NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
1. ORGANIZATION
AND BUSINESS
Business Description
–
We are a company committed to improving the lives of patients by manufacturing pharmaceutical products through our
contract development and manufacturing organization (“CDMO”), Avid Bioservices, Inc. (“Avid”). Over the
next sixty days, we plan to complete the transition from a research and development company to a dedicated CDMO company focused
on development and manufacturing of biopharmaceutical products derived from mammalian cell culture.
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 Pharmaceuticals, Inc., and our wholly-owned subsidiary, 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 SIX MONTHS ENDED OCTOBER 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 October 31, 2017,
we had $27,727,000 in cash and cash equivalents. We have expended substantial funds on research and development of product candidates
(which we are seeking to license or divest) 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, 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 on our business plans.
Historically, we have
funded a significant portion of our operations through the issuance of equity; however, during the quarter ended October 31, 2017,
we did not raise any additional capital through the issuance of equity. During the quarter 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).
In addition, 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 October 31, 2017, $67,674,000 remained available to us under our effective shelf registration
statement (which shelf expires in mid-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, and adverse
financial results. If we are unable to either raise sufficient capital in the equity markets or generate additional revenue from
Avid, 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.
Reclassification
Certain prior year
amounts related to other assets have been reclassified to property and equipment in our accompanying condensed consolidated balance
sheet for the fiscal year ended April 30, 2017 and in our accompanying unaudited condensed consolidated statement of cash flows
for the six months ended October 31, 2016 to conform to the current year presentation. This reclassification had no effect on
previously reported net loss.
Restructuring
Restructuring charges
consist of one-time termination benefits, including severance and other employee related costs related to a workforce reduction
pursuant to a restructuring plan we implemented in August 2017 (Note 9). One-time termination benefits are expensed at the date
we notified the employee, unless the employee was required to provide future service, in which case, the benefits are expensed
ratably over the future service period.
Cash and Cash Equivalents
We consider all short-term
investments readily convertible to cash with an initial maturity of three months or less to be cash equivalents.
PEREGRINE PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
(continued)
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 October 31, 2017 and April 30, 2017, restricted cash of $1,150,000 was pledged as collateral under
these letters of credit.
Concentrations of Credit Risk and Customer
Base
Financial instruments
that potentially subject us to a significant concentration of credit risk consist of cash and cash equivalents, restricted cash
and trade receivables. We maintain our cash and restricted cash balances primarily with one major commercial bank and our deposits
held with the bank exceed the amount of government insurance limits provided on our deposits. We are exposed to credit risk in
the event of default by the major commercial bank holding our cash and restricted cash balances to the extent of the cash and restricted
cash amounts recorded on the accompanying 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 October 31, 2017 and April 30, 2017, approximately 95% and 93%, respectively, of our trade receivables were
due from seven or fewer customers.
In addition, contract
manufacturing revenue generated by Avid has historically been derived from a small customer base. Historically, these customers
have not entered 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. During
the three and six months ended October 31, 2017, approximately, 81% and 83%, respectively, of our contract manufacturing revenue
was derived from our two largest customers.
Based on our current
commitments for manufacturing services from our two largest customers, we expect our future results of operations to be adversely
affected if revenue from either one of these primary customers continues to be further reduced, delayed, or eliminated, or until
we are able to further diversify our customer base.
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 six months ended October 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.
|
PEREGRINE PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
(continued)
As of October 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
and six months ended October 31, 2017 and 2016.
Customer Deposits
Customer deposits primarily
represent advance billings and/or payments received for services or raw materials 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.
PEREGRINE PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
(continued)
Research and Development Expenses
Research and development
expenses primarily include (i) payroll and related costs, including share-based compensation associated with research and development
personnel, (ii) costs related to clinical trials and preclinical testing of our technologies under development, (iii) costs to
develop and manufacture the product candidates, including raw materials and supplies, product testing, depreciation, and facility
related expenses, (iv) expenses for research services provided by universities and contract laboratories, including sponsored research
funding, and (v) other research and development expenses. Research and development expenses are charged to expense as incurred
when these expenditures relate to our research and development efforts and have no alternative future uses.
Clinical trial costs
have been 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 and six months ended October 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.
During the three months ended October 31, 2017, we wrote-off $757,000 in prepaid research and development expenses, which amount
is included in research and development expense in the accompanying unaudited condensed consolidated financial statements for
the three and six months ended October 31, 2017, as we believe there is no probable future economic benefit based on our transition
from a research and development company to a dedicated CDMO.
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 October
31, 2017, there were no outstanding share-based awards with market or performance conditions.
PEREGRINE PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
(continued)
Basic and Dilutive Net Loss Per Common
Share
Basic net loss per
common share is computed by dividing our net loss attributable to common stockholders by the weighted average number of shares
of common stock outstanding during the period excluding the dilutive effects of stock options, shares of common stock expected
to be issued under our Employee Stock Purchase Plan (the “ESPP”), warrants, and Series E Preferred Stock outstanding
during the period. Diluted net loss per common share is computed by dividing our net loss attributable to common stockholders by
the sum of the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effects
of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding
during the period. Net loss attributable to common stockholders represents our net loss plus Series E Preferred Stock accumulated
dividends. Series E Preferred Stock accumulated dividends include dividends declared for the period (regardless of whether or not
the dividends have been paid) and dividends accumulated for the period (regardless of whether or not the dividends have been declared).
The potential dilutive
effect of stock options, shares of common stock expected to be issued under our ESPP, and warrants outstanding during the period
are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive
effect of our Series E Preferred Stock outstanding during the period was calculated using the if-converted method assuming the
conversion of Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but are excluded
if their effect is anti-dilutive. However, because the impact of stock options, shares of common stock expected to be issued under
our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there was no difference between
basic and diluted loss per common share amounts for the three and six months ended October 31, 2017 and 2016.
The calculation of
weighted average diluted shares outstanding for the three and six months ended October 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:
|
|
Three Months Ended
October 31,
|
|
|
Six Months Ended
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
31,877
|
|
|
|
–
|
|
|
|
69,065
|
|
|
|
–
|
|
ESPP
|
|
|
–
|
|
|
|
23,668
|
|
|
|
133
|
|
|
|
17,139
|
|
Total
|
|
|
31,877
|
|
|
|
23,668
|
|
|
|
69,198
|
|
|
|
17,139
|
|
The calculation of
weighted average diluted shares outstanding for the three and six months ended October 31, 2017 and 2016 also excludes the following
weighted average outstanding stock options, warrants, shares of common stock expected to be issued under our ESPP, and Series
E Preferred Stock (assuming the if-converted method), as their exercise price, purchase price and/or conversion price were greater
than the average market price of our common stock during the respective periods, resulting in an anti-dilutive effect:
|
|
Three Months Ended
October 31,
|
|
|
Six Months Ended
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
3,600,478
|
|
|
|
4,258,060
|
|
|
|
3,608,917
|
|
|
|
4,119,209
|
|
ESPP
|
|
|
43,332
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Warrants
|
|
|
39,040
|
|
|
|
39,040
|
|
|
|
39,040
|
|
|
|
39,040
|
|
Series E Preferred Stock
|
|
|
1,978,783
|
|
|
|
1,971,206
|
|
|
|
1,978,783
|
|
|
|
1,932,771
|
|
Total
|
|
|
5,661,633
|
|
|
|
6,268,306
|
|
|
|
5,626,740
|
|
|
|
6,091,020
|
|
PEREGRINE PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
(continued)
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.
Pending Adoption of
Recent Accounting Pronouncements
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts
with Customers (Topic 606):
Revenue from Contracts with Customers
, which, along with subsequent amendments issued in 2015
and 2016, will replace substantially all current US GAAP revenue recognition guidance. ASU 2014-09, as amended, is based on the
principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services utilizing a new five-step revenue recognition
model. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs
incurred to obtain or fulfill a contract. ASU 2014-09, as amended, is effective for 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 CDMO business. While we continue to assess the impact of the new guidance, we believe the adoption of ASU
2014-09 will modify the way we analyze contracts. We have identified our revenue streams and based on our preliminary assessment,
we believe the most significant impact may relate to the recognition of contract manufacturing revenue over a period of time rather
than at a point in time. We plan to adopt ASU 2014-09, as amended, on May 1, 2018, on a modified retrospective basis.
In February 2016,
the FASB issued ASU 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.
PEREGRINE PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
(continued)
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 do not expect the adoption of ASU 2016-18 to have a material impact 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.
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:
|
|
October 31,
2017
|
|
|
April 30,
2017
|
|
Trade receivables
(1)
|
|
$
|
3,439,000
|
|
|
$
|
7,274,000
|
|
Other receivables
|
|
|
69,000
|
|
|
|
468,000
|
|
Total trade and other receivables
|
|
$
|
3,508,000
|
|
|
$
|
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 October 31,
2017 and April 30, 2017, 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. Construction-in-progress, which represents direct costs related to the construction of various equipment and leasehold
improvements associated with our manufacturing facilities, are not depreciated until the asset is completed and placed into service.
No interest was incurred or capitalized as construction-in-progress as of October 31, 2017.
PEREGRINE PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
(continued)
Property and equipment,
net, consists of the following:
|
|
October 31,
2017
|
|
|
April 30,
2017
|
|
Leasehold improvements
|
|
$
|
20,922,000
|
|
|
$
|
20,098,000
|
|
Laboratory equipment
|
|
|
11,423,000
|
|
|
|
10,777,000
|
|
Furniture, fixtures, office equipment and software
|
|
|
4,810,000
|
|
|
|
4,499,000
|
|
Construction-in-progress
|
|
|
2,993,000
|
|
|
|
2,841,000
|
|
Total property and equipment
|
|
|
40,148,000
|
|
|
|
38,215,000
|
|
Less accumulated depreciation and amortization
|
|
|
(13,000,000
|
)
|
|
|
(11,700,000
|
)
|
Total property and equipment, net
|
|
$
|
27,148,000
|
|
|
$
|
26,515,000
|
|
Depreciation and amortization
expense for the three and six months ended October 31, 2017 was $658,000 and $1,300,000, respectively. Depreciation and amortization
expense for the three and six months ended October 31, 2016 was $606,000 and $1,219,000, respectively.
5. INVENTORIES
Inventories are recorded
at the lower of cost or market (net realizable value) and primarily include raw materials, work-in-process (comprised of raw materials,
direct labor and overhead costs 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 do not include costs from abnormally low production
or idle capacity, which are expensed directly to cost of contract manufacturing in the period incurred. During the three and six
months ended October 31, 2017, we expensed $4,938,000 and $5,838,000, respectively, in idle capacity costs directly to cost of
contract manufacturing in the accompanying condensed consolidated financial statements. No idle capacity costs were incurred during
the same prior year periods. Cost is determined by the first-in, first-out method. Inventories consist of the following:
|
|
October 31,
2017
|
|
|
April 30,
2017
|
|
Raw materials
|
|
$
|
9,439,000
|
|
|
$
|
11,304,000
|
|
Work-in-process
|
|
|
7,079,000
|
|
|
|
13,755,000
|
|
Finished goods
|
|
|
–
|
|
|
|
8,040,000
|
|
Total inventories
|
|
$
|
16,518,000
|
|
|
$
|
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 six months
ended October 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 quarter 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.
PEREGRINE PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
(continued)
Series
E Preferred Stock Dividend
The following table
summarizes the Series E Preferred Stock quarterly dividend activity during the six months ended October 31, 2017:
Declaration
Date
|
|
Record
Date
|
|
Payment
Date
|
|
Dividends
Paid
|
|
Dividend
Per Share
|
6/6/2017
|
|
6/19/2017
|
|
7/3/2017
|
|
$1,081,000
|
|
$0.65625
|
9/5/2017
|
|
9/18/2017
|
|
10/2/2017
|
|
$1,081,000
|
|
$0.65625
|
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 October 31, 2017, 45,172,632 shares of our common stock were issued and
outstanding. In addition, our common stock outstanding as of October 31, 2017 excluded the following shares of our common stock
reserved for future issuance:
|
·
|
5,586,096 shares of common stock reserved for issuance under outstanding option grants and available
for issuance under our stock incentive plans;
|
|
·
|
1,303,770 shares of common stock reserved for and available for issuance under our ESPP;
|
|
·
|
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 October 31, 2017,
we had an aggregate of 5,586,096 shares of our common stock reserved for issuance under our stock incentive plans, of which, 4,123,054
shares were subject to outstanding options and 1,463,042 shares were available for future grants of share-based awards.
The following summarizes
our stock option transaction activity for the six months ended October 31, 2017:
Stock Options
|
|
Shares
|
|
|
Weighted Average
Exercisable Price
|
|
Outstanding, May 1, 2017
|
|
|
4,081,548
|
|
|
|
$ 8.77
|
|
Granted
|
|
|
327,497
|
|
|
|
$ 3.63
|
|
Exercised
|
|
|
(32,471
|
)
|
|
|
$ 3.46
|
|
Canceled or expired
|
|
|
(253,520
|
)
|
|
|
$ 7.51
|
|
Outstanding, October 31, 2017
|
|
|
4,123,054
|
|
|
|
$ 8.96
|
|
PEREGRINE PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
(continued)
Employee Stock Purchase Plan (ESPP)
We have reserved a
total of 2,142,857 shares of our common stock to be purchased under our ESPP, of which 1,303,770 shares remained available to purchase
at October 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. During the six months ended
October 31, 2017, 55,966 shares of our common stock were purchased under the ESPP at a purchase price of $3.87 per share.
Share-Based Compensation
Total share-based compensation
expense related to share-based awards issued under our equity compensation plans is included in the accompanying unaudited condensed
consolidated statements of operations as follows:
|
|
Three Months Ended
October 31,
|
|
|
Six Months Ended
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Cost of contract manufacturing
|
|
$
|
138,000
|
|
|
$
|
24,000
|
|
|
$
|
138,000
|
|
|
$
|
66,000
|
|
Selling, general and administrative
|
|
|
135,000
|
|
|
|
415,000
|
|
|
|
351,000
|
|
|
|
840,000
|
|
Research and development
|
|
|
36,000
|
|
|
|
446,000
|
|
|
|
305,000
|
|
|
|
816,000
|
|
Total
|
|
$
|
309,000
|
|
|
$
|
885,000
|
|
|
$
|
794,000
|
|
|
$
|
1,722,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
287,000
|
|
|
$
|
823,000
|
|
|
$
|
696,000
|
|
|
$
|
1,554,000
|
|
ESPP
|
|
|
22,000
|
|
|
|
62,000
|
|
|
|
98,000
|
|
|
|
168,000
|
|
|
|
$
|
309,000
|
|
|
$
|
885,000
|
|
|
$
|
794,000
|
|
|
$
|
1,722,000
|
|
As of October 31, 2017,
the total estimated unrecognized compensation cost related to non-vested employee stock options was $1,875,000. This cost is expected
to be recognized over a weighted average vesting period of 2.24 years based on current assumptions.
8. WARRANTS
No warrants were issued
or exercised during the three and six months ended October 31, 2017. As of October 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. RESTRUCTURING
On August 9, 2017,
our Board of Directors approved, and our management implemented, a restructuring plan intended to reduce operating costs and improve
cost efficiencies while we pursue strategic options for our research and development assets and focus our efforts on growing our
CDMO business. Under this restructuring plan, which we completed in October 2017, we reduced our overall workforce by 57 employees.
As a result, during the three months ended October 31, 2017, we incurred an aggregate of $1,588,000 in restructuring costs consisting
of one-time termination benefits, including severance, and other employee-related costs, of which $330,000 related to our research
and development segment and $1,258,000 related to our contract manufacturing services segment. Restructuring costs are included
in operating expenses in the accompanying unaudited condensed consolidated financial statements for the three and six months ended
October 31, 2017. In addition, of the total aggregate restructuring costs, $51,000 was unpaid as of October 31, 2017 and is included
in accrued payroll and related costs in the accompanying unaudited condensed balance sheet at October 31, 2017.
PEREGRINE PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
(continued)
10. SEGMENT
REPORTING
While our business
currently is organized into two reportable operating segments, we are pursuing strategic options to license or divest the assets
under our research and development segment as we transition to a dedicated CDMO. Historically, our research and development segment
engaged in the research and development of monoclonal antibodies for the treatment of cancer. Our contract manufacturing services
segment provides contract development and manufacturing services for third-party customers on a fee-for-service basis. Both segments
operate in the U.S.
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 and our evaluation of the performance of our research
and development segment was based on scientific progress. Our performance evaluation does not include segment assets. All revenues
shown below are derived from transactions with third-party customers.
Segment information is summarized as follows:
|
|
Three Months Ended
October 31,
|
|
|
Six Months Ended
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Contract manufacturing services revenue
|
|
$
|
12,782,000
|
|
|
$
|
23,370,000
|
|
|
$
|
39,859,000
|
|
|
$
|
28,979,000
|
|
Cost of contract manufacturing services
|
|
|
16,242,000
|
|
|
|
15,441,000
|
|
|
|
36,690,000
|
|
|
|
18,503,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss)
|
|
|
(3,460,000
|
)
|
|
|
7,929,000
|
|
|
|
3,169,000
|
|
|
|
10,476,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative expense
|
|
|
3,867,000
|
|
|
|
4,984,000
|
|
|
|
8,080,000
|
|
|
|
10,044,000
|
|
Research and development expense
|
|
|
3,722,000
|
|
|
|
7,022,000
|
|
|
|
7,367,000
|
|
|
|
15,591,000
|
|
Restructuring charges
|
|
|
1,588,000
|
|
|
|
–
|
|
|
|
1,588,000
|
|
|
|
–
|
|
Interest and other income (expense), net
|
|
|
13,000
|
|
|
|
21,000
|
|
|
|
37,000
|
|
|
|
46,000
|
|
Net loss
|
|
$
|
(12,624,000
|
)
|
|
$
|
(4,056,000
|
)
|
|
$
|
(13,829,000
|
)
|
|
$
|
(15,113,000
|
)
|
PEREGRINE PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (
unaudited
)
(continued)
11. 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 was named
a nominal defendant, against certain of our executive officers and our three former non-employee directors (collectively, the
“Defendants”). On December 1, 2015, the plaintiffs filed an amended and supplemental derivative and class action complaint
(the “Amended Complaint”). The Amended Complaint alleged 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 and 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. 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, which provides, among other things, that the three former non-employee directors
agreed to pay or cause to be paid $1,500,000 to us, which amount is included as a reduction to selling, general and administrative
expense in the accompanying unaudited condensed consolidated financial statements for the six months ended October 31, 2017. The
Company received such payment in full in August 2017.
12. SUBSEQUENT
EVENTS
Series E Preferred
Stock Dividend
On December 7, 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 October
1, 2017 through December 31, 2017. The cash dividend is payable on January 2, 2018 to holders of the Series E Preferred Stock of
record on December 18, 2017.