIC AND DILUTED INCOME (LOSS)
PER COMMON SHARE $ (0.03) $ 0.01
============== ==============
SHARES USED IN CALCULATION OF INCOME (LOSS) PER COMMON
SHARE:
Basic 110,275,209 98,856,492
============== ==============
Diluted 110,275,209 103,242,811
============== ==============
See accompanying notes to consolidated financial statements
3
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JULY 31, 2002 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON STOCK PAID-IN DEFERRED STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
-------------- -------------- -------------- -------------- -------------- --------------
BALANCES - May 1, 2002 110,275,209 $ 110,000 $ 134,221,000 $ (801,000) $(128,447,000) $ 5,083,000
Stock-based compensation - - - 151,000 - 151,000
Net loss - - - - (3,851,000) (3,851,000)
-------------- -------------- -------------- -------------- -------------- --------------
BALANCES - July 31, 2002 110,275,209 $ 110,000 $ 134,221,000 $ (650,000) $(132,298,000) $ 1,383,000
============== ============== ============== ============== ============== ==============
See accompanying notes to consolidated financial statements
4
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 2002 AND 2001 (UNAUDITED)
- -----------------------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(3,851,000) $ 719,000
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 93,000 112,000
Stock-based compensation 151,000 278,000
Changes in operating assets and liabilities:
Trade and other receivables (289,000) 14,000
Inventory (71,000) -
Prepaid expenses and other current assets (116,000) (1,000)
Accounts payable and accrued legal and accounting fees 392,000 (477,000)
Deferred revenue 141,000 (3,125,000)
Accrued clinical trial site fees (63,000) 157,000
Other accrued expenses and current liabilities 70,000 131,000
------------ ------------
Net cash used in operating activities (3,543,000) (2,192,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (107,000) (17,000)
Decrease in other assets 4,000 -
------------ ------------
Net cash used in investing activities (103,000) (17,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock - 2,778,000
Principal payments on notes payable (18,000) (28,000)
------------ ------------
Net cash (used in) provided by financing activities (18,000) 2,750,000
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $(3,664,000) $ 541,000
CASH AND CASH EQUIVALENTS, beginning of period 6,072,000 6,327,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 2,408,000 $ 6,868,000
============ ============
SUPPLEMENTAL INFORMATION:
Interest paid $ 1,000 $ 1,000
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property acquired in exchange for note payable $ 82,000 $ -
============ ============
See accompanying notes to consolidated financial statements
5
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Peregrine Pharmaceuticals, Inc. (the "Company") and its wholly owned
subsidiaries, Avid Bioservices, Inc. ("Avid") and Vascular Targeting
Technologies, Inc. All intercompany balances and transactions have been
eliminated.
At July 31, 2002, the Company had $2,408,000 in cash and cash
equivalents. During August 2002, the Company raised gross proceeds of $9,000,000
under various financing transactions as further discussed in Note 6. At August
31, 2002, the Company had $9,478,000 in cash and cash equivalents. The Company
has expended substantial funds on the development of its product candidates and
for clinical trials and it has incurred negative cash flows from operations for
the majority of its years since inception. The Company expects negative cash
flows from operations to continue until it is able to generate sufficient
revenue from the contract manufacturing services provided by Avid and/or from
the sale and/or licensing of its products under development.
Revenues earned by Avid during the quarter ended July 31, 2002 amounted
to $474,000. The Company expects that Avid will continue to generate revenues
for the foreseeable future and although we anticipate that such revenues will
lower our consolidated cash flows used in operations, thereby reducing the
amount of capital the Company will need to raise from alternative sources, the
Company expects that it will continue to need to raise additional capital to
provide for its anticipated clinical trial activities using Cotara(TM), its
anticipated development costs associated with Vasopermeation Enhancement Agents
("VEA's") and Vascular Targeting Agents ("VTA's"), and the expansion of the
Company's manufacturing capabilities.
Although the Company expects research and development expenses to
decrease during the remainder of the current fiscal year primarily due to the
Company's reduction in its clinical trial programs and future clinical expenses,
the Company has the ability to expand its research and development plans based
on potential capital resources obtained from future financing activities,
potential licensing arrangements, and the potential revenues generated from
Avid. There can be no assurances that the Company will be successful in raising
such funds on terms acceptable to us, or at all, or that sufficient additional
capital will be raised to complete the research, development, and clinical
testing of our product candidates.
The Company believes that it has sufficient cash on hand to meet its
obligations on a timely basis through at least the current fiscal year.
The accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring adjustments) which, in the
opinion of management, are necessary to present fairly the consolidated
financial position of the Company at July 31, 2002, and the consolidated results
of its operations and its consolidated cash flows for the three-month periods
ended July 31, 2002 and 2001. Although the Company believes that the disclosures
in the financial statements are adequate to make the information presented not
misleading, certain information and footnote disclosures normally included in
the consolidated financial statements have been condensed or omitted pursuant to
Article 10 of Regulation S-X of the Securities Exchange Act of 1934. The
consolidated financial statements included herein should be read in conjunction
with the consolidated financial statements of the Company, included in the
Company's Annual Report on Form 10-K for the year ended April 30, 2002, which
was filed with the Securities and Exchange Commission on August 13, 2002.
Results of operations for the interim periods covered by this Quarterly Report
may not necessarily be indicative of results of operations for the full fiscal
year.
6
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2002 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RECLASSIFICATION. Certain reclassifications were made to the prior
period balances to conform them to the current period presentation.
CASH AND CASH EQUIVALENTS. The Company considers all highly liquid,
short-term investments with an initial maturity of three months or less to be
cash equivalents.
INVENTORY. Inventory primarily consists of work-in-process and is
stated at the lower of cost or market.
REVENUE RECOGNITION. Revenues related to licensing agreements are
recognized when cash has been received and all obligations of the Company have
been met, which is generally upon the transfer of the technology license or
other rights to the licensee. Up-front fees from license agreements are
generally recognized over the estimated term of the agreement.
Contract Manufacturing Revenues are generally recognized once the
service has been provided and all milestones and testing have been completed.
Up-front fees from contract manufacturing agreements are initially recorded as
deferred revenue and are recognized over the service period.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), REVENUE RECOGNITION IN FINANCIAL
STATEMENTS. The bulletin draws on existing accounting rules and provides
specific guidance on how those accounting rules should be applied. Among other
things, SAB No. 101 requires that license and other up-front fees from research
collaborators be recognized over the term of the agreement unless the fee is in
exchange for products delivered or services performed that represent the
culmination of a separate earnings process. The Company adopted SAB No. 101 in
the fourth quarter of fiscal year 2001 and its adoption had no material impact
on the Company's financial position and results of operations.
NET INCOME (LOSS) PER COMMON SHARE. Basic net income (loss) per share
is calculated in accordance with Statement of Financial Accounting Standards No.
128, EARNINGS PER SHARE. Basic net income (loss) per common share is computed by
dividing the net income (loss) by the weighted average number of common shares
outstanding during the period and excludes the dilutive effects of options and
warrants. Diluted net income (loss) per common share is computed by dividing the
net income (loss) by the sum of the weighted average number of common shares
outstanding during the period plus the potential dilutive effects of options and
warrants outstanding during the period. Potentially dilutive common shares
consist of stock options and warrants calculated in accordance with the treasury
stock method, but are excluded if their effect is antidilutive. Due to the loss
during the quarter ended July 31, 2002, options and warrants to purchase up to
21,425,000 were outstanding and excluded from the calculation of diluted loss
per common share because their effect was antidilutive, however, these options
and warrants could potentially be dilutive in the future. Diluted net income per
7
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2002 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
common share for the three months ended July 31, 2001 includes the dilutive
effect of 4,386,319 shares of potentially issuable common stock from the
exercise of options and warrants calculated under the treasury stock method and
excludes outstanding options and warrants to purchase up to 6,116,013 shares of
common stock since their effect was antidilutive as the exercise prices exceeded
the average stock price during the period.
During August 2002, the Company entered into two financing transactions
(as further explained in Note 6), whereby the Company issued convertible
debentures which are due in three years and are currently convertible into
approximately 4,412,000 shares of common stock, sold approximately 8,121,000
shares of common stock and issued warrants to purchase up to approximately
9,400,000 shares of common stock, which numbers have been excluded from basic
and dilutive net loss per common share for the three months ended July 31, 2002.
RECENT ACCOUNTING PRONOUNCEMENTS. Effective May 1, 2002, the Company
adopted Statements of Financial Accounting Standards No. 141, BUSINESS
COMBINATIONS ("SFAS No. 141") and No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS
("SFAS No. 142"). These standards change the accounting for business
combinations by, among other things, prohibiting the prospective use of
pooling-of-interests accounting and requiring companies to stop amortizing
goodwill and certain intangible assets with an indefinite useful life created by
business combinations accounted for using the purchase method of accounting.
Instead, goodwill and intangible assets deemed to have an indefinite useful life
will be subject to an annual review for impairment. The adoption of SFAS No. 141
and SFAS No. 142 had no impact on the Company's consolidated financial position
and results of operations.
In August 2001, The Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 143 ("SFAS No. 143"), ASSET
RETIREMENT OBLIGATIONS. SFAS No. 143 requires entities to record the fair value
of a liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost by increasing the carrying amount of the related long-lived asset. Over
time, the liability is accreted to its present value each period, and the
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The standard is
effective for fiscal years beginning after June 15, 2002. The Company believes
that adopting SFAS No.143 will not have a material impact on its consolidated
financial position and results of operations.
Effective May 1, 2002, the Company adopted Statements of Financial
Accounting Standards No. 144 ("SFAS No. 144"), ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 replaces SFAS No. 121, ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF. The primary objectives of SFAS No. 144 were to develop one accounting model,
based on the framework established in SFAS No. 121, for long-lived assets to be
disposed of by sale and to address significant implementation issues. SFAS No.
144 requires that all long-lived assets, including discontinued operations, be
measured at the lower of carrying amount or fair value less cost to sell,
whether reported in continuing operations or in discontinued operations. The
adoption of SFAS No. 144 had no impact on the Company's consolidated financial
position and results of operations.
In June 2002, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 146 ("SFAS No. 146"), ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES, which nullifies Emerging Issues
Task Force Issue No. 94-3 ("EITF 94-3"), LIABILITY RECOGNITION FOR CERTAIN
EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN ACTIVITY (INCLUDING
CERTAIN COSTS INCURRED IN A RESTRUCTURING). SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
8
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2002 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
when the liability is incurred, whereas EITF 94-3 had recognized the liability
at the commitment date to an exit plan. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. The Company believes that
adopting SFAS No. 146 will not have a material impact on its consolidated
financial position and results of operations.
3. NOTE RECEIVABLE
During December 1998, the Company completed the sale and subsequent
leaseback of its two facilities and recorded an initial note receivable from the
buyer of $1,925,000. In accordance with the related lease agreement, if the
Company is in default under the lease agreement, including but not limited to,
filing a petition for bankruptcy or failure to pay the basic rent within five
(5) days of being due, the note receivable shall be deemed to be immediately
satisfied in full and the buyer shall have no further obligation to the Company
for such note receivable. Although the Company has made all payments under the
lease agreement and has not filed for protection under the laws of bankruptcy,
during the quarter ended October 31, 1999, the Company did not have sufficient
cash on hand to meet its obligations on a timely basis and was operating at
significantly reduced levels. In addition, at that time, if the Company could
not raise additional cash by December 31, 1999, the Company would have had to
file for protection under the laws of bankruptcy. Due to the uncertainty of the
Company's ability to pay its lease obligations on a timely basis, the Company
established a 100% reserve for the note receivable in the amount of $1,887,000
as of October 31, 1999. The Company reduces the reserve as payments are received
and records the reduction as Interest and other income in the accompanying
consolidated statement of operations. Due to the uncertainty of the Company's
capital resources beyond the current fiscal year and its ability to pay its
lease obligation beyond the current fiscal year, the carrying value of the note
receivable approximates its fair value at July 31, 2002. The Company has
received all payments through September 2002. The following represents a
rollforward of the allowance of the Company's note receivable for the quarter
ended July 31, 2002:
Allowance for note receivable, April 30, 2002 $ 1,760,000
Principal payments received (13,000)
------------------
Allowance for note receivable, July 31, 2002 $ 1,747,000
==================
4. NOTES PAYABLE
During May 2002, the Company entered into a note agreement with an
original amount due of $82,000 to finance laboratory equipment that bears
interest at approximately 10% per annum and requires aggregate monthly payments
of approximately $8,600 through May 2003.
5. SEGMENT REPORTING
In January 2002, the Company formed its wholly-owned subsidiary, Avid
Bioservices, Inc. ("Avid"), to provide an array of contract manufacturing
services, including contract manufacturing of antibodies and proteins, cell
culture development, process development, and testing of biologics.
9
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2002 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
The Company's business is now organized into two reportable operating
segments (i) Peregrine, the parent company, is engaged in the research and
development of cancer therapeutics and cancer diagnostics through a series of
proprietary platform technologies using monoclonal antibodies, and (ii) Avid, is
engaged in providing contract manufacturing and development of biologics to
biopharmaceutical and biotechnology businesses.
The Company primarily evaluates the performance of its segments based
on net revenues and gross profit. The Company has no intersegment revenues and
does not segregate assets at the segment level as such information is not used
by management. Net revenues and gross profit information for the Company's
segments consisted of the following:
THREE MONTHS ENDED JULY 31,
-------------------------
2002 2001
----------- -----------
NET REVENUES:
Research and development of cancer therapeutics $ -- $3,125,000
Contract manufacturing and development of biologics 474,000 --
----------- -----------
Total net revenues $ 474,000 $3,125,000
=========== ===========
GROSS PROFIT:
Research and development of cancer therapeutics $ -- $3,125,000
Contract manufacturing and development of biologics 154,000 --
----------- -----------
Total gross profit $ 154,000 $3,125,000
=========== ===========
Net revenues generated from Avid during the quarter ended July 31, 2002
were primarily from one customer located in Europe and one customer located in
the U.S.
6. SUBSEQUENT EVENTS
On August 9, 2002, the Company entered into a private placement with
four investors under a Securities Purchase Agreement ("SPA"), whereby the
Company issued Convertible Debentures ("Debenture") for gross proceeds of
$3,750,000. The Debenture earns interest at a rate of 6% per annum payable in
cash semi-annually each June 30th and December 31st, and mature in August 2005.
Under the terms of the Debenture, the principal amount is convertible, at the
option of the holder, into a number of shares of common stock of the Company
calculated by dividing the unpaid principal amount of the Debenture by the
initial conversion price of $0.85 per share ("Conversion Price"). If the Company
enters into any financing transactions within 18 months following the date the
registration statement was declared effective by the Securities & Exchange
Commission (or through March 9, 2004) at a per share price less than the
Conversion Price, the Conversion Price will be reset to the lower price for all
outstanding Debentures. The Debenture is secured by generally all assets of the
Company. Under the SPA, each Debenture holder was granted a warrant equal to 75%
of the quotient obtained by dividing the principal amount of the Debentures by
the Conversion Price or an aggregate of approximately 3,309,000 warrants. The
warrants have a 4-year term and are exercisable 6 months after the date of
issuance at an exercise price of $0.75 per share. If the Company defaults under
the provisions of the SPA, as defined in the agreement, which includes but is
not limited to, the default of an interest payment, the principal amount of the
Debenture becomes immediately due and payable.
10
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2002 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
Under the same SPA, the Company issued an aggregate of approximately
1,923,000 shares of common stock to two investors in exchange for gross proceeds
of $1,250,000. In conjunction with the private placement, the Company issued
warrants to purchase up to an aggregate of approximately 1,442,000 shares of
common stock. The warrants have a four year term and are exercisable six months
after the date of issuance at an exercise price of $0.71 per share. In addition,
if the Company enters any financing transaction within 18 months following the
date the registration statement was declared effective by the Securities &
Exchange Commission (or through March 9, 2004) at a per share price less than
the purchase price of $0.65 per share ("Adjusted Price"), then, after
shareholder approval, each investor will receive an adjustment warrant equal to
(1) the number of common shares that would have been issued to such investor on
the closing date at the Adjusted Price less (2) the number of common shares
actually issued to such investor on the closing date. The adjustment warrant is
priced at an exercise price $0.001 per share and shall expire four years from
the closing date as defined in the SPA.
Also on August 9, 2002, the Company agreed to sell approximately
3,298,000 shares of common stock at a negotiated price of $0.65 per share in
exchange for gross proceeds of $2,144,000 to one investor. In conjunction with
this offering, the Company issued a warrant to purchase up to approximately
4,649,000 shares of common stock. The warrants have a four year term and are
exercisable six months after the date of issuance at an exercise price of $0.71
per share. In addition, if the Company enters any financing transaction within
18 months following the date the registration statement was declared effective
by the Securities & Exchange Commission (or through March 9, 2004) at a per
share price less than the purchase price of $0.65 per share ("Adjusted Price"),
then, after shareholder approval, each investor will receive an adjustment
warrant equal to (1) the number of common shares that would have been issued to
such investor on the closing date at the Adjusted Price less (2) the number of
common shares actually issued to such investor on the closing date. The
adjustment warrant is priced at an exercise price $0.001 per share and shall
expire four years from the closing date as defined in the SPA.
In connection with all financing transactions entered into on August 9,
2002, the Company paid a finders fee $357,200. The Company is currently
disputing fees invoiced by another placement agent in the amount of $350,000 for
various reasons.
On November 14, 2001, the Company filed a registration statement on
Form S-3, File Number 333-71086 (the "Shelf") which was declared effective by
the Securities and Exchange Commission, allowing the Company to issue, from time
to time, in one or more offerings, (i) up to 10,000,000 shares of its common
stock, and (ii) warrants to purchase up to 2,000,000 shares of its common stock.
The common stock and warrants may be offered and sold separately or together in
one or more series of issuances.
On August 13, 2002, the Company sold 2,900,000 shares of its common
stock in exchange for gross proceeds of $1,856,000 under the Shelf. There were
no warrants issued in connection with this transaction. In connection with the
offering, the Company paid a fee to the placement agent equal to five percent
(5%) of the proceeds or $92,800. After this transaction, all shares and warrants
have been issued under the Shelf.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- ------- -------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
-----------------------------------
Except for historical information contained herein, this Quarterly
Report on Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. In light of the important factors that can materially affect results,
including those set forth elsewhere in this Form 10-Q, the inclusion of
forward-looking information should not be regarded as a representation by the
Company or any other person that the objectives or plans of the Company will be
achieved. When used in this Form 10-Q, the words "may," "should," "plans,"
"believe," "anticipate," "estimate," "expect," their opposites and similar
expressions are intended to identify forward-looking statements. The Company
cautions readers that such statements are not guarantees of future performance
or events and are subject to a number of factors that may tend to influence the
accuracy of the statements.
The following discussion is included to describe the Company's
financial position and results of operations for the quarter ended July 31, 2002
compared to the same period in the prior year. The consolidated financial
statements and notes thereto contain detailed information that should be
referred to in conjunction with this discussion. In addition, the consolidated
financial statements included herein should be read in conjunction with the
consolidated financial statements of the Company, included in the Company's
Annual Report on Form 10-K for the year ended April 30, 2002, which was filed
with the Securities and Exchange Commission on August 13, 2002. Results of
operations for the interim periods covered by this Quarterly Report may not
necessarily be indicative of results of operations for the full fiscal year.
COMPANY OVERVIEW. Peregrine Pharmaceuticals, Inc., located in Tustin,
California, is a biopharmaceutical company engaged in the research and
development and commercialization of cancer therapeutics and cancer diagnostics
through a series of proprietary platform technologies using monoclonal
antibodies.
Our main focus is on the development of our collateral targeting agent
technologies. Collateral targeting agents typically use antibodies that bind to
or target components found in or on most solid tumors. An antibody is a molecule
that humans and other animals create in response to disease. In pre-clinical
and/or clinical studies, these collateral targeting antibodies are capable of
targeting and delivering therapeutic killing agents that kill cancerous tumor
cells. We currently have exclusive rights to over 50 issued U.S. and foreign
patents protecting various aspects of our technology and have additional pending
patent applications that we believe will further strengthen our patent position.
Our three collateral targeting technologies are known as Tumor Necrosis Therapy
("TNT"), Vascular Targeting Agents ("VTA's") and Vasopermeation Enhancement
Agents ("VEA's"), and are discussed in greater detail in our Form 10-K for the
year ended April 30, 2002, which was filed with the Securities and Exchange
Commission on August 13, 2002.
In addition to collateral targeting agents, we have a direct
tumor-targeting antibody, Oncolym(R), for the treatment of Non-Hodgkins B-cell
Lymphoma. Oncolym(R) is currently in a Phase I/II clinical trial, which was
developed and initiated by Schering A.G. Until recently, we continued to enroll
patients as part of the clinical trial plan developed and initiated by Schering
A.G. Based on our available financial resources, however, we have currently
suspended patient enrollment for this study as we seek to license or partner
Oncolym(R) and focus our financial resources on our more advanced clinical
trial.
12
In January 2002, we formed our wholly-owned subsidiary, Avid
Bioservices, Inc. ("Avid"), to provide an array of contract manufacturing
services, contract manufacturing of antibodies and proteins, cell culture
development, process development, and testing of biologics for biopharmaeutical
and biotechnology companies under current Good Manufacturing Practices. Avid's
manufacturing facility is located in Tustin, California, adjacent to our
offices.
RESULTS OF OPERATIONS.
NET LOSS. Our reported net loss of approximately $3,851,000 for the
quarter ended July 31, 2002 represents an increase in net loss of $4,570,000
compared to a reported net income of approximately $719,000 for the quarter
ended July 31, 2001. The increase in net loss for the quarter ended July 31,
2002 is due to a decrease in revenues of $2,651,000 combined with a $1,876,000
increase in total cost and expenses and a $43,000 decrease in interest and other
income.
REVENUES. The decrease in revenues of $2,651,000 during the three
months ended July 31, 2002 compared to the same period in the prior year
resulted primarily from the recognition of a $3,000,000 up-front licensing
payment received from Schering A.G. in March 1999. During the prior year quarter
ended July 31, 2001, we recognized deferred license revenue of $3,000,000 when
we assumed the Oncolym(R) licensing rights from Schering A.G. and met all
obligations under the agreement. This decrease was offset by a $474,000 increase
in contract manufacturing revenue generated by Avid, which commenced operations
in January 2002. Future revenues generated by Avid cannot be reasonably
estimated at this time because Avid lacks historical experience since it
commenced operations in January 2002.
TOTAL COSTS AND EXPENSES. The increase in total costs and expenses of
$1,876,000 during the three months ended July 31, 2002 compared to the same
period in the prior year is due to an increase in cost of contract manufacturing
of $320,000, an increase in research & development expenses of $1,312,000 and an
increase in selling, general and administrative expenses of $244,000.
COST OF CONTRACT MANUFACTURING. The increase in cost of contract
manufacturing of $320,000 during the three months ended July 31, 2002 compared
to the same period in the prior year relates to an increase in contract
manufacturing services performed under Avid. We expect that cost of contract
manufacturing will increase in the future as Avid continues to provide an array
of contract manufacturing services.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
include internal salary expenses, contracted clinical trial fees, building lease
and facility expenses, contract research expenses, sponsored research expenses
paid to two universities, material and supplies for the research and
manufacturing laboratories, patent legal fees, stock-based compensation expense,
utilities and other general research costs. The increase in research and
development expenses of $1,312,000 during the three months ended July 31, 2002
compared to the same period in the prior year is primarily due to an increase in
the following expenses:
o CLINICAL TRIAL PROGRAM EXPENSES. The increase in clinical
trial program expenses is primarily due to the increase in
expenses associated with the planned Phase III clinical trial
for the treatment of brain cancer, including but not limited
to, increased consulting and clinical site qualification fees
associated with establishing the clinical trial in Europe and
Canada, and an investigator meeting held in Europe in June
2002.
13
o PRE-CLINICAL DEVELOPMENT EXPENSES. In addition to the
additional costs incurred for our clinical trial program, we
have incurred an increase in expenses associated with our
pre-clinical development of our two other platform
technologies: Vasopermeation Enhancement Agents ("VEA's") and
Vascular Targeting Agents ("VTA's"). We have increased our
sponsored research funding with the University of Texas
Southwestern Medical Center for the development of our VTA
technology compared to the same period in the prior year. In
addition, patent legal fees have increased primarily due to us
reacquiring our VTA rights from Oxigene, Inc., our former
joint venture partner, on February 28, 2002.
o MANUFACTURING OF ANTIBODIES FOR CLINICAL TRIALS. We have
incurred an increase in manufacturing expenses compared to the
same period in the prior year as we increased our supply of
Cotara(TM) for the planned Phase III clinical trial for the
treatment of brain cancer in addition to preparing our
facility for manufacturing biologics for other companies. In
addition, in order to operate a cGMP facility, we have
incurred an increase in salary, facility and validation
expenses as it requires highly specialized personnel and
equipment that must be maintained on a continual basis.
o STOCK-BASED COMPENSATION EXPENSE. The current quarter increase
was offset by a decrease in stock-based compensation expense
associated with the fair value of options granted to
non-employee consultants who are assisting us with the
development of our platform technologies. The options were
valued using the Black-Scholes valuation model and are being
amortized over the estimated period of service or related
vesting period.
The following represents the expenses we have incurred by each major
platform technology under development:
R&D EXPENSES- R&D EXPENSES-
PLATFORM TECHNOLOGY QUARTER ENDED MAY 1, 1998 TO
UNDER DEVELOPMENT JULY 31, 2002 JULY 31, 2002
---------------------------- ------------ ------------
TNT development (Cotara(TM)) $ 2,213,000 $20,583,000
VEA development 408,000 2,830,000
VTA development 584,000 3,594,000
Oncolym(R)development 148,000 13,027,000
------------ ------------
Total R&D expenses $ 3,353,000 $40,034,000
============ ============
From inception to April 1998, we have expensed $20,898,000 on research
and development of our product candidates, with the costs primarily being
closely split between TNT development and Oncolym(R) development. In addition to
the above costs, we have expensed an aggregate of $32,004,000 for the
acquisition of our TNT and VTA technologies, which were acquired during fiscal
years 1995 and 1997, respectively.
We have expended substantial funds on the research, development and
clinical trials of our product candidates, including our planned Phase III
clinical trial for the treatment of brain cancer. Although we have sufficient
cash on hand to meet our obligations on a timely basis through at least the
current fiscal year, we will continue to require additional funding to sustain
our research and development efforts, provide for additional clinical trials,
expand our manufacturing and product commercialization capabilities, and
continue our operations, until we are able to generate sufficient revenue from
14
our contract manufacturing services provided by Avid, and/or through the sale
and/or licensing of our products. Although we expect research and development
expenses to decrease over the current fiscal year based on our current capital
resources, we have the ability to expand our research and development plans
based on our available capital resources from future financing activities and
the operations of Avid.
It is extremely difficult for us to reasonably estimate all future
research and development costs associated with each of our technologies due to
the number of unknowns and uncertainties associated with pre-clinical and
clinical trial development. These unknown variables and uncertainties include,
but are not limited to:
o The uncertainty of future costs associated with our
pre-clinical candidates, Vasopermeation Enhancement Agents,
and Vascular Targeting Agents, which costs are dependent on
the success of pre-clinical development. We are uncertain
whether or not these product candidates will be successful and
we are uncertain whether or not we will incur any additional
costs beyond pre-clinical development;
o The uncertainty of future clinical trial results;
o The uncertainty of the number of patients to be treated in any
clinical trial;
o The uncertainty of the Food and Drug Administration allowing
our studies to move forward from Phase I clinical studies to
Phase II and Phase III clinical studies;
o The uncertainty of the rate at which patients are enrolled
into our studies. Any delays in clinical trials could
significantly increase the cost of the study and would extend
the estimated completion dates.
o The uncertainty of terms related to potential future
partnering or licensing arrangements;
o The uncertainty of our capital resources to fund these studies
beyond the next twelve months; and
o The uncertainty of protocol changes and modifications in the
design of our clinical trial studies, which may increase or
decrease our future costs.
We will need to do additional development and clinical testing prior to
seeking any regulatory approval for commercialization of our product candidates
as all of our products are in clinical and pre-clinical development. Testing,
manufacturing, commercialization, advertising, promotion, exporting and
marketing, among other things, of our proposed products are subject to extensive
regulation by governmental authorities in the United States and other countries.
The testing and approval process requires substantial time, effort and financial
resources, and we cannot guarantee that any approval will be granted on a timely
basis, if at all. Companies in the pharmaceutical and biotechnology industries
have suffered significant setbacks in conducting advanced human clinical trials,
even after obtaining promising results in earlier trials. Furthermore, the
United States Food and Drug Administration may suspend clinical trials at any
time on various grounds, including a finding that the subjects or patients are
being exposed to an unacceptable health risk. Even if regulatory approval of a
product is granted, such approval may entail limitations on the indicated uses
for which it may be marketed. Accordingly, we may experience difficulties and
delays in obtaining necessary governmental clearances and approvals to market
our products, and we may not be able to obtain all necessary governmental
clearances and approvals to market our products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The increase in selling,
general and administrative expenses of $244,000 during the three months ended
July 31, 2002 compared to the same period in the prior year is primarily due to
an increase in business development, salary and other general expenses
associated with the formation and start-up of our wholly-owned subsidiary, Avid
Bioservices, Inc., combined with an increase in business development expenses
associated with Peregrine's licensing activities. The Company expects selling,
15
general and administrative expenses to slightly increase during the current
fiscal year primarily due to the planned increase in operations and business
development activities of Avid combined with an anticipated increase in
Peregrine's business development activities associated with the potential
licensing of its technologies under development.
INTEREST AND OTHER INCOME. The decrease in interest and other income of
$43,000 during the three months ended July 31, 2002 compared to the same period
in the prior year is primarily due to a decrease in interest income as a result
of a lower average cash balance on hand during the quarter ended July 31, 2002
compared to the same period in the prior year.
LIQUIDITY AND CAPITAL RESOURCES. During August 2002, we entered into
two financing transactions (as further explained in our notes to the
consolidated financial statements contained herein) whereby we raised aggregate
gross proceeds of $9,000,000.
As of August 31, 2002, we had $9,478,000 in cash and cash equivalents.
We have financed our operations primarily through the sale of our common stock,
which has been supplemented with payments received from various licensing
collaborations. During the three months ended July 31, 2002, we supported our
cash used in operations of $3,543,000 primarily through our cash and cash
equivalents on hand combined with revenues generated by Avid.
We have expended substantial funds on the development of our product
candidates and for clinical trials and we have incurred negative cash flows from
operations for the majority of our years since inception. We expect negative
cash flows from operations to continue until we are able to generate sufficient
revenue from the contract manufacturing services provided by Avid and/or from
the sale and/or licensing of our products under development.
Revenues earned by Avid during the quarter ended July 31, 2002 amounted
to $474,000. We expect that Avid will continue to generate revenues for the
foreseeable future and although we anticipate that such revenues will lower our
consolidated cash flows used in operations, thereby reducing the amount of
capital we will need to raise from alternative sources, we expect that we will
continue to need to raise additional capital to provide for our anticipated
clinical trial activities using Cotara(TM), our anticipated development costs
associated with Vasopermeation Enhancement Agents ("VEA's") and Vascular
Targeting Agents ("VTA's"), and the expansion of our manufacturing capabilities.
Although we expect research and development expenses to decrease during
the remainder of the current fiscal year primarily due to our reduction in our
clinical trial programs and future clinical expenses, we have the ability to
expand our research and development plans based on potential capital resources
obtained from future financing activities, potential licensing arrangements, and
the potential revenues generated from Avid. There can be no assurances that we
will be successful in raising such funds on terms acceptable to us, or at all,
or that sufficient additional capital will be raised to complete the research,
development, and clinical testing of our product candidates.
We believe that we have sufficient cash on hand to meet our obligations
on a timely basis through at least the current fiscal year.
16
COMMITMENTS. At July 31, 2002, we had no material capital commitments,
although we have significant obligations under license agreements which are
contingent on clinical trial development milestones.
RISK FACTORS OF OUR COMPANY
The biotechnology industry includes many risks and challenges. Our
challenges may include, but are not limited to: uncertainties associated with
completing pre-clinical and clinical trials for our technologies; the
significant costs to develop our products as all of our products are currently
in development, pre-clinical studies or clinical trials and no revenue has been
generated from commercial product sales; obtaining additional financing to
support our operations and the development of our products; obtaining regulatory
approval for our technologies; complying with governmental regulations
applicable to our business; obtaining the raw materials necessary in the
development of such compounds; consummating collaborative arrangements with
corporate partners for product development; achieving milestones under
collaborative arrangements with corporate partners; developing the capacity to
manufacture, market and sell our products, either directly or indirectly with
collaborative partners; developing market demand for and acceptance of such
products; competing effectively with other pharmaceutical and biotechnological
products; attracting and retaining key personnel; protecting proprietary rights;
accurately forecasting operating and capital expenditures, other capital
commitments, or clinical trial costs and general economic conditions. A more
detailed discussion regarding the our industry and business risk factors can be
found in the Company's Annual Report on Form 10-K for the year ended April 30,
2002, as filed with the Securities and Exchange Commission on August 13, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
Changes in United States interest rates would affect the interest
earned on the Company's cash and cash equivalents. Based on the Company's
overall interest rate exposure at July 31, 2002, a near-term change in interest
rates, based on historical movements, would not materially affect the fair value
of interest rate sensitive instruments. The Company's debt instruments have
fixed interest rates and terms and, therefore, a significant change in interest
rates would not have a material adverse effect on the Company's financial
position or results of operations.
PART II OTHER INFORMATION
-------------------------
ITEM 1. LEGAL PROCEEDINGS. None.
- ------- ------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None.
- ------- ------------------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
- ------- --------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
- ------- ----------------------------------------------------
ITEM 5. OTHER INFORMATION. None.
- ------- ------------------
17
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
- ------- --------------------------------
(a) Exhibits:
99.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
18
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEREGRINE PHARMACEUTICALS, INC.
By: /s/ Edward J. Legere
--------------------------------------
Edward J. Legere
President & Chief Executive Officer
and Director
/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)
19
Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Edward J. Legere, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Peregrine
Pharmaceuticals, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Dated: September 16, 2002 Signed: /s/ EDWARD J. LEGERE
------------------ ------------------------------------
Edward J. Legere
PRESIDENT AND CHIEF EXECUTIVE OFFICER
20
Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Paul J. Lytle, certify that:
4. I have reviewed this quarterly report on Form 10-Q of Peregrine
Pharmaceuticals, Inc.;
5. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
6. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
Dated: September 16, 2002 Signed: /s/ PAUL J. LYTLE
------------------ ----------------------------
Paul J. Lytle
CHIEF FINANCIAL OFFICER
21