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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2003
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.)
119,600,501 shares of common stock
as of March 7, 2003
PEREGRINE PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 2003
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. Financial Statements:
Consolidated Balance Sheets at January 31, 2003 and April 30, 2002.. 1
Consolidated Statements of Operations for the three and nine
months ended January 31, 2003 and 2002.............................. 3
Consolidated Statement of Stockholders' Equity for the nine
months ended January 31, 2003....................................... 4
Consolidated Statements of Cash Flows for the nine months
ended January 31, 2003 and 2002..................................... 5
Notes to Consolidated Financial Statements ......................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................19
Company Overview ...................................................19
Risk Factors of Our Company ........................................29
Item 3. Quantitative and Qualitative Disclosures About Market Risk .........30
Item 4. Controls and Procedures ............................................30
PART II OTHER INFORMATION
Item 1. Legal Proceedings...................................................30
Item 2. Changes in Securities and Use of Proceeds ..........................30
Item 3. Defaults Upon Senior Securities ....................................30
Item 4. Submission of Matters to a Vote of Security Holders ................30
Item 5. Other Information ..................................................31
Item 6. Exhibits and Reports on Form 8-K....................................31
Signatures..........................................................32
Certifications......................................................33
i
PART I FINANCIAL INFORMATION
----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AT JANUARY 31, 2003 AND APRIL 30, 2002
- -----------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30,
2003 2002
------------ ------------
UNAUDITED
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,932,000 $ 6,072,000
Trade and other receivables, net of allowance for doubtful
accounts of $58,000 (January) and $80,000 (April) 1,148,000 328,000
Inventories 1,292,000 6,000
Prepaid expenses and other current assets 356,000 384,000
------------ ------------
Total current assets 6,728,000 6,790,000
PROPERTY:
Leasehold improvements 290,000 267,000
Laboratory equipment 1,936,000 1,803,000
Furniture, fixtures and computer equipment 724,000 698,000
------------ ------------
2,950,000 2,768,000
Less accumulated depreciation and amortization (2,028,000) (1,853,000)
------------ ------------
Property, net 922,000 915,000
OTHER ASSETS:
Note receivable, net of allowance of $1,661,000 (January) and
$1,705,000 (April) -- --
Debt issuance costs, net 306,000 --
Other 130,000 161,000
------------ ------------
Total other assets 436,000 161,000
------------ ------------
TOTAL ASSETS $ 8,086,000 $ 7,866,000
============ ============
See accompanying notes to consolidated financial statements
1
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AT JANUARY 31, 2003 AND APRIL 30, 2002 (CONTINUED)
- ---------------------------------------------------------------------------------------------------
JANUARY 31, APRIL 30,
2003 2002
-------------- --------------
UNAUDITED
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 560,000 $ 1,070,000
Accrued clinical trial site fees 243,000 607,000
Accrued legal and accounting fees 295,000 303,000
Accrued royalties and license fees 156,000 189,000
Accrued payroll and related costs 376,000 374,000
Notes payable, current portion 17,000 2,000
Other current liabilities 272,000 208,000
Deferred revenue 1,400,000 30,000
-------------- --------------
Total current liabilities 3,319,000 2,783,000
CONVERTIBLE DEBT, net of discount 618,000 --
DEFERRED REVENUE 300,000 --
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Common stock-$.001 par value; authorized 175,000,000 shares;
outstanding - 119,543,531 (January); 110,275,209 (April) 120,000 110,000
Additional paid-in capital 142,254,000 134,221,000
Deferred stock compensation (387,000) (801,000)
Accumulated deficit (138,138,000) (128,447,000)
-------------- --------------
Total stockholders' equity 3,849,000 5,083,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,086,000 $ 7,866,000
============== ==============
See accompanying notes to consolidated financial statements
2
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ---------------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
2003 2002 2003 2002
-------------- -------------- -------------- --------------
REVENUES:
Contract manufacturing revenue $ 162,000 $ -- $ 1,257,000 $ --
License revenue 350,000 125,000 350,000 3,375,000
-------------- -------------- -------------- --------------
Total revenues 512,000 125,000 1,607,000 3,375,000
COSTS AND EXPENSES:
Cost of contract manufacturing 270,000 -- 1,301,000 --
Research and development 1,676,000 3,170,000 7,126,000 7,985,000
Selling, general and administrative 681,000 746,000 2,204,000 1,703,000
-------------- -------------- -------------- --------------
Total costs and expenses 2,627,000 3,916,000 10,631,000 9,688,000
-------------- -------------- -------------- --------------
LOSS FROM OPERATIONS (2,115,000) (3,791,000) (9,024,000) (6,313,000)
-------------- -------------- -------------- --------------
OTHER INCOME (EXPENSE):
Interest and other income 57,000 82,000 197,000 299,000
Interest and other expense (592,000) (1,000) (864,000) (3,000)
-------------- -------------- -------------- --------------
NET LOSS $ (2,650,000) $ (3,710,000) $ (9,691,000) $ (6,017,000)
============== ============== ============== ==============
WEIGHTED AVERAGE
SHARES OUTSTANDING:
Basic and Diluted 118,831,011 107,750,771 115,463,097 102,743,776
============== ============== ============== ==============
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.02) $ (0.03) $ (0.08) $ (0.06)
============== ============== ============== ==============
See accompanying notes to consolidated financial statements
3
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL DEFERRED TOTAL
COMMON STOCK PAID-IN 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
Common stock issued for cash
under Securities Purchase
Agreement, net of issuance
costs of $341,000 5,221,540 5,000 2,858,000 -- -- 2,863,000
Common stock issued for cash
under Common Stock Purchase
Agreements, net of issuance
costs of $190,000 2,900,000 3,000 1,853,000 -- -- 1,856,000
Common stock issued upon
conversion of convertible debt,
net of issuance costs of $17,000 1,594,119 2,000 1,336,000 -- -- 1,338,000
Common stock issued upon exercise
of stock options 52,663 -- 18,000 -- -- 18,000
Rescind prior sale of common
stock to related party (500,000) -- (500,000) -- -- (500,000)
Intrinsic value of embedded
conversion feature related to
convertible debt -- -- 1,143,000 -- -- 1,143,000
Fair market value of detachable
warrants issued with
convertible debt -- -- 1,321,000 -- -- 1,321,000
Deferred stock compensation -- -- 4,000 (4,000) -- --
Stock-based compensation -- -- -- 418,000 -- 418,000
Net loss -- -- -- -- (9,691,000) (9,691,000)
-------------- -------------- -------------- -------------- -------------- --------------
BALANCES - January 31, 2003 119,543,531 $ 120,000 $ 142,254,000 $ (387,000) $(138,138,000) $ 3,849,000
============== ============== ============== ============== ============== ==============
See accompanying notes to consolidated financial statements
4
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED JANUARY 31,
2003 2002
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,691,000) $ (6,017,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 277,000 316,000
Stock-based compensation 418,000 593,000
Amortization of discount on convertible debt and debt issuance
costs 745,000 --
Changes in operating assets and liabilities:
Trade and other receivables (820,000) 29,000
Inventories (1,286,000) --
Prepaid expenses and other current assets 28,000 (235,000)
Accounts payable (510,000) 72,000
Deferred revenue 1,670,000 (3,375,000)
Accrued clinical trial site fees (364,000) 206,000
Other accrued expenses and current liabilities 25,000 222,000
------------- -------------
Net cash used in operating activities (9,508,000) (8,189,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (183,000) (149,000)
Proceeds from sale of property 11,000 67,000
Decrease in other assets -- (4,000)
------------- -------------
Net cash used in investing activities (172,000) (86,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 4,737,000 13,159,000
Rescind prior sale of common stock to related party (500,000) --
Proceeds from issuance of convertible debt, net of issuance
costs of $363,000 3,370,000 --
Principal payments on notes payable (67,000) (82,000)
------------- -------------
Net cash provided by financing activities 7,540,000 13,077,000
------------- -------------
5
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------------------
NINE MONTHS ENDED JANUARY 31,
-----------------------------------
2003 2002
--------------- ---------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS $ (2,140,000) $ 4,802,000
CASH AND CASH EQUIVALENTS, beginning of period 6,072,000 6,327,000
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 3,932,000 $ 11,129,000
=============== ===============
SUPPLEMENTAL INFORMATION:
Interest paid $ 97,000 $ 3,000
=============== ===============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property acquired in exchange for note payable $ 82,000 $ --
=============== ===============
For supplemental information relating to conversion of convertible debentures into
common stock and property acquired in exchange for note payable, see Notes 4 and 7.
See accompanying notes to consolidated financial statements
6
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Peregrine Pharmaceuticals, Inc. ("Peregrine") and its wholly-owned
subsidiaries, Avid Bioservices, Inc. ("Avid"), which was formed in January 2002,
and Vascular Targeting Technologies, Inc. (collectively the "Company"). All
intercompany balances and transactions have been eliminated.
At January 31, 2003, the Company had $3,932,000 in cash and cash
equivalents and current receivables of $1,148,000. 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 licensing or
sale of its products under development.
Revenues earned by Avid during the nine months ended January 31, 2003
amounted to $1,257,000. The Company expects that Avid will continue to generate
revenues which should lower 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 operations, including the anticipated development and
clinical trial costs of Cotara(TM), the anticipated development costs associated
with Vasopermeation Enhancement Agents ("VEA's") and Vascular Targeting Agents
("VTA's"), and the potential expansion of the Company's manufacturing
capabilities.
Assuming the Company does not raise any additional capital from
financing activities or from the sale or licensing of its technologies, and
further assuming that Avid does not generate any additional revenues beyond its
two major active contracts, the Company believes it has sufficient cash on hand
to meet its obligations on a timely basis through at least June 2003.
Given the uncertainty of the availability of cash from the capital
markets and the existing restrictions and limitations we have for equity or debt
financings, the Company is actively exploring various other sources of cash by
leveraging its many assets. The transactions being explored by the Company for
its technologies include licensing or partnering Cotara(TM), licensing,
partnering or the divestiture of Oncolym(R), divesting all radiopharmaceutical
based technologies (Oncolym(R), Cotara(TM) (TNT based therapeutic and imaging
uses) and VTA based radiopharmaceuticals for therapeutic uses, licensing or
partnering the Company's lead VEA clinical candidate, NHS76/PEP and licensing or
partnering our various VTA based technologies.
In addition to licensing, partnering or the divestiture of the
Company's technologies to raise capital, the Company is also exploring strategic
transactions related to its subsidiary, Avid Bioservices, Inc. In this regard,
the Company has begun to explore the possibility of selling a portion or all of
Avid as a means of raising additional capital. The Company believes that Avid is
a valuable asset and would like to maintain a significant ownership in the
subsidiary, but there are significant advantages to partnering the Avid
subsidiary. Avid needs working and expansion capital to continue growing its
customer base to reach profitability. Partnering the facility can help to
increase the potential that Avid survives and thrives as a stand alone business
and takes advantage of the current business opportunities for biologics contract
7
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
manufacturing organizations. Partnering or selling Avid can potentially supply
the Company and Avid with additional working capital.
There can be no assurances that the Company will be successful in
raising sufficient capital on terms acceptable to it, or at all (from either
debt, equity or the licensing, partnering or sale of technology assets and/or
the sale of some or all of Avid), or that sufficient additional revenues will be
generated from Avid or under potential licensing agreements to sustain its
operations beyond June 2003. If the Company is unable to generate additional
capital in the near term, the Company will be forced to drastically reduce its
expenses on a go forward basis.
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 January 31, 2003, and the consolidated
results of its operations and its consolidated cash flows for the nine-month
periods ended January 31, 2003 and 2002. 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.
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.
INVENTORIES. Inventories are stated at the lower of cost or market and
primarily includes raw materials and supplies, and direct labor and overhead
costs associated with our wholly-owned subsidiary, Avid. Inventories consist of
the following at January 31, 2003 and April 30, 2002:
JANUARY APRIL
2003 2002
----------- -----------
Raw materials and supplies $ 19,000 $ --
Work in process 1,273,000 6,000
----------- -----------
Total Inventories $1,292,000 $ 6,000
=========== ===========
DEFERRED REVENUE. Deferred revenue primarily consists of customer
deposits received in advance for up-front contract fees associated with Avid's
contract manufacturing and development agreements and up-front license fees
8
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
associated with the licensing of Peregrine's technology. Deferred revenue is
generally recognized once the service has been provided or all obligations have
been met and/or upon shipment of the product to the customer.
REVENUE RECOGNITION. The Company currently derives revenues primarily
from licensing agreements associated with Peregrine's technologies under
development and from contract manufacturing services provided by Avid.
The Company recognizes revenues pursuant to Staff Accounting Bulletin
No. 101, REVENUE RECOGNITION ("SAB No. 101"). The bulletin draws on existing
accounting rules and provides specific guidance on how those accounting rules
should be applied. Revenue is generally realized or realizable and earned when
persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the seller's price to the buyer is fixed or determinable,
and collectibility is reasonably assured. 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 represents the culmination of a
separate earnings process.
Amounts received under licensing agreements primarily consist of
nonrefundable up-front license fees and milestone payments. Revenues under
licensing agreements are recognized based on the performance requirements of the
agreement. Nonrefundable up-front license fees, whereby the Company has an
ongoing involvement or performance obligations, are generally deferred and
recognized as revenue on a straight-line basis over the term of the performance
obligations or relevant agreement. Nonrefundable up-front license fees received
under license agreements, whereby continued performance or future obligations
are considered inconsequential to the relevant licensed technology, are
generally recognized as revenue upon delivery of the technology. Milestone
payments are generally recognized as revenue upon completion of the milestone
assuming there are no other obligations.
Contract manufacturing revenues are generally recognized once the
service has been provided and/or upon shipment of the product to the customer.
The Company also records a provision for estimated contract losses, if any, in
the period in which they are determined.
In July 2000, the Emerging Issues Task Force ("EITF") released Issue
99-19 ("EITF 99-19"), REPORTING REVENUE GROSS AS A PRINCIPAL VERSUS NET AS AN
AGENT. EITF 99-19 summarized the EITF's views on when revenue should be recorded
at the gross amount billed to a customer because it has earned revenue from the
sale of goods or services, or the net amount retained (the amount billed to the
customer less the amount paid to a supplier) because it has earned a fee or
commission. In addition, the EITF released Issue 00-10 ("EITF 00-10"),
ACCOUNTING FOR SHIPPING AND HANDLING FEES AND COSTS, and Issue 01-14 ("EITF
01-14"), INCOME STATEMENT CHARACTERIZATION OF REIMBURSEMENTS RECEIVED FOR
"OUT-OF-POCKET" EXPENSES INCURRED. EITF 00-10 summarized the EITF's views on how
the seller of goods should classify in the income statement amounts billed to a
customer for shipping and handling and the costs associated with shipping and
handling. EITF 01-14 summarized the EITF's views on when the reimbursement of
out-of-pocket expenses should be characterized as revenue or as a reduction of
expenses incurred. The Company's revenue recognition policies are in compliance
with EITF 99-19, EITF 00-10 and EITF 01-14 whereby the Company records revenue
9
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
for the gross amount billed to customers (the cost of raw materials, supplies,
and shipping, plus the related handling mark-up fee) and records the cost of the
amounts billed as cost of sales as the Company acts as a principal in these
transactions.
BASIC AND DILUTIVE NET LOSS PER COMMON SHARE. Basic and dilutive net
loss per common share is calculated in accordance with Statement of Financial
Accounting Standards No. 128, EARNINGS PER SHARE. Basic net loss per common
share is computed by dividing the net loss by the weighted average number of
common shares outstanding during the period and excludes the dilutive effects of
options, warrants and convertible instruments. Diluted net loss per common share
is computed by dividing the net loss by the sum of the weighted average number
of common shares outstanding during the period plus the potential dilutive
effects of options, warrants, and convertible debt outstanding during the
period. Potentially dilutive common shares consist of stock options and warrants
calculated in accordance with the treasury stock method, but are excluded if
their effect is antidilutive. The potential dilutive effect of convertible debt
was calculated using the if-converted method assuming the conversion of the
convertible debt as of the earliest period reported or at the date of issuance,
if later. Because the impact of options, warrants, and other convertible
instruments are antidilutive, there is no difference between basic and diluted
loss per share amounts for the three and nine months ended January 31, 2003 and
January 31, 2002. The Company has excluded the dilutive effect of the following
shares issuable upon the exercise of options, warrants, and convertible debt
outstanding during the period because their effect is antidilutive:
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
JANUARY 31, JANUARY 31, JANUARY 31, JANUARY 31,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Common stock equivalent shares assuming
issuance of shares represented by
outstanding stock options and warrants
utilizing the treasury stock method 3,366,990 9,497,991 5,638,358 7,552,794
Common stock equivalent shares assuming
issuance of shares upon conversion of
convertible debt utilizing the
if-converted method -- -- 2,505,413 --
----------- ----------- ----------- -----------
Total 3,366,990 9,497,991 8,143,771 7,552,794
=========== =========== =========== ===========
Weighted outstanding options and warrants to purchase up to 18,350,568
and 14,476,323 shares of common stock for the three and nine months ended
January 31, 2003, respectively, were also excluded from the calculation of
diluted earnings per common share because their exercise prices were greater
than the average market price during the period. In addition, weighted shares of
3,488,107, assuming issuance of shares upon conversion of convertible debt for
the three months ended January 31, 2003, were also excluded from the calculation
of diluted earnings per common share because their conversion price was greater
than the average market price during the period.
Weighted outstanding options and warrants to purchase up to 5,821,478
and 6,127,403 shares of common stock for the three and nine months ended
January 31, 2002, respectively, were also excluded from the calculation of
diluted earnings per common share because their exercise prices were greater
than the average market price during the period.
10
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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 objective of SFAS No. 144 was 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
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.
11
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
In December 2002, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 148 ("SFAS No. 148"),
ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE. SFAS No. 148
amends SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, and is effective
for fiscal years ending after December 15, 2002. SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. Disclosure requirements for interim financial
statements are effective for interim periods beginning after December 15, 2002,
although early adoption is permitted in certain circumstances. The Company
believes that adopting SFAS No. 148 will not have a material impact on its
consolidated financial position and results of operations and plans to adopt the
interim and annual disclosure requirements beginning with the quarter ended
April 30, 2003 on the Company's annual report on Form 10-K for the year ending
April 30, 2003.
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 defaults under the lease agreement, including but not limited to, filing
a petition for bankruptcy or failure to pay the basic rent within five (5) days
of being due, the note receivable shall be deemed to be immediately satisfied in
full and the buyer shall have no further obligation to the Company for such note
receivable. Although the Company has made all payments under the lease agreement
and has not filed for protection under the laws of bankruptcy, during the
quarter ended October 31, 1999, the Company did not have sufficient cash on hand
to meet its obligations on a timely basis and was operating at significantly
reduced levels. In addition, at that time, if the Company could not raise
additional cash by December 31, 1999, the Company 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
statements of operations. Due to the uncertainty of the Company's capital
resources beyond June 2003 and its ability to pay its lease obligation beyond
such period, the carrying value of the note receivable approximates its fair
value at January 31, 2003. The Company has received all payments through March
2003. The following represents a rollforward of the allowance of the Company's
note receivable for the nine months ended January 31, 2003:
Allowance for note receivable, April 30, 2002 $ 1,760,000
Principal payments received (41,000)
------------
Allowance for note receivable, January 31, 2003 $ 1,719,000
============
12
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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 April 2003.
5. LICENSING
During January 2003, the Company and Merck KGaA entered into an
amendment to the license agreement dated October 14, 2000, whereby the Company
received an extension to the royalty period from six years to ten years from the
date of the first commercial sale. Under the terms of the amendment, the Company
received the remaining up-front fee of $350,000 in February 2003. The $350,000
was recorded as license revenue during the quarter ended January 31, 2003 in
accordance with SAB No. 101 and included in Trade and Other Receivables at
January 31, 2003.
During December 2002, the Company granted the exclusive rights for the
development of diagnostic and imaging agents in the field of oncology to
Schering A.G. under its Vascular Targeting Agent ("VTA") technology. Under the
terms of the agreement, the Company received an up-front payment of $300,000,
which was recorded as deferred revenue in accordance with SAB No. 101 during the
quarter ended January 31, 2003 and will be amortized over the term of the
remaining obligations as stated in the agreement. In addition, the Company could
also receive future milestone payments and a royalty on net sales, as defined in
the agreement.
6. RELATED PARTY TRANSACTIONS
On November 19, 2001, the Company received $5,750,000 under a Common
Stock Purchase Agreement in exchange for the issuance of 5,750,000 shares of its
common stock and warrants to purchase up to 1,725,000 shares of common stock at
an exercise price of $1.00 per share. Mr. Eric Swartz, a director of the
Company, invested $500,000 of the total amount in exchange for 500,000 shares of
the Company's common stock and warrants to purchase up to 150,000 shares of
common stock at an exercise price of $1.00. Subsequent to the sale, the Company
was informed by The Nasdaq Stock Market that the sale of shares to a director of
the Company at a discount to the market price of the Company's common stock
required shareholder approval in order for the Company to be in compliance with
Nasdaq Market Rule 4350. On October 22, 2002, the Company's prior sale of common
stock to Mr. Eric Swartz did not receive shareholder approval due to
insufficient shareholder votes. As such, the Company was required to rescind the
transaction and to return the sum of $500,000 to Mr. Swartz in exchange for the
500,000 shares of common stock and the cancellation of a warrant to purchase up
to 150,000 shares of common stock. During the quarter ended January 31, 2003,
the Company paid Mr. Eric Swartz $508,000, which included interest calculated at
the Company's money market rates.
13
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
7. CONVERTIBLE DEBT
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 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
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. 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. Under the SPA, each Debenture holder was granted a detachable 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 detachable 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. Also
under the terms of the SPA, certain Board members agreed to a lock-up provision
whereby no shares or options can be sold by such Board members until the sooner
of (i) the conversion of all outstanding convertible debt, (ii) the payment of
all outstanding convertible debt or (iii) September 5, 2003.
In accordance with EITF 00-27, APPLICATION OF ISSUE NO. 98-5 TO CERTAIN
CONVERTIBLE Instruments, the Company initially recorded its convertible debt net
of discount of (i) the relative fair value of the warrants issued in the amount
of $1,321,000 and (ii) the intrinsic value of the embedded conversion feature in
the amount of $1,143,000. The relative fair value of the warrants was determined
in accordance with the Black-Scholes valuation model based on the warrant terms.
The debt discount associated with unconverted debentures and warrants are
amortized on a straight-line basis over the term of the Debenture and warrants,
or three and four years, respectively, which approximates the effective interest
method, and the amortization is recorded as interest expense. Upon conversion of
any debentures and/or warrants, the entire unamortized debt discount remaining
at the date of conversion that is associated with the converted debentures
and/or warrants are immediately recognized as interest expense and are included
in Interest and other expense in the consolidated statement of operations.
14
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
At January 31, 2003, the convertible debt, net of discount, was
$618,000 calculated as follows:
PRINCIPAL BALANCE OF CONVERTIBLE DEBT
Initial Convertible Debentures Issued $ 3,750,000
Debenture conversions as of January 31, 2003 (1,355,000)
------------
Unconverted principal balance of convertible
debt at January 31, 2003 2,395,000
------------
DISCOUNT ON CONVERTIBLE DEBT
Initial convertible debt discount 2,464,000
Amount amortized as interest expense (687,000)
------------
Convertible debt discount at January 31, 2003 1,777,000
------------
Convertible debt, net of discount, at January
31, 2003 $ 618,000
============
During the quarter ended January 31, 2003, debenture holders elected to
convert an aggregate of $1,355,000 of the outstanding Debentures in exchange for
approximately 1,594,119 shares of common stock at the conversion price of $0.85
per share.
In connection with the convertible debentures issued on August 9, 2002,
the Company incurred approximately $363,000 in debt issuance costs which are
being amortized on a straight-line basis over the life of the Debentures, which
approximates the effective interest method. Debt issuance costs includes
combined placement agent fees of $318,000 paid to A.G. Edwards and Olympus
Securities in August 2002. The amortization of the debt issuance costs is
recorded as non-cash interest expense and is included in Interest and other
expense in the consolidated statement of operations.
8. 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.
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 or loss. The Company has no intersegment
revenues and does not segregate assets at the segment level as such information
is not used by management.
15
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
Net revenues and gross profit (loss) information for the Company's
segments for the three months ended January 31, 2003 and 2002 consisted of the
following:
THREE MONTHS ENDED
JANUARY 31,
-------------------------
2003 2002
---------- ----------
NET REVENUES:
Research and development of cancer therapeutics $ 350,000 $ 125,000
Contract manufacturing and development of biologics 162,000 --
---------- ----------
Total net revenues $ 512,000 $ 125,000
========= =========
GROSS PROFIT (LOSS):
Research and development of cancer therapeutics $ 350,000 $ 125,000
Contract manufacturing and development of biologics (108,000) --
---------- ----------
Total gross profit $ 242,000 $ 125,000
========== ==========
Net revenues generated from Avid during the three months ended January
31, 2003 were primarily from one customer located in Europe and one customer
located in the U.S. For the three months ended January 31, 2003, the customer
located in Europe accounted for 68% of reported revenue and the one customer
located in the U.S. accounted for 26% of reported net revenues.
Net revenues and gross profit information for the Company's segments
for the nine months ended January 31, 2003 and 2002 consisted of the following:
NINE MONTHS ENDED JANUARY 31,
-----------------------------
2003 2002
------------ ------------
NET REVENUES:
Research and development of cancer therapeutics $ 350,000 $ 3,375,000
Contract manufacturing and development of biologics 1,257,000 --
------------ ------------
Total net revenues $ 1,607,000 $ 3,375,000
============ ============
GROSS PROFIT (LOSS):
Research and development of cancer therapeutics $ 350,000 $ 3,375,000
Contract manufacturing and development of biologics (44,000) --
------------ ------------
Total gross profit $ 306,000 $ 3,375,000
============ ============
Net revenues generated from Avid during the nine months ended January
31, 2003 were primarily from one customer located in Europe and one customer
located in the U.S. For the nine months ended January 31, 2003, the customer
located in Europe accounted for 57% of reported revenue and the one customer
located in the U.S. accounted for 40% of reported revenues.
16
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
9. STOCKHOLDERS' EQUITY
On August 9, 2002, the Company entered into a private placement with
two investors under a Securities Purchase Agreement ("SPA") and issued an
aggregate of approximately 1,923,000 shares of common stock 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 into 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 the Company receives prior 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 would be 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 warrant has a four year term and is
exercisable six months after the date of issuance at an exercise price of $0.71
per share. In addition, if the Company enters into 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 the Company receives prior 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 would be priced at an
exercise price $0.001 per share and shall expire four years from the closing
date as defined in the SPA.
Under the terms of the SPA as described above and in footnote 7, the
Company cannot sell common stock or instruments convertible into common stock at
a price per share of less than $0.85 before March 9, 2004 without first
obtaining shareholder approval. The sale of common stock below $0.85 per share
would trigger a reset of the purchase price for investors under the SPA which
would cause the Company to issue additional shares or warrants (in addition to
the original issuance of shares) that would in total exceed twenty percent (20%)
of the Company's outstanding shares of common stock as of the date of the
transaction, which would require prior shareholder approval under the rules of
The Nasdaq Stock Market. On October 22, 2002, the Company attempted to obtain
prior shareholder approval but the proposal did not receive sufficient
shareholder votes. There can be no guarantees that the Company will be
successful in obtaining future shareholder approval, if necessary.
17
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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. As of January 31, 2003,
500,000 shares of common stock and warrants to purchase up to 150,000 shares of
common stock were available for issuance under the Shelf.
Under all equity financing agreements entered into during August 2002,
the Company paid combined placement agent fees of approximately $445,000 to A.G.
Edwards, Atlas Capital, and Olympus Securities.
10. SUBSEQUENT EVENT
On March 17, 2003, the Company announced the resignation of Mr. Edward
J. Legere, President and Chief Executive Officer, to be effective at the close
of business on March 18, 2003. Mr. Steven King, Chief Operating Officer of
Peregrine and President of Avid, has been appointed the President and CEO of
Peregrine effective March 19, 2003. Mr. Legere will remain on Peregrine's Board
of Directors and will provide full time consulting services to the Company for a
minimum period of three months during the period of transition.
18
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 three and nine months ended
January 31, 2003 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.
In January 2002, we formed our 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 for
biopharmaceutical and biotechnology companies under current Good Manufacturing
Practices. Avid's manufacturing facility is located in Tustin, California,
adjacent to our offices.
With the addition of Avid, our 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.
Peregrine's main focus is on the development of its 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"). Our VTA and VEA technologies are
currently in preclinical development. Our first TNT-based product, Cotara(TM),
is currently in a Phase I clinical study at Stanford University Medical Center
for the treatment of colorectal, pancreatic and soft-tissue sarcoma cancers. In
addition, during February 2003, we received protocol approval from the U.S. Food
19
and Drug Administration ("FDA") to initiate our Phase III registration clinical
study using Cotara(TM) for the treatment of brain cancer. We do not anticipate
treating any additional patients in either the current Phase II brain cancer
clinical study or under the approved Phase III protocol while we actively seek a
licensing partner for the Cotara(TM) program.
In addition to collateral targeting agents, we have a direct
tumor-targeting antibody, Oncolym(R), for the treatment of Non-Hodgkins B-cell
Lymphoma. The clinical enrollment under the Phase I/II clinical trial was
suspended during August 2002 in an effort to focus our resources on our more
advanced Cotara(TM) program. We are actively seeking to license, partner or the
divestiture of the Oncolym(R) technology.
Avid's main focus is to provide an array of contract manufacturing
services, including contract manufacturing of antibodies and proteins, cell
culture development, process development, and testing of biologics for third
party customers.
RECENT DEVELOPMENTS
CLINICAL TRIALS. During February 2003, we received protocol approval
from the U.S. Food and Drug Administration ("FDA") to initiate our Phase III
registration clinical study using Cotara(TM) for the treatment of brain cancer.
We do not anticipate treating any additional patients in either the current
Phase II brain cancer clinical study or under the approved Phase III protocol
while we actively seek a licensing partner for the Cotara(TM) program.
Currently, multiple third parties are reviewing technology packages for each of
the Company's technologies.
DELISTING. During August 2002, we received a letter from The Nasdaq
Stock Market, Inc. notifying us that our common stock had failed to maintain a
minimum bid price of $1.00 over a period of 30 consecutive trading days as
required by The Nasdaq SmallCap Market listing requirements. The letter stated
that we would have 180-days or until February 18, 2003 to regain compliance by
establishing and maintaining a minimum closing bid price of $1.00 per share for
a period of 10 consecutive trading days. In February 2003, we received notice
from Nasdaq informing us that we had an additional 180-day grace period, or
until August 15, 2003, within which to regain compliance with the minimum
closing bid price requirement of $1.00 per share.
In addition, on January 30, 2003, Nasdaq announced plans to extend the
pilot program governing minimum bid price rules, which is subject to approval by
the Securities and Exchange Commission. The proposed rule would extend the
minimum bid price grace period for SmallCap companies demonstrating compliance
with the core initial listing criteria from 180 to up to 540 days (approximately
18 months) and compliance with this standard will be verified every 180 days. If
the new pilot program is approved, the Company could potentially have until
August 2004 to meet the minimum bid price requirement subject to meeting the
core listing requirements every 180 days. Core initial listing criteria include
either demonstrating net income of at least $750,000 in either its latest fiscal
year or in two of its last three fiscal years, stockholders' equity of $5
million or a market capitalization of at least $50 million. There can be no
guarantees that the proposed extension to the pilot program will be approved by
the Securities and Exchange Commission nor can we provide assurance that we will
meet the core listing requirements in August 2003.
REDUCTION OF OUR CLINICAL TRIAL DEPARTMENT. On January 9, 2003, we
announced the reduction of our Clinical Trial Department to be more in line with
our current clinical trial program. We do not anticipate treating any additional
patients in either the current Phase II brain cancer clinical study or under the
approved Phase III protocol while we actively seek a licensing partner for the
Cotara(TM) program. This restructuring included the elimination of three
positions including Dr. Terence Chew, the Company's former Senior Vice President
of Clinical and Regulatory Affairs. The Clinical Trial Department now consists
of four people who are focused on the existing Cotara(TM) Phase I clinical study
at Stanford University as well as supporting the licensing and partnering
initiatives for Cotara(TM) and Oncolym(R) and the VEA and VTA technology
platforms.
20
RESIGNATION OF OUR PRESIDENT AND CEO. On March 17, 2003, we announced
that Edward J. Legere has resigned from his position as President and Chief
Executive Officer of Peregrine Pharmaceuticals, Inc. effective the close of
business on March 18, 2003. Mr. Steven King, Chief Operating Officer of
Peregrine and President of Avid, has been appointed the President and CEO of
Peregrine effective March 19, 2003. Mr. Legere will remain on Peregrine's Board
of Directors and will provide full-time consulting services to the Company for a
minimum period of three months, which can be extended by mutual agreement. Mr.
Legere's initial duties as a full-time consultant are to assist in the
transition of the President and CEO position to Mr. King, to assist the Company
with its efforts to raise capital through strategic transactions, and to perform
other duties as set forth by the Company.
Mr. Legere was named interim President and Chief Executive Officer in
February 2001. During April 2001, Mr. Legere accepted the position of President
and Chief Executive Officer under a one year contract. Under the terms of the
contract, Mr. Legere and the Board of Directors agreed that Mr. Legere would not
relocate from the east coast to the west coast, although this required extensive
travel for Mr. Legere and extensive time away from his family. The current
demands of the Company's business are such that it has become increasing
difficult for Mr. Legere to perform his duties as President and CEO and spend
time with his family, even periodically. Therefore, Mr. Legere felt it was in
the best interest of the Company if he resigned and transferred his
responsibilities to Mr. Steven King effective March 19, 2003, who had progressed
from Director of Research and Development to Chief Operating Officer of
Peregrine over the past five years.
Mr. King has been an employee of Peregrine since 1997 as the Director
of Research & Development. During his employment, Mr. King has continually
assumed greater responsibilities in the management of the Company. Mr. King was
promoted to Vice President of Technology and Product Development in 1999 where
his duties were to direct the Company's research and development activities,
oversee and direct the patent strategy for the Company's various technologies
and to participate in business development activities. In January 2002, Mr. King
was named the President and CEO of Avid Bioservices, Inc., the Company's
wholly-owned subsidiary. Mr. King was responsible for setting up Avid as a
biologics contract manufacturer and successfully launching the business. During
this time, Mr. King also retained his duties as Peregrine's Vice President of
Technology and Product Development. In September 2002, the Board of Directors
promoted Mr. King to the position of Chief Operating Officer of Peregrine. The
Board of Directors believes Mr. King has consistently excelled in the
performance of his duties as he has been given increased management
responsibilities. Therefore, the Board of Directors believes Mr. King is not
only prepared to assume the President and Chief Executive Officer position at
Peregrine but that he will excel in this capacity.
RESULTS OF OPERATIONS
NET LOSS:
- ---------
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------------------- --------------------------------------------
( $ in thousands): 2003 2002 $ Change 2003 2002 $ Change
----------- ----------- ------------- ------------- ----------- -----------
Net loss ($ 2,650) ($ 3,710) $ 1,060 ($ 9,691) ($ 6,017) ($ 3,674)
The decrease in our reported net loss of $1,060,000 for the three
months ended January 31, 2003 compared to the same period in the prior year is
due to an increase in total revenues of $387,000 combined with a decrease in
total costs and expenses of $1,289,000. These amounts were offset by a $25,000
decrease in interest and other income and a $591,000 increase in interest and
other expense.
21
The increase in our reported net loss of $3,674,000 for the nine months
ended January 31, 2003 compared to the same period in the prior year is due to a
decrease in total revenues of $1,768,000, an increase in total costs and
expenses of $943,000, a decrease in interest and other income of $102,000 and an
increase in interest and other expense of $861,000.
TOTAL REVENUES:
- ---------------
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------------------- --------------------------------------------
( $ in thousands): 2003 2002 $ Change 2003 2002 $ Change
----------- ----------- ------------- ------------- ----------- -----------
Total revenues $ 512 $ 125 $ 387 $ 1,607 $ 3,375 ($ 1,768)
The increase in total revenues of $387,000 during the three months
ended January 31, 2003 compared to the same period in the prior year is due to
an increase in license revenue of $225,000 combined with an increase in contract
manufacturing revenue of $162,000.
The decrease in total revenues of $1,768,000 during the nine months
ended January 31, 2003 compared to the same period in the prior year is due to a
decrease in license revenue of $3,025,000 offset by an increase in contract
manufacturing revenue of $1,257,000.
CONTRACT MANUFACTURING REVENUE:
- -------------------------------
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------------------- --------------------------------------------
($ in thousands): 2003 2002 $ Change 2003 2002 $ Change
----------- ----------- ------------- ------------- ----------- -----------
Contract
manufacturing revenue $ 162 $ - $ 162 $ 1,257 $ - $ 1,257
The increase in contract manufacturing revenue for the three and nine
months ended January 31, 2003 compared to the same periods in the prior year is
due to the commencement of Avid's operations in January 2002. We expect contract
manufacturing revenue to increase during the remainder of the current fiscal
year based on the anticipated completion of projects under our current contract
manufacturing agreements.
LICENSE REVENUE:
- ----------------
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------------------- --------------------------------------------
($ in thousands): 2003 2002 $ Change 2003 2002 $ Change
----------- ----------- ------------- ------------- ----------- -----------
License revenue $ 350 $ 125 $ 225 $ 350 $ 3,375 ($ 3,025)
The increase in license revenue of $225,000 during the three months
ended January 31, 2003 compared to the same period in the prior year is
primarily due to the recognition of revenue associated with up-front license
fees of $350,000 under a license agreement we amended during the current quarter
with Merck KGaA.
The decrease in license revenue of $3,025,000 during the nine months
ended January 31, 2003 compared to the same period in the prior year resulted
primarily from the recognition of a $3,000,000 up-front licensing fee during the
prior year period. During the prior year quarter ended July 31, 2001, we
22
recognized deferred license revenue of $3,000,000 when we assumed the Oncolym(R)
licensing rights from Schering AG and met all obligations under the agreement.
This decrease was offset by the recognition of revenue associated with an
up-front license fee of $350,000 under a license agreement we amended during the
quarter ended January 31, 2003. Although we are in various pre-contract stages
of licensing discussions with third parties for our technologies under
development, we cannot estimate nor can we determine the likelihood that we will
be successful in entering into any additional definitive license agreements
during the remainder of the current fiscal year.
TOTAL COSTS AND EXPENSES:
- -------------------------
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------------------- --------------------------------------------
($ in thousands): 2003 2002 $ Change 2003 2002 $ Change
----------- ----------- ------------- ------------- ----------- -----------
Total costs and
expenses $ 2,627 $ 3,916 ($ 1,289) $ 10,631 $ 9,688 $ 943
The decrease in total costs and expenses of $1,289,000 during the three
months ended January 31, 2003 compared to the same period in the prior year is
due to a decrease in research and development expenses of $1,494,000 combined
with a decrease in selling, general and administrative expenses of $65,000.
These decreases were offset by a $270,000 increase in the cost of contract
manufacturing.
The increase in total costs and expenses of $943,000 during the nine
months ended January 31, 2003 compared to the same period in the prior year is
due to an increase in cost of contract manufacturing of $1,301,000 combined with
an increase in selling, general and administrative expenses of $501,000. These
increases were offset by an $859,000 decrease in research and development
expenses.
COST OF CONTRACT MANUFACTURING:
- -------------------------------
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------------------- --------------------------------------------
($ in thousands): 2003 2002 $ Change 2003 2002 $ Change
----------- ----------- ------------- ------------- ----------- -----------
Cost of contract
manufacturing $ 270 $ - $ 270 $ 1,301 $ - $ 1,301
The increase in cost of contract manufacturing during the three and
nine months ended January 31, 2003 compared to the same periods in the prior
year is due to the commencement of Avid's operations in January 2002 and the
increase in related revenues. We expect that cost of contract manufacturing will
continue to increase during the remainder of the current fiscal year as Avid
continues to provide an array of contract manufacturing services under our
current contract manufacturing agreements.
RESEARCH AND DEVELOPMENT EXPENSES:
- ----------------------------------
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------------------- --------------------------------------------
($ in thousands): 2003 2002 $ Change 2003 2002 $ Change
----------- ----------- ------------- ------------- ----------- -----------
Research and
development expenses $ 1,676 $ 3,170 ($ 1,494) $ 7,126 $ 7,985 ($ 859)
23
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 decrease in research and development expenses of $1,494,000 during
the three months ended January 31, 2003 compared to the same period in the prior
year was primarily due to a decrease in clinical trial program and pre-clinical
development expenses combined with the allocation of labor and overhead expenses
to cost of sales and inventories in relation to contract manufacturing services
provided by Avid to outside customers since its inception in January 2002. The
decrease in clinical trial program expenses is primarily due to the decrease in
expenses associated with the treatment of fewer patients as a result of the
reduction of our clinical trial program combined with a reduction in costs
associated with seeking protocol approval and start-up activities for a Phase
III clinical trial for the treatment of brain cancer. The decrease in
pre-clinical development expenses is primarily due to a decrease in drug
development expenses for our Tumor Necrosis Therapy ("TNT") and Vascular
Targeting Agent ("VTA") technologies offset by an increase in patent legal fees
associated with our VTA technologies. These decreases in research and
development expenses were offset by a slight increase in salary and facility
expenses.
The decrease in research and development expenses of $859,000 for the
nine months ended January 31, 2003 compared to the same period in the prior year
is primarily due to a decrease in clinical trial program expenses and
stock-based compensation expense combined with the allocation of labor and
overhead expenses to cost of sales and inventories in relation to contract
manufacturing services provided by Avid to outside customers since its inception
in January 2002. The decrease in clinical trial program expenses is primarily
due to the decrease in expenses associated with the treatment of fewer patients
as a result of the reduction of our clinical trial program, including but not
limited to, decreased patient fees and related expenses. These decreases in
clinical trial program expenses were offset by an increase in expenses incurred
in the first quarter of fiscal year 2003 associated with seeking protocol
approval and start-up activities primarily related to a European investigator
meeting for a Phase III clinical trial for the treatment of brain cancer. The
decrease in stock-based compensation expense is associated with the fair value
of options granted to non-employee consultants that were fully amortized in the
prior year period 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 above decreases in research and development expenses were offset by
an increase in pre-clinical development expenses and manufacturing expenses. The
increase in pre-clinical development expenses was primarily due to an increase
in patent legal fees associated with our VTA technologies combined with an
increase in radiolabeling and sponsored research fees paid to two universities.
These increases were offset by a decrease in drug development expenses for our
TNT and VTA technologies. The increase in manufacturing expenses is primarily
due to the increase in our supply of Cotara(TM) during the first quarter of
fiscal year 2003 for use in the planned Phase III clinical trial for the
treatment of brain cancer (for which we are now seeking a licensing partner). In
addition, in order to operate a cGMP facility, we have incurred an increase in
salary expense due to increased headcount, combined with an increase in facility
and validation expenses as a cGMP facility requires highly specialized personnel
and equipment that must be maintained on a continual basis.
We anticipate our research and development expenses to continue to
decrease over the remainder of the current fiscal year as we wrap-up current
clinical trials and focus our business development efforts on either licensing
or selling the Oncolym(R) and Cotara(TM) technologies with collaborators who
will fund future clinical and commercial development. We intend to focus the
majority of our pre-clinical development expenses on our VTA and VEA
technologies.
The following represents the expenses we have incurred by each major
platform technology under development:
24
R&D EXPENSES- R&D EXPENSES-
PLATFORM TECHNOLOGY QUARTER ENDED MAY 1, 1998 TO
UNDER DEVELOPMENT JANUARY 31, 2003 JANUARY 31, 2003
---------------------------- ---------------- ----------------
TNT development (Cotara(TM)) $ 796,000 $ 22,554,000
VEA development 290,000 3,465,000
VTA development 567,000 4,664,000
Oncolym(R)development 23,000 13,124,000
---------------- ----------------
Total R&D expenses $ 1,676,000 $ 43,807,000
================ ================
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 the TNT and Oncolym(R) technologies. In addition to the
above costs, we have expensed an aggregate of $32,004,000 for the acquisition of
our TNT and VTA technologies, which were acquired during fiscal years 1995 and
1997, respectively.
Looking beyond the current fiscal year, it is extremely difficult for
us to reasonably estimate all future research and development costs associated
with each of our technologies due to the number of unknowns and uncertainties
associated with pre-clinical and clinical trial development. These unknown
variables and uncertainties include, but are not limited to:
o The uncertainty of our capital resources to fund research,
development and clinical studies beyond the remainder of the
current fiscal year;
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; and
o The uncertainty of protocol changes and modifications in the
design of our clinical trial studies, which may increase or
decrease our future costs.
We or our potential partners will need to do additional development and
clinical testing prior to seeking any regulatory approval for commercialization
of our product candidates as all of our products are in clinical and
pre-clinical development. Testing, manufacturing, commercialization,
advertising, promotion, exporting and marketing, among other things, of our
proposed products are subject to extensive regulation by governmental
authorities in the United States and other countries. The testing and approval
process requires substantial time, effort and financial resources, and we cannot
guarantee that any approval will be granted on a timely basis, if at all.
Companies in the pharmaceutical and biotechnology industries have suffered
significant setbacks in conducting advanced human clinical trials, even after
obtaining promising results in earlier trials. Furthermore, the United States
Food and Drug Administration may suspend clinical trials at any time on various
grounds, including a finding that the subjects or patients are being exposed to
an unacceptable health risk. Even if regulatory approval of a product is
granted, such approval may entail limitations on the indicated uses for which it
may be marketed. Accordingly, we or our potential partners may experience
difficulties and delays in obtaining necessary governmental clearances and
approvals to market our products, and we or our potential partners may not be
able to obtain all necessary governmental clearances and approvals to market our
products.
25
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES:
- ----------------------------------------------
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------------------- --------------------------------------------
($ in thousands): 2003 2002 $ Change 2003 2002 $ Change
----------- ----------- ------------- ------------- ----------- -----------
Selling, general and
administrative
expenses $ 681 $ 746 ($ 65) $ 2,204 $ 1,703 $ 501
The decrease in selling, general and administrative expenses of $65,000
during the three months ended January 31, 2003 compared to the same period in
the prior year is primarily due to a decrease in public relations expenses,
legal fees and annual shareholder meeting costs associated with Peregrine.
The increase in selling, general and administrative expenses of
$501,000 during the nine months ended January 31, 2003 compared to the same
period in the prior year is primarily due to an increase in business
development, salary and other general expenses associated with the formation and
start-up of our wholly-owned subsidiary, Avid Bioservices, Inc., combined with
an increase in business development expenses associated with Peregrine's
licensing activities. We expect selling, general and administrative expenses to
slightly increase during the remainder of the current fiscal year primarily due
to the increase in business development activities of Avid combined with our
anticipated increase in Peregrine's business development activities associated
with the potential licensing, partnering or the selling of its technologies
under development.
INTEREST AND OTHER INCOME:
- --------------------------
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------------------- --------------------------------------------
($ in thousands): 2003 2002 $ Change 2003 2002 $ Change
----------- ----------- ------------- ------------- ----------- -----------
Interest and other
income $ 57 $ 82 ($ 25) $ 197 $ 299 ($ 102)
The decrease in interest and other income during the three and nine
months ended January 31, 2003 compared to the same periods in the prior year is
primarily due to a decrease in interest income as a result a lower average cash
balance on hand and lower prevailing interest rates during the current periods.
INTEREST AND OTHER EXPENSE:
- ---------------------------
Three Months Ended Nine Months Ended
January 31, January 31,
-------------------------------------------- --------------------------------------------
($ in thousands): 2003 2002 $ Change 2003 2002 $ Change
----------- ----------- ------------- ------------- ----------- -----------
Interest and other
expense $ 592 $ 1 $ 591 $ 864 $ 3 $ 861
The increase in interest and other expense during the three and nine
months ended January 31, 2003 compared to the same periods in the prior year is
primarily due to an increase in interest expense associated with the issuance of
$3,750,000 in convertible debt during August 2002 combined with an increase in
non-cash interest expense resulting from the amortization of the convertible
debt discount associated with the fair value of detachable warrants and
intrinsic value of the embedded conversion feature combined with the
amortization of related debt issuance costs.
26
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 January 31, 2003, we had approximately $3,932,000 in cash and
cash equivalents and current receivables of $1,148,000. We have financed our
operations primarily through the sale of our common stock, which has been
supplemented with payments received from various licensing collaborations and
through the revenues generated from Avid. During the nine months ended January
31, 2003, we supported our cash used in operations of $9,508,000 primarily
through cash received under the financing transaction completed in August 2002
for aggregate gross proceeds of $9,000,000.
We have expended substantial funds on the development of our product
candidates and for clinical trials and we have incurred negative cash flows from
operations for the majority of our years since inception. We expect negative
cash flows from operations to continue until we are able to generate sufficient
revenue from the contract manufacturing services provided by Avid and/or from
the licensing of Peregrine's products under development.
Revenues earned by Avid during the nine months ended January 31, 2003
amounted to $1,257,000. Although we expect that Avid will continue to generate
revenues, we will continue to need to raise additional capital to provide for
initial clinical studies, the anticipated development costs associated with
Vasopermeation Enhancement Agents ("VEA's") and Vascular Targeting Agents
("VTA's"), and the potential expansion of our manufacturing capabilities.
Assuming we do not raise any additional capital from either financing
activities or under licensing, partnering or technology selling arrangements,
and assuming that Avid does not generate any additional revenues beyond its two
major active contracts, we believe that we have sufficient cash on hand to meet
our obligations on a timely basis through at least June 2003. We believe we will
be able to sustain our operations beyond June 2003 if we are able to (i) execute
additional manufacturing contracts for Avid (ii) license, partner or the
divestiture of our technologies under development specifically, Cotara(TM)
(which has a recently FDA approved protocol for a Phase III clinical trial) or
Oncolym(R) (iii) raise additional capital under equity or debt arrangements
(which may be difficult given current market conditions and the rights of
existing convertible debt and warrant holders, as described below) (iv) license
or partner uses of the VTA technology platforms (v) license or partner our
initial product candidate under our VEA technology, (NHS76/PEP), or (vi)
spin-off and sell all or a portion of Avid Bioservices, Inc., as further
discussed below.
With respect to possible future contract manufacturing revenues, Avid
currently has outstanding project proposals with various potential customers.
These project proposals generally range from approximately $500,000 to over $1.2
million per proposal. The submission of a project proposal is the first step in
generating potential new business. The estimated time to complete any one of the
outstanding project proposals is generally less than one year, assuming no
significant delays. As discussed in our Annual Report on Form 10-K for the year
ended April 30, 2002, we believe the sales cycle from client introduction to
signing an agreement, if one is to be signed, will generally take anywhere from
three to six months. Potential contracts may happen sooner or later based on the
complexity of the project and customer timelines, or not at all. There can be no
assurances that Avid will be successful in generating new business or that any
of the outstanding contract proposals will generate new business.
27
In regards to potential licensing, during the three months ended
January 31, 2003, the Company recorded license revenue of $350,000 under a
licensing agreement as discussed in the footnotes to the consolidated financial
statements, which amount was received in February 2003. In addition, during
December 2002, we entered into a license agreement with Schering AG for certain
diagnostic and imaging rights using our VTA technology and received an up-front
fee of $300,000 in January 2003, included in deferred revenue in the
consolidated financial statements as of January 31, 2003. Peregrine is currently
in various pre-contract stages of licensing discussions for all of its
technologies under development. Although we are in various pre-contract
discussions, there can be no assurances that we will be successful in completing
any licensing transactions on terms acceptable to us and the potential licensing
partner.
In addition, we will be focusing our efforts on potential equity and
debt financing activities. Our potential financing activities are currently
restricted under the terms of the Securities Purchase Agreement ("SPA") executed
in August 2002. Under the SPA, we cannot sell common stock or instruments
convertible into common stock at a price per share of less than $0.85 before
March 9, 2004 without first obtaining shareholder approval. The sale of common
stock below $0.85 per share would trigger a reset of the purchase price for
investors under the SPA which would cause us to issue additional shares or
warrants (in addition to the original issuance of shares) that would in total
exceed twenty percent (20%) of our outstanding shares of common stock as of the
date of the transaction. On October 22, 2002, we attempted to obtain prior
shareholder approval for this transaction, however, the proposal did not receive
a sufficient number of shareholder votes. Based on the Company's average closing
stock price of $0.58 per share for the 30 trading days ended March 5, 2003,
there can be no guarantees or assurances that we will have the ability to raise
additional capital on terms allowed under the SPA.
The Company is also actively seeking the potential to sell part of or
all of Avid Bioservices, Inc. in order to potentially raise additional capital
to sustain the operations of Peregrine beyond June 2003 and ensure the long-term
viability of Avid. The Company is currently seeking to sell a portion or all of
Avid's operations, depending on the valuation we can obtain for the Avid asset.
Our goal is to maintain a significant ownership stake in Avid while providing it
and Peregrine with sufficient working capital. We are currently in various
pre-contract discussions with a number of strategic partners. There can be no
guarantees or assurances that we will be successful in raising additional
capital from the partnering or sale of Avid within a reasonably short period of
time remaining to complete a transaction.
If the Company is unable to generate sufficient capital in the near
term through one of the methods described above, the Company may be forced to
take additional measures to reduce its monthly cash expenditures, including but
not limited to, the reduction of personnel and related expenses, the
postponement of our Phase I clinical trial, the reduction of development efforts
being performed in-house and by an outside university, the reduction of patent
fees and related expenses, and the reduction of other general expenses. The
Company is diligently working towards raising sufficient capital so these
drastic measures can be avoided. There can be no guarantees or assurances that
we will be successful in raising additional capital.
COMMITMENTS
At January 31, 2003, we had no material capital commitments, although
we have significant obligations under license agreements which are contingent on
clinical trial development milestones.
28
RISK FACTORS OF OUR COMPANY
The biotechnology industry includes many risks and challenges. Our
challenges may include, but are not limited to: uncertainties associated with
completing pre-clinical and clinical trials for our technologies; the
significant costs to develop our products as all of our products are currently
in development, pre-clinical studies or clinical trials and no revenue has been
generated from commercial product sales; obtaining additional financing to
support our operations and the development of our products; obtaining regulatory
approval for our technologies; complying with governmental regulations
applicable to our business; obtaining the raw materials necessary in the
development of such compounds; consummating collaborative arrangements with
corporate partners for product development; achieving milestones under
collaborative arrangements with corporate partners; developing the capacity to
manufacture, market and sell our products, either directly or indirectly with
collaborative partners; developing market demand for and acceptance of such
products; competing effectively with other pharmaceutical and biotechnological
products; attracting and retaining key personnel; protecting proprietary rights;
accurately forecasting operating and capital expenditures, other capital
commitments, or clinical trial costs and general economic conditions. A more
detailed discussion regarding our industry and business risk factors can be
found in our Annual Report on Form 10-K for the year ended April 30, 2002, as
filed with the Securities and Exchange Commission on August 13, 2002.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
Changes in United States interest rates would affect the interest
earned on the Company's cash and cash equivalents. Based on the Company's
overall interest rate exposure at January 31, 2003, a near-term change in
interest rates, based on historical movements, would not materially affect the
fair value of interest rate sensitive instruments. The Company's debt
instruments have fixed interest rates and terms and, therefore, a significant
change in interest rates would not have a material adverse effect on the
Company's financial position or results of operations.
ITEM 4. CONTROLS AND PROCEDURES
- ------- -----------------------
An evaluation has been performed under the supervision and with the
participation of our management, including our CEO and CFO, of the effectiveness
of the design and operation of our disclosure controls and procedures as of
January 31, 2003. Based on that evaluation, our management, including our CEO
and CFO, concluded that our disclosure controls and procedures were effective as
of January 31, 2003. There have been no significant changes in our internal
controls or in other factors that could significantly affect internal controls
subsequent to January 31, 2003.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. None.
- ------- ------------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
- ------- ------------------------------------------
The following is a summary of transactions by the Company during the
quarterly period of November 1, 2002 through January 31, 2003 involving issuance
and sales of the Company's securities that were not registered under the
Securities Act of 1933, as amended (the "Securities Act").
On August 9, 2002, the Company entered into a private placement with
four investors under a Securities Purchase Agreement, whereby the Company issued
Convertible Debentures ("Debenture") for gross proceeds of $3,750,000. During
the quarter ended January 31, 2003, debenture holders elected to convert an
aggregate of $1,355,000 of the outstanding Debentures in exchange for
approximately 1,594,119 shares of common stock at the conversion price of $0.85
per share.
The issuances of the securities of the Company in the above
transactions were deemed to be exempt from registration under the Securities Act
by virtue of Section 4(2) thereof or Regulation D promulgated thereunder, as a
transaction by an issuer not involving a public offering. The recipient of such
securities either received adequate information about the Company or had access,
through employment or other relationships with the Company, to such information.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None.
- ------- --------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None.
- ------- ----------------------------------------------------
30
ITEM 5. OTHER INFORMATION. None.
- ------- ------------------
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
(b) Reports on Form 8-K: None.
31
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
3 /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)
32
CERTIFICATIONS
--------------
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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: March 14, 2003 Signed: /s/ EDWARD J. LEGERE
-------------- -------------------------------------
Edward J. Legere
PRESIDENT AND CHIEF EXECUTIVE OFFICER
33
Certification required by Section 302(a) of the Sarbanes-Oxley Act of 2002
I, Paul J. Lytle, 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;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: March 14, 2003 Signed: /s/ PAUL J. LYTLE
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Paul J. Lytle
CHIEF FINANCIAL OFFICER
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