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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 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__.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). 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.)
133,727,686 shares of common stock
as of September 10, 2003
PEREGRINE PHARMACEUTICALS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 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 July 31, 2003 and April 30, 2003 .... 1
Consolidated Statements of Operations for the three months ended
July 31, 2003 and 2002 ............................................. 3
Consolidated Statement of Stockholders' Equity for the three
months ended July 31, 2003 ......................................... 4
Consolidated Statements of Cash Flows for the three months ended
July 31, 2003 and 2002 ............................................. 5
Notes to Consolidated Financial Statements ......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .............................................. 17
Company Overview ....................................................17
Risk Factors of Our Company .........................................23
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........23
Item 4. Controls and Procedures .............................................23
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................................24
Item 2. Changes in Securities and Use of Proceeds ...........................24
Item 3. Defaults Upon Senior Securities .....................................24
Item 4. Submission of Matters to a Vote of Security Holders .................24
Item 5. Other Information ...................................................24
Item 6. Exhibits and Reports on Form 8-K.....................................25
Signatures...........................................................26
i
PART I FINANCIAL INFORMATION
----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AT JULY 31, 2003 AND APRIL 30, 2003
- ------------------------------------------------------------------------------------------------
JULY 31, APRIL 30,
2003 2003
------------- -------------
UNAUDITED
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 8,322,000 $ 3,137,000
Trade and other receivables, net of allowance for doubtful
accounts of $60,000 (July) and $59,000 (April) 260,000 245,000
Short-term investment -- 242,000
Inventories 659,000 376,000
Prepaid expenses and other current assets 142,000 257,000
------------- -------------
Total current assets 9,383,000 4,257,000
PROPERTY:
Leasehold improvements 366,000 291,000
Laboratory equipment 1,950,000 1,936,000
Furniture, fixtures and computer equipment 724,000 724,000
------------- -------------
3,040,000 2,951,000
Less accumulated depreciation and amortization (2,202,000) (2,115,000)
------------- -------------
Property, net 838,000 836,000
OTHER ASSETS:
Note receivable, net of allowance of $1,630,000 (July) and
$1,645,000 (April) -- --
Debt issuance costs, net 36,000 176,000
Other 130,000 130,000
------------- -------------
Total other assets 166,000 306,000
------------- -------------
TOTAL ASSETS $ 10,387,000 $ 5,399,000
============= =============
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED BALANCE SHEETS
AT JULY 31, 2003 AND APRIL 30, 2003 (CONTINUED)
- ----------------------------------------------------------------------------------------------------
JULY 31, APRIL 30,
2003 2003
-------------- --------------
UNAUDITED
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 836,000 $ 560,000
Accrued clinical trial site fees 203,000 260,000
Accrued legal and accounting fees 352,000 194,000
Accrued royalties and license fees 184,000 149,000
Accrued payroll and related costs 262,000 314,000
Other current liabilities 262,000 300,000
Deferred revenue 582,000 531,000
-------------- --------------
Total current liabilities 2,681,000 2,308,000
CONVERTIBLE DEBT, net of discount 115,000 760,000
DEFERRED REVENUE 181,000 200,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock-$.001 par value; authorized 175,000,000 shares;
outstanding - 130,605,663 (July); 119,600,501 (April) 131,000 120,000
Additional paid-in capital 151,575,000 142,274,000
Deferred stock compensation (179,000) (257,000)
Accumulated deficit (144,117,000) (140,006,000)
-------------- --------------
Total stockholders' equity 7,410,000 2,131,000
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,387,000 $ 5,399,000
============== ==============
See accompanying notes to consolidated financial statements
2
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JULY 31, 2003 AND 2002 (UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
----------------------------------
JULY 31, 2003 JULY 31, 2002
-------------- --------------
REVENUES:
Contract manufacturing revenue $ 353,000 $ 474,000
License revenue 19,000 --
-------------- --------------
Total revenues 372,000 474,000
COST AND EXPENSES:
Cost of contract manufacturing 318,000 320,000
Research and development 1,872,000 3,353,000
Selling, general and administrative 1,019,000 710,000
-------------- --------------
Total cost and expenses 3,209,000 4,383,000
-------------- --------------
LOSS FROM OPERATIONS (2,837,000) (3,909,000)
-------------- --------------
OTHER INCOME (EXPENSE):
Interest and other income 85,000 59,000
Interest and other expense (1,359,000) (1,000)
-------------- --------------
NET LOSS $ (4,111,000) $ (3,851,000)
============== ==============
WEIGHTED AVERAGE
SHARES OUTSTANDING:
Basic and Diluted 124,733,593 110,275,209
============== ==============
BASIC AND DILUTED LOSS
PER COMMON SHARE $ (0.03) $ (0.03)
============== ==============
See accompanying notes to consolidated financial statements
3
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------------
ADDITIONAL TOTAL
COMMON STOCK PAID-IN DEFERRED STOCK ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT EQUITY
------------------------------------------------------------------------------------------------
BALANCES - May 1, 2003 119,600,501 $ 120,000 $ 142,274,000 $ (257,000) $(140,006,000) $ 2,131,000
Common stock issued for cash
under June 6, 2003 Common Stock
Purchase Agreement, net of
issuance costs of $104,000 2,412,448 2,000 1,969,000 -- -- 1,971,000
Common stock issued for cash
under June 26, 2003 Common
Stock Purchase Agreement, net
of issuance costs of $101,000 1,599,997 2,000 1,737,000 -- -- 1,739,000
Common stock issued for cash
under July 24, 2003 Common
Stock Purchase Agreement, net
of issuance costs of $1,000 750,000 1,000 1,085,000 -- -- 1,086,000
Common stock issued upon
conversion of convertible debt 2,170,586 2,000 1,843,000 -- -- 1,845,000
Common stock issued upon exercise
of options and warrants, net of
issuance costs of $133,000 4,072,131 4,000 2,667,000 -- -- 2,671,000
Stock-based compensation -- -- -- 78,000 -- 78,000
Net loss -- -- -- -- (4,111,000) (4,111,000)
------------------------------------------------------------------------------------------------
BALANCES - July 31, 2003 130,605,663 $ 131,000 $ 151,575,000 $ (179,000) $(144,117,000) $ 7,410,000
================================================================================================
See accompanying notes to consolidated financial statements
4
PEREGRINE PHARMACEUTICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED JULY 31, 2003 AND 2002 (UNAUDITED)
- ---------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JULY 31,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(4,111,000) $(3,851,000)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 87,000 93,000
Stock-based compensation 78,000 151,000
Amortization of discount on convertible debt and debt
issuance costs 1,340,000 --
Changes in operating assets and liabilities:
Trade and other receivables (15,000) (289,000)
Short-term investment 242,000 --
Inventories (283,000) (71,000)
Prepaid expenses and other current assets 115,000 (116,000)
Accounts payable 276,000 392,000
Deferred revenue 32,000 141,000
Accrued clinical trial site fees (57,000) (63,000)
Other accrued expenses and current liabilities 103,000 70,000
------------ ------------
Net cash used in operating activities (2,193,000) (3,543,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Property acquisitions (89,000) (107,000)
Decrease in other assets -- 4,000
------------ ------------
Net cash used in investing activities (89,000) (103,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance
costs of $339,000 7,467,000 --
Principal payments on notes payable -- (18,000)
------------ ------------
Net cash provided by (used in) financing activities 7,467,000 (18,000)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,185,000 (3,664,000)
CASH AND CASH EQUIVALENTS, beginning of period 3,137,000 6,072,000
------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 8,322,000 $ 2,408,000
============ ============
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property acquired in exchange for note payable $ -- $ 82,000
============ ============
See accompanying notes to consolidated financial statements
5
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 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"), and Vascular Targeting
Technologies, Inc. (collectively the "Company"). All intercompany balances and
transactions have been eliminated.
As of July 31, 2003, the Company had $8,322,000 in cash and cash
equivalents on hand. The Company has expended substantial funds on the
development of its product candidates and for clinical trials and it has
incurred negative cash flows from operations for the majority of its years since
inception. The Company expects negative cash flows from operations to continue
until it is able to generate sufficient revenue from the contract manufacturing
services provided by Avid and/or from the sale and/or licensing of its products
under development.
Revenues earned by Avid during the three months ended July 31, 2003
amounted to $353,000. The Company expects that Avid will continue to generate
revenues which should lower consolidated cash flows used in operations, although
the Company expects those near term revenues will be insufficient to cover
consolidated cash flows used in operations. As such, the Company 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, the
Company believes it has sufficient cash on hand to meet its obligations on a
timely basis through at least its fiscal year 2004 excluding any revenues
expected to be generated from Avid's operations.
In addition to equity financing, 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, partnering
or the sale of Cotara(TM) and Oncolym(R), divesting all radiopharmaceutical
based technologies, including Oncolym(R), Cotara(TM) and radiopharmaceutical
uses of VTA's, and licensing or partnering the Company's various VEA and VTA
based technology uses.
In addition to the potential licensing, partnering or sale of the
Company's technologies to raise capital, the Company is also exploring a
possible strategic transaction related to its subsidiary, Avid. In this regard,
the Company is exploring the possibility of partnering, or a complete sale of
Avid as a means of raising additional capital. The Company has not classified
the related assets as held for sale in accordance with Statement of Financial
Accounting Standards No. 144 ("SFAS No. 144"), ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, since the Company is strictly exploring the
possibility of a partnering or sale arrangement and the partnering or sale of
the asset is not currently probable under Statement of Financial Accounting
Standards No. 5 ("SFAS No. 5"), ACCOUNTING FOR CONTINGENCIES.
6
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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 all or a portion of Avid), or that sufficient additional revenues
will be generated from Avid or under potential licensing agreements to sustain
its operations beyond its fiscal year 2004.
The accompanying interim consolidated financial statements are
unaudited; however, they contain all adjustments (consisting of only normal
recurring adjustments) which, in the opinion of management, are necessary to
present fairly the consolidated financial position of the Company at July 31,
2003, and the consolidated results of its operations and its consolidated cash
flows for the three month periods ended July 31, 2003 and 2002. Although the
Company believes that the disclosures in the financial statements are adequate
to make the information presented herein 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, 2003, which was filed with the Securities and Exchange
Commission on July 29, 2003. 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
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.
SHORT-TERM INVESTMENTS - The Company classifies its short-term
investments as trading securities under the requirements of Statement of
Financial Accounting Standards No. 115 ("SFAS No. 115"), ACCOUNTING FOR CERTAIN
INVESTMENTS IN DEBT AND EQUITY SECURITIES. SFAS No. 115 considers trading
securities as securities that are bought with the intention of being sold in the
near term for the general purpose of realizing profits. Trading securities are
recorded at fair market value and gains and losses on trading securities are
included in interest and other income in the accompanying consolidated financial
statements.
INVENTORIES - Inventories are stated at the lower of cost or market and
primarily includes raw materials, direct labor and overhead costs associated
with our wholly-owned subsidiary, Avid. Inventories consist of the following at
July 31, 2003 and April 30, 2003:
JULY 31, APRIL 30,
2003 2003
--------- ---------
Raw materials $165,000 $205,000
Work-in-process 494,000 171,000
--------- ---------
Total Inventories $659,000 $376,000
========= =========
7
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
CONCENTRATIONS OF CREDIT RISK - The majority of trade and other
receivables are from customers in the United States, Europe and Israel. Most
contracts require up-front payments and progress payments as the contract
progresses. The Company performs periodic credit evaluations of its ongoing
customers and generally does not require collateral, but can terminate the
contract if a material default occurs. Reserves are maintained for potential
credit losses, and such losses have been minimal and within management's
estimates.
DEFERRED REVENUE - Deferred revenue primarily consists of up-front
contract fees received in advance under contract manufacturing and development
agreements and up-front license fees received under technology license
agreements. Deferred revenue is generally recognized once the service has been
provided, all obligations have been met and/or upon shipment of the product to
the customer.
REVENUE RECOGNITION - 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 ("SAB No. 101"), REVENUE RECOGNITION. 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
(i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the seller's price to the buyer is fixed or
determinable, and (iv) collectibility is reasonably assured.
Revenues associated with 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 received under license
agreements, whereby continued performance or future obligations are considered
inconsequential to the relevant licensed technology, are generally recognized as
revenue upon delivery of the technology. Nonrefundable up-front license fees,
whereby ongoing involvement or performance obligations exist, are generally
recorded as deferred revenue and generally recognized as revenue over the term
of the performance obligation or relevant agreement. Under some license
agreements, the obligation period may not be contractually defined. Under these
circumstances, the Company exercises judgment in estimating the period of time
over which certain deliverables will be provided to enable the licensee to
practice the license.
Contract manufacturing revenues are generally recognized once the
service has been provided and/or upon shipment of the product to the customer.
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
8
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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
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.
RESEARCH AND DEVELOPMENT - Research and development costs are charged
to expense when incurred in accordance with Statement of Financial Accounting
Standards No. 2, ACCOUNTING FOR RESEARCH AND DEVELOPMENT COSTS. Research and
development expenses primarily include (i) payroll and related costs associated
with research and development personnel, (ii) costs related to clinical and
pre-clinical testing of the Company's technologies under development, (iii) the
costs to manufacture the product candidates, including raw materials and
supplies, (iv) expenses for research and services rendered under outside
contracts, including sponsored research funding, and (v) facilities expenses.
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 was no difference between basic and diluted
loss per share amounts for the three months ended July 31, 2003 and July 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 was antidilutive since the
Company reported a net loss in the periods presented:
THREE MONTHS ENDED
----------------------------------
JULY 31, 2003 JULY 31, 2002
--------------- ---------------
Common stock equivalent shares assuming issuance of
shares represented by outstanding stock options
and warrants utilizing the treasury stock method 8,686,616 6,182,010
Common stock equivalent shares assuming issuance of
shares upon conversion of convertible debt
utilizing the if-converted method 1,408,769 --
--------------- ---------------
Total 10,095,385 6,182,010
=============== ===============
9
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
Weighted average outstanding options and warrants to purchase up to
10,393,778 and 8,517,174 shares of common stock for the three months ended July
31, 2003 and July 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.
During August 2003, the Company sold 2,682,025 shares of its common
stock under two separate financing transactions (Note 10), which numbers have
been excluded from basic and dilutive net loss per common share for the three
months ended July 31, 2003.
STOCK-BASED COMPENSATION - In December 2002, the FASB issued Statement
of Financial Accounting Standards No. 148 ("SFAS No. 148"), ACCOUNTING FOR
STOCK-BASED COMPENSATION-TRANSITION AND DISCLOSURE, which the Company adopted on
February 1, 2003. SFAS No. 148 amends SFAS No. 123 ("SFAS No. 123"), ACCOUNTING
FOR STOCK-BASED COMPENSATION, and 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.
The Company has not adopted a method under SFAS No. 148 to expense
stock options but rather continues to apply the provisions of SFAS No. 123. As
SFAS No. 123 permits, the Company elected to continue accounting for its
employee stock options in accordance with Accounting Principles Board Opinion
No. 25 ("APB No. 25"), ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES and related
Interpretations. APB No. 25 requires compensation expense to be recognized for
stock options when the market price of the underlying stock exceeds the exercise
price of the stock option on the date of the grant.
The Company utilizes the guidelines in APB No. 25 for measurement of
stock-based transactions for employees and, accordingly no compensation expense
has been recognized for the options in the accompanying consolidated financial
statements for the three months ended July 31, 2003 and July 31, 2002. Had the
Company used a fair value model for measurement of stock-based transactions for
employees under SFAS No. 123 and amortized the expense over the vesting period,
pro forma information would be as follows:
THREE MONTHS ENDED JULY 31,
------------------------------
2003 2002
------------ ------------
Net loss, as reported $(4,111,000) $(3,851,000)
Stock-based employee compensation cost that would have been
included in the determination of net loss if the fair
value based method had been applied to all awards (209,000) (466,000)
------------ ------------
Pro forma net loss as if the fair value based method had
been applied to all awards $(4,320,000) $(4,317,000)
============ ============
Basic and diluted net loss per share, as reported $ (0.03) $ (0.03)
============ ============
Basic and diluted net loss per share, pro forma $ (0.03) $ (0.04)
============ ============
10
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
Stock-based compensation expense recorded during each of the three
months ended July 31, 2003 and July 31, 2002 primarily relates to stock option
grants made to consultants and has been measured utilizing the Black-Scholes
option valuation model. Stock-based compensation expense recorded during the
three months ended July 31, 2003 and 2002 amounted to $78,000 and $151,000,
respectively, and is being amortized over the estimated period of service or
related vesting period.
RECENT ACCOUNTING PRONOUNCEMENTS. In August 2001, the Financial
Accounting Standards Board (the "FASB") issued Statement 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 adopted SFAS No.143 on May 1,
2003, which had no material impact on its consolidated financial position and
results of operations.
In January 2003, the FASB issued Interpretation No. 46 ("FIN No. 46"),
CONSOLIDATION OF VARIABLE INTEREST ENTITIES, an Interpretation of Accounting
Principles Board No. 50. FIN No. 46 requires certain variable interest entities
to be consolidated by the primary beneficiary of the entity if the equity
investors in the entity do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN No. 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. For variable interest entities
created or acquired prior to February 1, 2003, the provisions of FIN No. 46 must
be applied for the first interim or annual period beginning after June 15, 2003.
The adoption of FIN 46 is not expected to have a material impact on the
Company's consolidated financial position and results of operations.
In May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150, ("SFAS No. 150"), ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company is currently evaluating the
impact of SFAS No. 150 on its financial position and results of operations.
3. SHORT-TERM INVESTMENT
During March 2003, the Company received 61,653 shares of SuperGen, Inc.
common stock under a license agreement with SuperGen, Inc. dated February 13,
2001. The Company accounts for its short-term investment at fair value as
trading securities in accordance with SFAS No. 115. The cost basis of the common
stock was $200,000. During the quarter ended July 31, 2003, the Company sold all
61,653 shares of common stock of SuperGen, Inc. for gross proceeds of $271,000.
The realized gain of $71,000 related to the short-term investment is included in
interest and other income in the accompanying consolidated financial statements
for the quarter ended July 31, 2003.
11
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
4. 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 may 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 its current fiscal year, the carrying value of the note
receivable approximates its fair value at July 31, 2003. The Company has
received all payments through September 2003.
The following represents a rollforward of the allowance of the
Company's note receivable for the three months ended July 31, 2003:
Allowance balance, April 30, 2003 $ 1,705,000
Principal payments received (15,000)
--------------
Allowance balance, July 31, 2003 $ 1,690,000
==============
5. CONVERTIBLE DEBT
On August 9, 2002, the Company entered into a private placement with
four investors under a Securities Purchase Agreement ("Debt 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 before 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. If the Company defaults under the
provisions of the Debt 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.
12
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
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 related
warrants, which approximates the effective interest method, and the amortization
is recorded as interest and other expense in the accompanying consolidated
statements of operations. 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 a non-cash interest expense. During the quarter ended July 31,
2003, the Company recognized $1,200,000 in non-cash interest expense associated
with the conversion of convertible debt and related warrants, which amount was
included in interest and other expense in the accompanying consolidated
statements of operations.
The convertible debt balance, net of discount, was $115,000 at July 31,
2003, calculated as follows:
Principal Balance of Convertible Debt
-------------------------------------
Convertible Debentures, April 30, 2003 $ 2,395,000
Conversions, quarter ended July 31, 2003 (1,845,000)
--------------
Convertible Debentures, July 31, 2003 550,000
--------------
Discount on Convertible Debt
----------------------------
Convertible debt discount, April 30, 2003 1,635,000
Discount amortized, quarter ended July 31, 2003 (1,200,000)
--------------
Convertible debt discount, July 31, 2003 435,000
--------------
Convertible debt, net of discount, July 31, 2003 $ 115,000
==============
During the quarter ended July 31, 2003, debenture holders elected to
convert an aggregate principal amount of $1,845,000 of the outstanding
convertible debt in exchange for 2,170,586 shares of common stock at the
conversion price of $0.85 per share.
During the month ended August 31, 2003, debenture holders elected to
convert an additional principal amount of $150,000 of outstanding convertible
debt in exchange for 176,471 shares of common stock at the conversion price of
$0.85 per share. The unconverted principal balance of the convertible debt at
August 31, 2003 was $400,000.
Under the Debt 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 3,308,827 warrants.
The detachable warrants have a 4-year term with an exercise price of $0.75 per
share. During the quarter ended July 31, 2003, investors exercised 2,244,120
warrants under the Debt SPA in exchange for gross proceeds of $1,683,000 at the
exercise price of $0.75 per share (Note 9).
13
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
In connection with the convertible debentures issued on August 9, 2002,
the Company incurred approximately $363,000 in debt issuance costs, including
placement agent fees of $318,000, which are being amortized on a straight-line
basis over the life of the Debentures, which approximates the effective interest
method. Upon conversion of any debentures, the unamortized debt issuance costs
remaining at the date of conversion which were allocated to the converted
debentures is immediately recognized as non-cash interest expense. During the
quarter ended July 31, 2003, the Company expensed $140,000 in debt issuance
costs included in interest and other expense in the accompanying consolidated
statements of operations. At July 31, 2003, the unamortized balance of debt
issuance costs of $36,000 was included in other assets in the accompanying
consolidated financial statements.
6. LICENSING
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, of
which, $256,000 was included in deferred revenue at July 31, 2003, in accordance
with SAB No. 101. Deferred license revenue is 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. Under the same agreement, the Company granted Schering A.G. an
option to obtain certain non-exclusive rights to the VTA technology with
predetermined up-front fees and milestone payments as defined in the agreement.
7. SEGMENT REPORTING
The Company's business is 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.
Net revenues and gross profit information for the Company's segments
for the three months ended July 31, 2003 and 2002 consisted of the following:
THREE MONTHS ENDED
JULY 31,
----------------------
2003 2002
--------- ---------
NET REVENUES:
Research and development of cancer therapeutics $ 19,000 $ --
Contract manufacturing and development of biologics 353,000 474,000
--------- ---------
Total net revenues $372,000 $474,000
========= =========
GROSS PROFIT:
Research and development of cancer therapeutics $ 19,000 $ --
Contract manufacturing and development of biologics 35,000 154,000
--------- ---------
Total gross profit $ 54,000 $154,000
========= =========
14
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
For the three months ended July 31, 2003, one customer located in
Israel accounted for 68% of reported net revenues, one customer located in
Europe accounted for 14% of reported net revenues and one customer located in
the U.S. accounted for 13% of reported net revenues.
For the three months ended July 31, 2002, one customer located in
Europe accounted for 87% of reported net revenues and one customer located in
the U.S. accounted for 8% of reported net revenues.
8. STOCKHOLDERS' EQUITY
FINANCING UNDER SHELF REGISTRATION STATEMENT ON FORM S-3, FILE NUMBER
333-71086
On November 14, 2001, the Company filed a registration statement on
Form S-3, File Number 333-71086 (the "November 2001 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.
On June 6, 2003, the Company received gross proceeds of $355,000 under
a Common Stock Purchase agreement in exchange for approximately 412,445 shares
of its common stock. In connection with the offering, the Company paid a fee to
the placement agent equal to five percent (5%) of the gross proceeds, or
$18,000. As of July 31, 2003, 87,555 shares of common stock were available for
issuance under the November 2001 Shelf. All warrants were issued under the
November 2001 Shelf as of July 31, 2003.
FINANCING UNDER SHELF REGISTRATION STATEMENT ON FORM S-3, FILE NUMBER
333-103965
On March 21, 2003, the Company filed a registration statement on Form
S-3, File Number 333-103965 which was declared effective by the Securities and
Exchange Commission, allowing the Company to issue, from time to time, in one or
more offerings, up to 10,000,000 shares of its common stock ("March 2003
Shelf").
On June 6, 2003, the Company received gross proceeds of $1,720,000
under a Common Stock Purchase Agreement in exchange for 2,000,003 shares of its
common stock and warrants to purchase up to 150,000 shares of common stock at an
exercise price of $0.86 per share ("June 6, 2003 Financing"). The warrants have
a four year term and are exercisable at an exercise price of $0.86 per share.
The fair value of the warrants were recorded as a cost of equity based on a
Black-Scholes valuation model after considering the terms in the related warrant
agreement. The warrants were issued under the November 2001 Shelf. In connection
with the offering, the Company paid a fee to the placement agent equal to five
percent (5%) of the gross proceeds, or $86,000.
15
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2003 (UNAUDITED) (CONTINUED)
- --------------------------------------------------------------------------------
On June 26, 2003, the Company received gross proceeds of $1,840,000
under a Common Stock Purchase Agreement in exchange for 1,599,997 shares of its
common stock ("June 26, 2003 Financing"). Under the same arrangement, the
Company granted the investors a six-month option to purchase up to 1,599,997
additional shares of common stock from the Company under the same terms as this
offering. The fair value of the option was recorded as a cost of equity based on
a Black-Scholes valuation model after considering terms in the related
agreement. In connection with the offering, the Company paid a fee to the
placement agent equal to five percent (5%) of the gross proceeds, or $92,000.
During August 2003, the investors had elected to purchase 1,432,025 shares of
the Company's common stock under the six-month option in exchange for gross
proceeds of $1,647,000. As of August 31, 2003, 167,972 shares of the Company's
common stock were reserved for under the six-month option.
On July 24, 2003, the Company entered into a Common Stock Purchase
Agreement with one institutional investor whereby the Company agreed to sell
from time to time, at the Company's option, up to an aggregate of 2,000,000
shares of the Company's common stock at the per share price of $1.45 ("July 24,
2003 Financing"). As of July 31, 2003, the Company sold and issued 750,000
shares of its common stock to the institutional investor for gross proceeds of
$1,087,000. Subsequent to the quarter ended July 31, 2003, the Company sold and
issued the remaining 1,250,000 shares of the Company's common stock under the
July 24, 2003 Financing to the investor for gross proceeds of $1,813,000. The
Company paid no commissions in connection with this offering.
As of August 31, 2003, 2,967,975 shares of common stock were available
for issuance under the March 2003 Shelf.
9. WARRANTS
During the quarter ended July 31, 2003, the Company received net
proceeds of $2,521,000 upon the exercise of 3,780,512 warrants on a combined
cash and cashless basis in exchange for the issuance of 3,755,892 shares of the
Company's common stock, including the 2,244,120 warrants exercised under the
Debt SPA (Note 5). As of July 31, 2003, warrants to purchase 16,309,207 were
issued and outstanding.
10. SUBSEQUENT EVENT
During August 2003, the Company received gross proceeds of $1,647,000
upon the exercise of the option granted under the June 26, 2003 Financing in
exchange for 1,432,025 shares of its common stock at an exercise price of $1.15
per share (Note 8).
During August 2003, the Company received gross proceeds of $1,813,000
under the July 24, 2003 Financing in exchange for 1,250,000 shares of its common
stock at a purchase price of $1.45 per share (Note 8).
16
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 months ended July 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, 2003, which was filed
with the Securities and Exchange Commission on July 29, 2003. 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 80
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
and Drug Administration ("FDA") to initiate a registration clinical study using
Cotara(TM) for the treatment of brain cancer. We do not anticipate treating any
additional brain cancer patients while we actively seek a licensing partner for
the Cotara(TM) program under the approved registration trial.
17
In addition to collateral targeting agents, we have a direct
tumor-targeting antibody, Oncolym(R), for the treatment of Non-Hodgkins B-cell
Lymphoma. During fiscal year 2002, we suspended patient enrollment for this
study and we are currently in the process of closing the current Phase I/II
clinical trial while we actively seek to license or partner the Oncolym(R)
product. We currently do not anticipate continuing with clinical studies without
a licensing or development partner for this technology.
RESULTS OF OPERATIONS
NET LOSS:
- ---------
THREE MONTHS ENDED JULY 31,
----------------------------------------------------------------
2003 2002 $ CHANGE
------------------- ------------------ -------------------
(in thousands)
NET LOSS ($4,111) ($3,851) $ 260
The increase in our reported net loss of $260,000 for the three months
ended July 31, 2003 compared to the same period in the prior year is due to a
decrease in total revenues of $102,000 combined with an increase in interest and
other expense of $1,358,000. These amounts were offset by a decrease in total
cost and expenses of $1,174,000 and a $26,000 increase in interest and other
income.
TOTAL REVENUES:
- ---------------
THREE MONTHS ENDED JULY 31,
----------------------------------------------------------------
2003 2002 $ CHANGE
------------------- ------------------ -------------------
(in thousands)
TOTAL REVENUES $ 372 $ 474 ($ 102)
The decrease in total revenues of $102,000 during the three months
ended July 31, 2003 compared to the same period in the prior year is due to a
decrease in contract manufacturing revenue of $121,000 offset by an increase in
license revenue of $19,000.
The decrease in contract manufacturing revenue of $121,000 during the
three months ended July 31, 2003 compared to the same period in the prior year
is primarily due to the timing of contract manufacturing services performed by
our wholly-owned subsidiary, Avid Bioservices, Inc. ("Avid"). 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. In addition to our current contract manufacturing
agreements, Avid currently has numerous outstanding project proposals with
various potential customers, however, we cannot estimate nor can we determine
the likelihood that we will be successful in converting any of these proposals
into definitive agreements during the remainder of the current fiscal year.
The increase in license revenue of $19,000 during the three months
ended July 31, 2003 compared to the same period in the prior year is due to the
amortization of deferred license revenue associated with the up-front license
fee of $300,000 received under a license agreement we entered into with Schering
A.G. during fiscal year 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 definitive license agreements during the
remainder of the current fiscal year.
18
TOTAL COST AND EXPENSES:
- ------------------------
THREE MONTHS ENDED JULY 31,
----------------------------------------------------------------
2003 2002 $ CHANGE
------------------- ------------------ -------------------
(in thousands)
TOTAL COST AND EXPENSES $ 3,209 $ 4,383 ($ 1,174)
The decrease in total cost and expenses of $1,174,000 during the three
months ended July 31, 2003 compared to the same prior year period is due to a
decrease in research and development expenses of $1,481,000 combined with a
decrease in the cost of contract manufacturing of $2,000. These amounts were
offset by a $309,000 increase in selling, general and administrative expenses.
RESEARCH AND DEVELOPMENT EXPENSES:
- ----------------------------------
THREE MONTHS ENDED JULY 31,
----------------------------------------------------------------
2003 2002 $ CHANGE
------------------- ------------------ -------------------
(in thousands)
RESEARCH AND DEVELOPMENT $ 1,872 $ 3,353 ($ 1,481)
The decrease in research and development expenses of $1,481,000 during
the three months ended July 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. The reduction in clinical trial costs is
primarily due to expenses incurred in the prior year quarter ended July 31, 2002
associated with seeking protocol approval from the Food and Drug Administration
and start-up activities primarily related to a European investigator meeting
held to support a previously planned registration clinical trial for the
treatment of brain cancer using Cotara(TM), for which we are now seeking a
licensing partner. In connection with our focused efforts on licensing our
products under development, we reduced our patient fees and related expenses
during the current quarter. The decrease in pre-clinical development expenses is
primarily due to a decrease in sponsored research funding paid to the University
of Southern California. This current quarter decrease in pre-clinical
development expenses was offset by an increase in patent legal fees and drug
development expenses associated with our Vascular Targeting Agent technologies.
The following represents the research and development expenses ("R&D
Expenses") we have incurred by each major platform technology under development:
R&D EXPENSES- R&D EXPENSES-
PLATFORM TECHNOLOGY UNDER QUARTER ENDED MAY 1, 1998 TO
DEVELOPMENT JULY 31, 2003 JULY 31, 2003
----------------------------- ------------- -------------
TNT development (Cotara(TM)) $ 892,000 $24,175,000
VEA development 113,000 3,723,000
VTA development 836,000 6,170,000
Oncolym(R)development 31,000 13,229,000
------------ ------------
Total research and development $ 1,872,000 $47,297,000
============ ============
19
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 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 any current or future study. Any delays in clinical
trials could significantly increase the cost of the study and
would extend the estimated completion dates.
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.
20
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES:
- ---------------------------------------------
THREE MONTHS ENDED JULY 31,
----------------------------------------------------------------
2003 2002 $ CHANGE
------------------- ------------------ -------------------
(in thousands)
SELLING, GENERAL AND ADMINISTRATIVE $ 1,019 $ 710 $ 309
The increase in selling, general and administrative expenses of
$309,000 during the three months ended July 31, 2003 compared to the same period
in the prior year is primarily due to an increase in director fees associated
with increased oversight responsibilities mandated by the Sarbanes-Oxley Act of
2002. Prior to the current fiscal year, directors did not receive any cash
compensation other than the reimbursement of expenses. The increase in selling,
general and administrative expenses was further supplemented by an increase in
business development activities associated with Avid and our efforts to license
our technologies under development.
INTEREST AND OTHER INCOME:
- --------------------------
THREE MONTHS ENDED JULY 31,
----------------------------------------------------------------
2003 2002 $ CHANGE
------------------- ------------------ -------------------
(in thousands)
INTEREST AND OTHER INCOME $ 85 $ 59 $ 26
The increase in interest and other income of $26,000 during the three
months ended July 31, 2003 compared to the same period in the prior year is
primarily due to the realized gain associated with the sale of our short-term
investment during the current quarter.
INTEREST AND OTHER EXPENSE:
- ---------------------------
THREE MONTHS ENDED JULY 31,
----------------------------------------------------------------
2003 2002 $ CHANGE
------------------- ------------------ -------------------
(in thousands)
INTEREST AND OTHER EXPENSE $ 1,359 $ 1 $ 1,358
The increase in interest and other expense of $1,358,000 during the
three months ended July 31, 2003 compared to the same period in the prior year
is primarily due to an increase in non-cash interest expense associated with the
amortization of the convertible debt discount related to the current quarter
conversions of convertible debt issued during August 2002 combined with the
amortization of related debt issuance costs.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 2003, we had $8,322,000 in cash and cash equivalents.
During August 2003, we raised an additional $3,460,000 in gross proceeds in
exchange for 2,682,025 shares of our common stock (as further explained in our
notes to the consolidated financial statements contained herein). As of August
31, 2003, we had $10,438,000 in cash and cash equivalents. We have generally
financed our operations primarily through the sale of our common stock and
issuance of convertible debt, which has been supplemented with payments received
from various licensing collaborations and through the revenues generated from
Avid.
21
During the current quarter ended July 31, 2003, cash used in operating
activities decreased $1,350,000 to $2,193,000 compared to $3,543,000 for the
three months ended July 31, 2002. Cash used in investing activities decreased
$14,000 to $89,000 for the three months ended July 31, 2003 compared to $103,000
for the three months ended July 31, 2002. Cash provided by financing activities
increased $7,485,000 to $7,467,000 for the three months ended July 31, 2003
compared to cash used of $18,000 for the same prior year period. The increase in
cash provided by financing activities was due to $7,467,000 in proceeds received
from the sale of our common stock and the exercise of options and warrants
during the quarter ended July 31, 2003.
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 three months ended July 31, 2003
amounted to $353,000. We expect that Avid will continue to generate revenues
which should lower consolidated cash flows used in operations, although we
expect those near term revenues will be insufficient to cover consolidated cash
flows used in operations. As such, we will continue to need to raise additional
capital to provide for our operations, including the anticipated development and
clinical 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 Avid's manufacturing capabilities.
Assuming we do not raise any additional capital from financing
activities or from the sale or licensing of our technologies, and further
assuming that Avid does not generate any additional revenues beyond our current
active contracts, we believe we have sufficient cash on hand to meet our
obligations on a timely basis through at least the current fiscal year.
In addition to equity financing, we are actively exploring various
other sources of cash by leveraging our many assets. The transactions being
explored include licensing, partnering or the sale of Cotara(TM) and Oncolym(R),
divesting all radiopharmaceutical based technologies, including Oncolym(R),
Cotara(TM), and radiopharmaceutical uses of our VTA's, and licensing or
partnering our various VEA and VTA based technology uses.
In addition to licensing, partnering or the divestiture of some of our
technologies to raise capital, we are also exploring a possible strategic
transaction related to our subsidiary, Avid Bioservices, Inc. In this regard, we
are exploring the possibility to partner or a complete sale of Avid as a means
of raising additional capital.
There can be no assurances that we will be successful in raising such
funds on terms acceptable to us, or at all, or that sufficient additional
capital will be raised to complete the research, development, and clinical
testing of our product candidates.
COMMITMENTS
At July 31, 2003, we had no material capital commitments, although we
have significant obligations under license agreements which are contingent on
clinical trial development milestones.
22
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, 2003, as
filed with the Securities and Exchange Commission on July 29, 2003.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
Changes in United States interest rates would affect the interest
earned on the Company's cash and cash equivalents. Based on the Company's
overall interest rate exposure at July 31, 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
- ------- -----------------------
The Company maintains disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are designed to ensure that information
required to be disclosed in its reports filed under the Securities Exchange Act
of 1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our management, including its Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. In designing and evaluating the disclosure
controls and procedures, management recognized that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily was
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.
The Company carried out an evaluation, under the supervision and with
the participation of management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of its
disclosure controls and procedures as of July 31, 2003, the end of the period
covered by this Quarterly Report. Based on that evaluation, the Company's Chief
Executive Officer and Chief Financial Officer concluded that its disclosure
controls and procedures were effective at the reasonable assurance level as of
July 31, 2003.
There have been no changes in the Company's internal control over
financial reporting, during the three months ended July 31, 2003, that has
materially affected, or is reasonably likely to materially affect, the Company's
internal controls over financial reporting.
23
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 May 1, 2003 through July 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 June 18, 2003, the Company issued 14,124 shares of common stock to
one institutional investor upon the cashless exercise of 16,854 warrants under
the Common Stock Equity Line, which was exhausted and terminated during fiscal
year 2002.
On June 18, 2003, the Company issued 141,310 shares of common stock to
one institutional investor upon the cashless exercise of 163,200 warrants. The
warrants were issued in conjunction with a Regulation D Subscription Agreement
entered into during January 2000.
On various dates during the quarter ended July 31, 2003, debenture
holders elected to convert an aggregate of $1,845,000 of the outstanding
convertible debt in exchange for approximately 2,170,586 shares of common stock
at the conversion price of $0.85 per share. The convertible debentures were
issued in conjunction with a Securities Purchase Agreement ("SPA") entered into
during August 2002.
On various dates during the quarter ended July 31, 2003, the Company
issued 2,244,120 shares of common stock to debenture holders upon the exercise
of 2,244,120 warrants at an exercise price of $0.75 per share. The warrants were
issued in conjunction with the SPA entered into during August 2002.
On various dates during the quarter ended July 31, 2003, the Company
issued 1,303,847 shares of common stock to two investors upon the exercise of
1,303,847 warrants at an exercise price of $0.71 per share. The warrants were
issued in conjunction with the SPA entered into during August 2002
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.
- ------- ----------------------------------------------------
ITEM 5. OTHER INFORMATION. None.
- ------- ------------------
24
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K.
- ------- --------------------------------
(a) Exhibits:
10.87 Common Stock Purchase Agreement dated June 6, 2003 between
Registrant and eight institutional investors.
10.88 Common Stock Purchase Agreement dated June 6, 2003 between
Registrant and one institutional investor.
10.89 Common Stock Purchase Agreement dated June 26, 2003 between
Registrant and seven institutional investors.
10.90 Common Stock Purchase Agreement dated July 24, 2003 between
Registrant and one institutional investor.
31.1 Certification of the Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
(b) Reports on Form 8-K:
(i) Current report on Form 8-K as filed with the Commission on
June 10, 2003 reporting the Company completed a financing
transaction with eight institutional investors for
aggregate gross proceeds of $2.07 million.
(ii) Current report on Form 8-K as filed with the Commission on
June 30, 2003 reporting the Company completed a financing
transaction with seven institutional investors for
aggregate gross proceeds of $1.8 million.
(iii) Current report on Form 8-K as filed with the Commission on
July 3, 2003 reporting the Company's financial results for
the fiscal year ended April 30, 2003 and its operational
highlights.
25
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/ Steven W. King
--------------------------------
Steven W. King
President & Chief Executive
Officer
/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)
26