NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017 (
unaudited
)
1. ORGANIZATION
AND BUSINESS
Business Description
–
We are a biopharmaceutical company committed to improving the lives of patients by manufacturing and delivering pharmaceutical
products through our wholly-owned subsidiary, Avid Bioservices, Inc. (“Avid”), our contract development and manufacturing
organization (“CDMO”) while we pursue strategic options for our research and development assets, including our novel,
development-stage immunotherapy product, bavituximab. On August 9, 2017, we commenced a restructuring plan designed to reduce our
operating costs while we pursue strategic options for our research and development assets and focus our efforts on growing our
CDMO business. Under this restructuring plan, which is expected to be completed in October 2017, we have reduced our overall workforce
by 60 employees (or 20%) (Note 11).
Reverse Stock Split
– On July 7, 2017, we effected a reverse stock split of our outstanding shares of common stock at a ratio of one-for-seven
pursuant to our filed Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of
Delaware. The reverse stock split took effect with the opening of trading on July 10, 2017. The primary purpose of the reverse
stock split, which was approved by our stockholders at our 2016 Annual Meeting on October 13, 2016, was to enable us to regain
compliance with the $1.00 minimum bid price requirement for continued listing on The NASDAQ Capital Market. Pursuant to the reverse
stock split, every seven shares of our issued and outstanding shares of common stock were automatically combined into one issued
and outstanding share of common stock, without any change in the par value per share of our common stock. All share and per share
amounts of our common stock included in the accompanying unaudited condensed consolidated financial statements have been retrospectively
adjusted to give effect to the reverse stock split for all periods presented, including reclassifying an amount equal to the reduction
in par value to additional paid-in capital. No fractional shares were issued in connection with the reverse stock split. Any fractional
share of common stock created by the reverse stock split was rounded up to the nearest whole share. The number of authorized shares
of our common stock remained unchanged.
The reverse stock split
affected all issued and outstanding shares of our common stock, as well as the shares of common stock underlying our stock options,
employee stock purchase plan, warrants and the general conversion right with respect to our 10.50% Series E Convertible Preferred
Stock (the “Series E Preferred Stock”).
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles
(“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”)
related to quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by
U.S. GAAP for a complete set of financial statements. These unaudited condensed consolidated financial statements and notes thereto
should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report
on Form 10-K for the year ended April 30, 2017. The condensed consolidated balance sheet at April 30, 2017 has been derived
from audited financial statements at that date. The unaudited financial information for the interim periods presented herein reflects
all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results
of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments. Results of operations
for interim periods covered by this Quarterly Report on Form 10-Q may not necessarily be indicative of results of operations for
the full fiscal year or any other interim period.
The unaudited condensed
consolidated financial statements include the accounts of Peregrine and Avid. All intercompany accounts and transactions among
the consolidated entities have been eliminated in the unaudited condensed consolidated financial statements.
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts, as well as disclosures of commitments and contingencies in the financial statements and accompanying notes. Actual results
could differ materially from those estimates and assumptions.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017
(unaudited) (continued)
Going Concern
The accompanying
condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments
relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined
that we are unable to continue as a going concern.
At July 31, 2017,
we had $37,256,000 in cash and cash equivalents. We have expended substantial funds on the research and development of our product
candidates, and funding the operations of Avid. As a result, we have historically experienced losses and negative cash flows from
operations since our inception and we expect negative cash flows from operations to continue for the foreseeable future until we
can generate sufficient revenue from Avid’s contract manufacturing services to achieve profitability. Therefore, unless and
until we are able to generate sufficient revenue from Avid’s contract manufacturing services or from the licensing, partnering,
or sale of our product candidate under development, we expect such losses to continue in the foreseeable future, and as a result,
we must raise additional capital during fiscal year 2018 in order to fund our operations and to execute our business plans.
Historically, we
have funded a significant portion of our operations through the issuance of equity. During the three months ended July 31, 2017,
we raised $4,304,000 in aggregate gross proceeds from the sale of shares of our common stock under an At Market Issuance Sales
Agreement (Note 6). As of July 31, 2017, we had raised the full amount of gross proceeds available to us under the At Market Issuance
Sales Agreement (Note 6). As of September 11, 2017, $67,674,000 remained available to us under our effective shelf registration
statement (which shelf expires in January 2018), which allows us from time to time to offer and sell shares of our common stock,
in one or more offerings, either individually or in combination.
Our ability to raise
additional capital in the equity markets to fund our obligations in future periods is dependent on a number of factors, including,
but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a
number of risks and uncertainties, including but not limited to, negative economic conditions, adverse market conditions, adverse
financial results, and negative research and development results. If we are unable to either (i) raise sufficient capital in the
equity markets, (ii) generate additional revenue from Avid, or (iii) license, partner or sell our product candidate in development,
or any combination thereof, we may need to further restructure, or cease, our operations. In addition, even if we are able to raise
additional capital, it may not be at a price or on terms that are favorable to us.
As a result, we have
concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that
our accompanying unaudited condensed consolidated financial statements are issued.
Cash and Cash Equivalents
We consider all short-term
investments readily convertible to cash with an initial maturity of three months or less to be cash equivalents.
Restricted Cash
Under the terms of three
separate operating leases related to our facilities, we are required to maintain, as collateral, letters of credit during the
terms of such leases. At July 31, 2017 and April 30, 2017, restricted cash of $1,150,000 was pledged as collateral under these
letters of credit.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017
(unaudited) (continued)
Concentrations of Credit Risk and Customer
Base
Financial instruments
that potentially subject us to a significant concentration of credit risk consist of cash and cash equivalents, restricted cash
and trade receivables. We maintain our cash and restricted cash balances primarily with one major commercial bank and our deposits
held with the bank exceed the amount of government insurance limits provided on our deposits. We are exposed to credit risk in
the event of default by the major commercial bank holding our cash and restricted cash balances to the extent of the cash and restricted
cash amounts recorded on the accompanying unaudited condensed consolidated balance sheet.
Our trade receivables
from amounts billed for contract manufacturing services provided by Avid have historically been derived from a small customer base.
Most contracts require up-front payments and installment payments during the service period. We perform periodic evaluations of
the financial condition of our customers and generally do not require collateral, but we can terminate any contract if a material
default occurs. At July 31, 2017 and April 30, 2017, approximately 83% and 93%, respectively, of our trade receivables were due
from four customers.
In addition, contract
manufacturing revenue generated by Avid has historically been derived from a small customer base (Note 9). These customers typically
do not enter into long-term contracts because their need for drug supply depends on a variety of factors, including the drug’s
stage of development, their financial resources, and, with respect to commercial drugs, demand for the drug in the market.
Our future results
of operations could be adversely affected if revenue from any one of our primary customers is significantly reduced or eliminated.
Comprehensive Loss
Comprehensive loss
is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources.
Comprehensive loss is equal to our net loss for all periods presented.
Impairment
Long-lived assets are
reviewed for impairment in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets
are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. Long-lived
assets are reported at the lower of carrying amount or fair value less cost to sell. For the three months ended July 31, 2017 and
2016, there were no indicators of impairment of the value of our long-lived assets.
Fair Value Measurements
Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:
|
·
|
Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical
assets or liabilities.
|
|
·
|
Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets
or liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are
based on quoted prices of instruments with similar attributes in active markets.
|
|
·
|
Level 3 – Unobservable inputs that are supported by little or no market activity and significant
to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation
techniques and assumptions.
|
As of July 31, 2017
and April 30, 2017, we do not have any Level 2 or Level 3 financial assets or liabilities and our cash equivalents, which are primarily
invested in money market funds with one major commercial bank, are carried at fair value based on quoted market prices for identical
securities (Level 1 input). In addition, there were no transfers between any Levels of the fair value hierarchy during the three
months ended July 31, 2017 and 2016.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017
(unaudited) (continued)
Customer Deposits
Customer deposits primarily
represent advance billings and/or payments received from Avid’s third-party customers prior to the initiation of contract
manufacturing services.
Revenue Recognition
We currently derive
revenue from our contract manufacturing services provided by Avid. We recognize revenue in accordance with the authoritative guidance
for revenue recognition when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery
has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability
is reasonably assured. We also comply with the authoritative guidance for revenue recognition regarding arrangements with multiple
elements.
Revenue arrangements
with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered
element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated among the separate
units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate
units, which may require the use of significant judgement. Deliverables are considered separate units of accounting if (1) the
delivered item(s) has value to the customer on a stand-alone basis and (2) the arrangement includes a general right of return relative
to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.
Arrangement consideration
is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The
relative selling price for each deliverable is determined using vendor specific objective evidence (“VSOE”) of selling
price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price
exists, we use our best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is
limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting,
and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales
price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized
under any agreement.
On
occasion, we receive requests from customers to hold product manufactured by Avid on a “bill-and-hold” basis. Revenue
is recognized for these “bill-and-hold” arrangements in accordance with the authoritative guidance, which requires,
among other things, the existence of a valid business purpose for the arrangement; the “bill-and-hold” arrangement
is at the request of the customer; title and risk of ownership must pass to the customer; the product is complete and ready for
shipment; a fixed
delivery date that is reasonable and consistent with
the customer’s business practices; the product has been separated from our inventory; and no further performance obligations
by us exist.
In addition, we also
follow the authoritative guidance when reporting revenue as gross when we act as a principal versus reporting revenue as net when
we act as an agent. For transactions in which we act as a principal, have discretion to choose suppliers, bear credit and inventory
risk and perform a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated
with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.
Any amounts received
prior to satisfying our revenue recognition criteria are recorded as deferred revenue or customer deposits in the accompanying
unaudited condensed consolidated financial statements. We also record a provision for estimated contract losses, if any, in the
period in which they are determined.
Research and Development Expenses
Research and development
expenses primarily include (i) payroll and related costs, including share-based compensation associated with research and development
personnel, (ii) costs related to clinical trials and preclinical testing of our technologies under development, (iii) costs to
develop and manufacture the product candidates, including raw materials and supplies, product testing, depreciation, and facility
related expenses, (iv) expenses for research services provided by universities and contract laboratories, including sponsored research
funding, and (v) other research and development expenses. Research and development expenses are charged to expense as incurred
when these expenditures relate to our research and development efforts and have no alternative future uses.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017
(unaudited) (continued)
Clinical trial costs
are a significant component of our research and development expenses. We have historically contracted with third parties to perform
various clinical trial activities on our behalf. The financial terms of these contracts are subject to negotiations and may vary
from contract to contract and may result in uneven payment flow. Expenses related to clinical trials are accrued based on our estimates
and/or representations from third parties (including clinical research organizations) regarding services performed. If the contracted
amounts are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), we
modify our accruals accordingly on a prospective basis. Revisions in the scope of a contract are charged to expense in the period
in which the facts that give rise to the revision become reasonably certain. There were no material adjustments for a change in
estimate to research and development expenses in the accompanying unaudited condensed consolidated financial statements for the
three months ended July 31, 2017 and 2016.
Under certain research
and development agreements, we are obligated to make certain advance payments, including nonrefundable amounts, for goods or services
that will be used or rendered for future research and development activities and are deferred and capitalized as prepaid research
and development expenses. These advance payments are recognized as an expense in the period the related goods are delivered or
the related services are performed. We assess our prepaid research and development expenses for impairment when events or changes
in circumstances indicate that the carrying amount of the prepaid expense may not be recoverable or provide future economic benefit.
In addition, under
certain in-licensing agreements associated with the research and development of our product candidates, we are obligated to pay
certain milestone payments based on potential clinical development and regulatory milestones. These milestone payments have no
alternative future uses (in other research and development projects or otherwise) and therefore have no separate economic values
and are expensed as research and development costs at the time the costs are incurred. We have no in-licensed product candidates
that have alternative future uses in research and development projects or otherwise. In addition, we do not perform any research
and development activities for any unrelated entities.
Share-based Compensation
We account for stock
options and other share-based awards granted under our equity compensation plans in accordance with the authoritative guidance
for share-based compensation. The estimated fair value of share-based payments to employees in exchange for services is measured
at the grant date, using a fair value based method, such as a Black-Scholes option valuation model, and is recognized as expense
on a straight-line basis over the requisite service periods. The fair value of modifications to share-based awards, if any, is
generally estimated using a Black-Scholes option valuation model, unless a lattice model is required. Pursuant to the adoption
of ASU 2016-09 (Note 2), forfeitures are recognized as a reduction of share-based compensation expense as they occur. As of July
31, 2017, there were no outstanding share-based awards with market or performance conditions.
Basic and Dilutive Net Loss Per Common
Share
Basic net loss per
common share is computed by dividing our net loss attributable to common stockholders by the weighted average number of shares
of common stock outstanding during the period excluding the dilutive effects of stock options, shares of common stock expected
to be issued under our Employee Stock Purchase Plan (the “ESPP”), warrants, and Series E Preferred Stock outstanding
during the period. Diluted net loss per common share is computed by dividing our net loss attributable to common stockholders by
the sum of the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effects
of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding
during the period. Net loss attributable to common stockholders represents our net loss plus Series E Preferred Stock accumulated
dividends. Series E Preferred Stock accumulated dividends include dividends declared for the period (regardless of whether or not
the dividends have been paid) and dividends accumulated for the period (regardless of whether or not the dividends have been declared).
The potential dilutive
effect of stock options, shares of common stock expected to be issued under our ESPP, and warrants outstanding during the period
are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive
effect of our Series E Preferred Stock outstanding during the period was calculated using the if-converted method assuming the
conversion of Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but are excluded
if their effect is anti-dilutive. However, because the impact of stock options, shares of common stock expected to be issued under
our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there was no difference between
basic and diluted loss per common share amounts for the three months ended July 31, 2017 and 2016.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017 (
unaudited) (continued
)
The calculation of
weighted average diluted shares outstanding for the three-month periods ended July 31, 2017 and 2016 excludes the dilutive effect
of the following weighted average outstanding stock options and shares of common stock expected to be issued under our ESPP as
their impact are anti-dilutive during periods of net loss:
|
|
July 31,
2017
|
|
|
July 31,
2016
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
102,074
|
|
|
|
–
|
|
ESPP
|
|
|
2,184
|
|
|
|
2,663
|
|
Total
|
|
|
104,258
|
|
|
|
2,663
|
|
The calculation of
weighted average diluted shares outstanding for the three-month periods ended July 31, 2017 and 2016 also excludes the following
weighted average outstanding stock options, warrants, and Series E Preferred Stock (assuming the if-converted method), as their
exercise prices or conversion price were greater than the average market price of our common stock during the respective periods,
resulting in an anti-dilutive effect:
|
|
July 31,
2017
|
|
|
July 31,
2016
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
3,602,628
|
|
|
|
3,980,357
|
|
Warrants
|
|
|
39,040
|
|
|
|
39,040
|
|
Series E Preferred Stock
|
|
|
1,978,783
|
|
|
|
1,894,337
|
|
Total
|
|
|
5,620,451
|
|
|
|
5,913,734
|
|
Recently Adopted Accounting
Pronouncements
Effective May 1, 2017,
we adopted Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330):
Simplifying the Measurement of Inventory
.
ASU 2015-11 requires that inventory should be measured at the lower of cost and net realizable value for entities that measure
inventory using the first-in, first-out method. ASU 2015-11 defines net realizable value as the estimated selling prices in the
ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The adoption of
ASU 2015-11 did not have a material impact on our condensed consolidated financial statements.
Effective May 1, 2017,
we adopted ASU 2015-17, Income Taxes (Topic 740):
Balance Sheet Classification of Deferred Taxes
. Under existing standards,
deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net long-term asset or liability.
To simplify presentation, the new guidance will require that all deferred tax assets and liabilities, along with related valuation
allowances, be classified as long-term on the balance sheet. As a result, each tax-paying jurisdiction will now only have one net
long-term deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting
deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. Due to the full valuation allowance
on our U.S. deferred tax assets, the adoption of ASU 2015-17 did not have a material impact on our condensed consolidated financial
statements.
Effective May 1, 2017,
we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
.
ASU 2016-09 changes certain aspects of accounting for share-based payments to employees and involves several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. Specifically, ASU 2016-09 requires that all income tax effects of share-based
awards be recognized as income tax expense or benefit in the reporting period in which they occur. Additionally, ASU 2016-09 amends
existing guidance to allow forfeitures of share-based awards to be recognized as they occur. Previous guidance required that share-based
compensation expense include an estimate of forfeitures. Upon adoption of ASU 2016-09, we made a policy election to recognize forfeitures
as they occur. The adoption of ASU 2016-09 did not have a material impact on our condensed consolidated financial statements.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017 (
unaudited) (continued
)
Pending Adoption of
Recent Accounting Pronouncements
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts
with Customers (Topic 606):
Revenue from Contracts with Customers
, which, along with subsequent amendments issued in 2015
and 2016, will replace substantially all current US GAAP revenue recognition guidance. ASU 2014-09, as amended, is based on the
principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. The new guidance also requires additional disclosure
about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09, as amended,
is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period,
which will be our fiscal year 2019 beginning May 1, 2018. The new guidance permits adoption either by using (i) a full retrospective
approach for all periods presented in the period of adoption or (ii) a modified retrospective approach where the new standard is
applied in the financial statements starting with the year of adoption. Under both approaches, cumulative impact of the adoption
is reflected as an adjustment to retained earnings (accumulated deficit) as of the earliest date presented in accordance with the
new standard. We are continuing to assess the impact of the new guidance on our accounting policies and procedures and are evaluating
the new requirements as applied to existing manufacturing contracts under our contract manufacturing business. Although we are
continuing to assess the impact of the new guidance, we have identified our revenue streams and based on our preliminary assessment
we believe the most significant impact may relate to the recognition of contract manufacturing revenue over a period of time rather
than at a point in time. We plan to adopt ASU 2014-09, as amended, on May 1, 2018 and have not yet determined which transition
method will be elected.
In February 2016,
the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-2 requires an entity to recognize right-of-use assets and lease liabilities
on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance
for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative
information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty
of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2018, which will be our fiscal year 2020 beginning May 1, 2019. Early adoption is permitted. We are currently
in the process of evaluating the impact of adoption of ASU 2016-02 on our condensed consolidated financial statements and related
disclosures.
In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash
, which
addresses diversity in practice related to the classification and presentation of changes in restricted cash on the statement
of cash flows. ASU 2016-18 will require that a statement of cash flows explain the change during the period in the total of cash,
cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally
described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2017, which will be our fiscal year 2019 beginning
May 1, 2018. Early adoption is permitted. We are currently evaluating the impact the adoption of ASU 2016-18 will have on our
condensed consolidated financial statements and related disclosures.
In May 2017, the FASB
issued ASU 2017-09, Compensation - Stock Compensation (Topic 718):
Scope of Modification Accounting
, which provides guidance
about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting
in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, which will be our
fiscal year 2019 beginning May 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-09 to have a material
impact on our condensed consolidated financial statements and related disclosures.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017 (
unaudited) (continued
)
3. Trade
and other RECEIVABLEs
Trade receivables are
recorded at the invoiced amount net of an allowance for doubtful accounts, if necessary. Other receivables are reported at amounts
expected to be collected net of an allowance for doubtful accounts, if necessary. Trade and other receivables consist of the following:
|
|
July 31,
2017
|
|
|
April 30,
2017
|
|
Trade receivables
(1)
|
|
$
|
5,452,000
|
|
|
$
|
7,274,000
|
|
Other receivables
|
|
|
2,432,000
|
|
|
|
468,000
|
|
Total trade and other receivables
|
|
$
|
7,884,000
|
|
|
$
|
7,742,000
|
|
______________
(1)
Represents amounts billed for contract manufacturing services provided by Avid.
We continually monitor
our allowance for doubtful accounts for all receivables. We apply judgment in assessing the ultimate realization of our receivables
and we estimate an allowance for doubtful accounts based on various factors, such as, the aging of accounts receivable balances,
historical experience, and the financial condition of our customers. Based on our analysis of our receivables as of July 31, 2017
and 2016, we determined no allowance for doubtful accounts was necessary.
4. PROPERTY
AND EQUIPMENT
Property and equipment
is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related asset, generally ranging from three to ten years. Amortization of leasehold
improvements is calculated using the straight-line method over the shorter of the estimated useful life of the asset or the remaining
lease term.
Property and equipment,
net, consists of the following:
|
|
July 31,
2017
|
|
|
April 30,
2017
|
|
Leasehold improvements
|
|
$
|
20,675,000
|
|
|
$
|
20,098,000
|
|
Laboratory equipment
|
|
|
11,340,000
|
|
|
|
10,777,000
|
|
Furniture, fixtures, office equipment and software
|
|
|
4,726,000
|
|
|
|
4,499,000
|
|
Total property and equipment
|
|
|
36,741,000
|
|
|
|
35,374,000
|
|
Less accumulated depreciation and amortization
|
|
|
(12,342,000
|
)
|
|
|
(11,700,000
|
)
|
Total property and equipment, net
|
|
$
|
24,399,000
|
|
|
$
|
23,674,000
|
|
Depreciation and amortization
expense for the three months ended July 31, 2017 and 2016 was $642,000 and $613,000, respectively.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017 (
unaudited) (continued
)
5. INVENTORIES
Inventories are
recorded at the lower of cost or market (net realizable value) and primarily include raw materials, work-in-process (comprised
of raw materials, direct labor and overhead costs associated with in-process manufacturing services), and finished goods (representing
manufacturing services completed and ready for shipment) associated with our wholly-owned subsidiary, Avid. Overhead costs allocated
to work-in-process inventory are based on the normal capacity of our production facilities and does not include costs from abnormally
low production or idle capacity, which are expensed directly to cost of contract manufacturing in the period incurred. During
the three months ended July 31, 2017 and 2016, we expensed $900,000 and nil, respectively, in idle capacity costs directly to
cost of contract manufacturing in the accompanying condensed consolidated financial statements. Cost is determined by the first-in,
first-out method. Inventories consist of the following:
|
|
July 31,
2017
|
|
|
April 30,
2017
|
|
Raw materials
|
|
$
|
10,721,000
|
|
|
$
|
11,304,000
|
|
Work-in-process
|
|
|
13,514,000
|
|
|
|
13,755,000
|
|
Finished goods
|
|
|
–
|
|
|
|
8,040,000
|
|
Total inventories
|
|
$
|
24,235,000
|
|
|
$
|
33,099,000
|
|
6. STOCKHOLDERS’
EQUITY
Sales of Common Stock
Our ability to continue
to fund our operations is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise
additional capital to support our future operations through one or more methods, including but not limited to, issuing additional
equity.
During the three months
ended July 31, 2017, we issued shares of our common stock under the following agreement:
AMI Sales Agreement
- On August 7, 2015, we entered into an At Market Issuance Sales Agreement (“AMI Sales Agreement”) with MLV & Co.
LLC (“MLV”), pursuant to which we were able to sell shares of our common stock through MLV, as agent, for aggregate
gross proceeds of up to $30,000,000, in registered transactions from our shelf registration statement on Form S-3 (File No. 333-201245),
which was declared effective by the SEC on January 15, 2015. Sales of our common stock through MLV were made by any method that
was deemed an “at the market offering” as defined in Rule 415 of the Securities Act. We paid MLV a commission equal
to 2.5% of the gross proceeds from the sale of our common stock pursuant to the AMI Sales Agreement. During the three months ended
July 31, 2017, we sold 1,051,258 shares of our common stock at market prices under the AMI Sales Agreement, for aggregate gross
proceeds of $4,304,000 before deducting commissions and other issuance costs of $111,000. As of July 31, 2017, we had raised the
full amount of gross proceeds available to us under the AMI Sales Agreement.
Series
E Preferred Stock Dividend
On June 6, 2017, our
Board of Directors declared a quarterly cash dividend of $0.65625 per share on our Series E Preferred Stock. The dividend
payment is equivalent to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference, accruing
from April 1, 2017 through June 30, 2017. The cash dividend of $1,081,000 was paid on July 3, 2017 to holders of the Series
E Preferred Stock of record on June 19, 2017.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017 (
unaudited) (continued
)
Shares
of Common Stock Authorized and Reserved for Future Issuance
We are authorized to
issue up to 500,000,000 shares of our common stock. As of July 31, 2017, 45,094,154 shares of our common stock were issued and
outstanding. In addition, our common stock outstanding as of July 31, 2017 excluded the following shares of our common stock reserved
for future issuance:
|
·
|
5,612,106 shares of common stock reserved for issuance under outstanding option grants and available
for issuance under our stock incentive plans;
|
|
·
|
1,359,736 shares of common stock reserved for and available for issuance under our Employee Stock
Purchase Plan;
|
|
·
|
39,040 shares of common stock issuable upon exercise of outstanding warrants; and
|
|
·
|
6,826,435 shares of common stock issuable upon conversion of our outstanding Series E Preferred
Stock
(1)
.
|
_____________
|
(1)
|
The
Series E Preferred Stock is convertible into a number of shares of our common stock determined
by dividing the liquidation preference of $25.00 per share by the conversion price, currently
$21.00 per share. If all of our outstanding Series E Preferred Stock were converted at
the $21.00 per share conversion price, the holders of our Series E Preferred Stock would
receive an aggregate of 1,961,619 shares of our common stock. However, we have reserved
the maximum number of shares of our common stock that could be issued upon a change of
control event assuming our shares of common stock are acquired for consideration of $5.985
per share or less. In this scenario, each outstanding share of our Series E Preferred
Stock could be converted into 4.18 shares of our common stock, representing the Share
Cap.
|
7. equity
compensation plans
Stock Incentive Plans
As of July 31, 2017,
we had an aggregate of 5,612,106 shares of our common stock reserved for issuance under our stock incentive plans, of which, 4,022,136
shares were subject to outstanding options and 1,589,970 shares were available for future grants of share-based awards.
The following summarizes
our stock option transaction activity for the three months ended July 31, 2017:
Stock Options
|
|
Shares
|
|
|
Weighted
Average
Exercisable
Price
|
Outstanding, May 1, 2017
|
|
|
4,081,548
|
|
|
$ 8.77
|
Granted
|
|
|
20,213
|
|
|
$ 4.43
|
Exercised
|
|
|
(9,959
|
)
|
|
$ 3.43
|
Canceled or expired
|
|
|
(69,666
|
)
|
|
$ 10.45
|
Outstanding, July 31, 2017
|
|
|
4,022,136
|
|
|
$ 8.73
|
Employee Stock Purchase Plan
We have reserved a
total of 2,142,857 shares of our common stock to be purchased under our ESPP, of which 1,359,736 shares remained available to purchase
at July 31, 2017, and are subject to adjustment as provided in the ESPP for stock splits, stock dividends, recapitalizations and
other similar events. Under the ESPP, we sell shares to participants at a price equal to the lesser of 85% of the fair market value
of our common stock at the (i) beginning of a six-month offering period, or (ii) end of the six-month offering period. The ESPP
provides for two six-month offering periods each year; the first offering period begins on the first trading day on or after each
May 1; the second offering period begins on the first trading day on or after each November 1. No shares of our common stock were
purchased under the ESPP during the three months ended July 31, 2017 as the current six-month offering period ends on October 31,
2017.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017 (
unaudited) (continued
)
Share-Based Compensation
Total share-based compensation
expense related to share-based awards issued under our equity compensation plans is included in the accompanying unaudited condensed
consolidated statements of operations as follows:
|
|
Three Months Ended
July 31,
|
|
|
|
2017
|
|
|
2016
|
|
Cost of contract manufacturing
|
|
$
|
–
|
|
|
$
|
42,000
|
|
Research and development
|
|
|
269,000
|
|
|
|
370,000
|
|
Selling, general and administrative
|
|
|
216,000
|
|
|
|
425,000
|
|
Total share-based compensation expense
|
|
$
|
485,000
|
|
|
$
|
837,000
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation from:
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
409,000
|
|
|
$
|
731,000
|
|
Employee stock purchase plan
|
|
|
76,000
|
|
|
|
106,000
|
|
|
|
$
|
485,000
|
|
|
$
|
837,000
|
|
As of July 31, 2017,
the total estimated unrecognized compensation cost related to non-vested employee stock options was $1,570,000. This cost is expected
to be recognized over a weighted average vesting period of 1.43 years based on current assumptions.
8. WARRANTS
No warrants were issued
or exercised during the three months ended July 31, 2017. As of July 31, 2017, warrants to purchase 39,040 shares of our common
stock at an exercise price of $17.29 were outstanding and are exercisable through August 30, 2018.
9. SEGMENT
REPORTING
Our business is organized
into two reportable operating segments and both operate in the U.S. Peregrine is engaged in the research and development of monoclonal
antibodies for the treatment of cancer. Avid is engaged in providing contract manufacturing services for third-party customers
on a fee-for-service basis while also supporting our internal drug development efforts.
The accounting policies
of the operating segments are the same as those described in Note 2. We evaluate the performance of our contract manufacturing
services segment based on gross profit or loss from third-party customers. However, our products in the research and development
segment are not evaluated based on gross profit or loss, but rather based on scientific progress of the technologies. As such,
gross profit or loss is only provided for our contract manufacturing services segment in the below table. All revenues shown below
are derived from transactions with third-party customers.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017 (
unaudited) (continued
)
Segment information is summarized as follows:
|
|
Three Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Contract manufacturing services revenue
|
|
$
|
27,077,000
|
|
|
$
|
5,609,000
|
|
Cost of contract manufacturing services
|
|
|
20,448,000
|
|
|
|
3,062,000
|
|
Gross profit
|
|
|
6,629,000
|
|
|
|
2,547,000
|
|
Research and development expense
|
|
|
(3,645,000
|
)
|
|
|
(8,569,000
|
)
|
Selling, general and administrative expense
|
|
|
(4,213,000
|
)
|
|
|
(5,060,000
|
)
|
Other income (expense), net
|
|
|
24,000
|
|
|
|
25,000
|
|
Net loss
|
|
$
|
(1,205,000
|
)
|
|
$
|
(11,057,000
|
)
|
Revenue generated from
our contract manufacturing services segment was derived from a limited number of customers. The percentages below represent revenue
derived from each customer as a percentage of total contract manufacturing services revenue:
|
|
Three Months Ended July 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Halozyme Therapeutics, Inc.
|
|
|
78%
|
|
|
|
65%
|
|
Customer A
|
|
|
6%
|
|
|
|
29%
|
|
Other customers
|
|
|
16%
|
|
|
|
6%
|
|
Total
|
|
|
100%
|
|
|
|
100%
|
|
In addition, during
the three months ended January 31, 2017 and 2016, contract manufacturing services revenue was derived solely from U.S. based customers.
Our long-lived assets
are located in the U.S. and consist of leasehold improvements, laboratory equipment, furniture and fixtures, office equipment and
software and are net of accumulated depreciation. Long-lived assets by segment consist of the following:
|
|
July 31,
2017
|
|
|
April 30,
2017
|
|
Long-lived Assets, net:
|
|
|
|
|
|
|
|
|
Contract manufacturing services
|
|
$
|
23,901,000
|
|
|
$
|
22,599,000
|
|
Products in research and development
|
|
|
498,000
|
|
|
|
1,075,000
|
|
Total
|
|
$
|
24,399,000
|
|
|
$
|
23,674,000
|
|
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017 (
unaudited) (continued
)
10. commitments
and contingencies
Legal Proceedings
– In the ordinary course of business, we are at times subject to various legal proceedings and disputes. We make provisions
for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Such provisions are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and
administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case.
On October 10,
2013, a derivative and class action complaint, captioned
Michaeli v. Steven W. King, et al.
, C.A. No. 8994-VCL, was filed
in the Court of Chancery of the State of Delaware (the “Court”), purportedly on behalf of the Company, which is named
a nominal defendant, against certain of our executive officers and directors (collectively, the “Defendants”). On December
1, 2015, the plaintiffs filed an amended and supplemental derivative and class action complaint (the “Amended Complaint”).
The Amended Complaint alleges that the Defendants breached their respective fiduciary duties in connection with certain purportedly
improper compensation decisions made by our board of directors during the past four fiscal years ended April 30, 2015, including:
(i) the grant of a stock option to Mr. King on May 4, 2012; (ii) the non-routine broad-based stock option grant to our directors,
executives, all other employees and certain consultants on December 27, 2012; and (iii) the payment, during the past four fiscal
years ended April 30, 2015, of compensation to our non-employee directors. In addition, the complaint alleges that our directors
breached their fiduciary duty of candor by filing and seeking stockholder action on the basis of an allegedly materially false
and misleading proxy statement for our 2013 annual meeting of stockholders. The plaintiffs are seeking, among other things, rescission
of a portion of the stock option grant to Mr. King on May 4, 2012 and the stock options granted to the Defendants on December 27,
2012, as well as disgorgement of any excessive compensation paid to our non-employee directors during the four fiscal years ended
April 30, 2015 and other monetary relief for our benefit. On May 15, 2017, the parties filed with the Court a Stipulation and Agreement
of Compromise, Settlement and Release (the “Settlement”) setting forth the terms of the proposed settlement of the
claims in the Amended Complaint. At a hearing on July 27, 2017, the Court issued an order approving the Settlement. The following
is a summary of the essential terms of the Settlement:
|
·
|
The non-employee directors agreed to pay or cause to be paid $1,500,000 to us, which amount
is included in trade and other receivables at July 31, 2017 and as a reduction to selling, general and administrative expense in
the accompanying unaudited condensed consolidated financial statements for the three months ended July 31, 2017 (payment was received
by the Company in full in August 2017).
|
|
·
|
Our Board of Directors agreed to reprice all of the stock options granted to the
non-employee directors and executive officers (other than one executive officer whose employment terminated in 2013) on December
27, 2012, from $8.26 per share to $17.01, representing the closing price of our common stock on January 7, 2013
(as adjusted for the one-for-seven reverse stock split effected on July 7, 2017).
|
|
·
|
The non-employee directors agreed to an annual compensation cap (cash and stock compensation) for
a two-year period equal to the greater of: (i) $400,000 (comprised of compensation both for service as a director of Peregrine
Pharmaceuticals, Inc. and for services as a director of Avid Bioservices, Inc.); or (ii) the 75th percentile of compensation paid
by our peer group to their non-employee directors, as determined by an independent compensation consultant.
|
|
·
|
The Board of Directors agreed, contingent upon, and within three (3) months following, the FDA’s
approval of bavituximab for marketing in the United States, to increase the authorized number of directors from four to five, and
appoint an appropriate and suitable independent candidate to serve as the fifth member.
|
|
·
|
In addition, we agreed to several governance changes related to our equity award practices
and compensation disclosures. The new governance procedures must be implemented within ninety (90) days following the
approval of the Settlement and maintained for a period of three (3) years thereafter. The new governance procedures
generally
require that (i) all equity awards be made in compliance with all applicable laws, rules and regulations, (ii) an
independent
third party compensation consultant review the process by which stock options and other equity awards are granted, (iii)
equity award practices are overseen by a newly appointed Chief Compliance Officer (who may be an existing executive
officer), (iv)
the Board of Directors establish a uniform, pre-set time for all annual equity grants, (v) the Compensation Committee review
and approve all
compensation disclosures in our proxy statements, (vi) an independent third party compensation
consultant advise the Compensation Committee annually with regard to non-employee director compensation, (vii) all grants of
options to officers and directors be approved only at a meeting of the Compensation Committee, and not by unanimous written
consent, and (viii) beginning with its proxy statement for the 2017 annual meeting of stockholders, we provide
enhanced disclosure regarding non-employee director compensation.
|
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED JULY 31, 2017 (
unaudited) (continued
)
11. SUBSEQUENT
EVENTS
Corporate Restructuring
On August 9, 2017,
our Board of Directors approved, and management commenced, a restructuring plan designed to reduce operating costs and better position
the Company to achieve overall profitability while we pursue strategic options for our research and development assets. Under this
restructuring plan, which is expected to be completed in October 2017, we have reduced our overall workforce by 60 employees (or
20%). In addition, the a
ffected employees are eligible to receive severance
payments based on years of service, contingent upon an affected employee’s execution (and non-revocation) of a separation
agreement, which includes a general release of claims against the Company. As a result,
we estimate that we will incur aggregate
restructuring charges between $1.1 million and $1.7 million related to one-time termination benefits, including severance, and
other employee related costs, all of which are expected to be incurred and paid during the second quarter of our fiscal year 2018
ending October 31, 2017.
Series E Preferred
Stock Dividend
On September 5, 2017,
our Board of Directors declared a quarterly cash dividend of $0.65625 per share on our Series E Preferred Stock. The dividend payment
is equivalent to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference, accruing from July
1, 2017 through September 30, 2017. The cash dividend is payable on October 2, 2017 to holders of the Series E Preferred Stock
of record on September 18, 2017.