News Column

PEREGRINE PHARMACEUTICALS INC - 10-K - Management's Discussion And Analysis Of Financial Condition And Results Of Operations

July 14, 2014

The following discussion is included to describe our financial position and results of operations for each of the three years in the period ended April 30, 2014. The audited consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction with this discussion. Overview

We are a biopharmaceutical company with a pipeline of novel drug candidates in clinical trials focused on the treatment and diagnosis of cancer. Our lead immunotherapy candidate, bavituximab, is in Phase III development for the treatment of second-line non-small cell lung cancer (the "SUNRISE trial") along with several investigator-sponsored trials evaluating other treatment combinations and additional oncology indications. In addition, we are evaluating our lead molecular imaging agent, 124I-PGN650 ("PGN650"), in an exploratory clinical trial for the imaging of multiple solid tumor types. Our pipeline of novel drug candidates in clinical trials is based on our first-in-class phosphatidylserine ("PS")-targeting technology platform. The PS-targeting platform includes monoclonal antibodies that target and bind to PS, a highly immunosuppressive molecule usually located inside the membrane of healthy cells, but "flips" and becomes exposed on the outside of cells that line tumor blood vessels, causing the tumor to evade immune detection. PS-targeting antibodies target and bind to PS and block this immunosuppressive signal, thereby enabling the immune system to recognize and fight the tumor. Bavituximab is our lead immunotherapeutic PS-targeting antibody, which has demonstrated broad therapeutic potential and represents a new approach to treating cancer. In addition to the potential for our PS-targeting antibodies to treat cancer, we believe these antibodies may have broad potential for the imaging and diagnosis of multiple diseases, including cancer. PGN650 is our lead PS-targeting imaging agent that represents a potential new approach to imaging cancer. The following represents a summary of our company and investigator-sponsored clinical trials under our first-in-class PS-targeting technology platform with respect to our oncology and imaging programs in clinical-stage development. Additional information pertaining to each clinical trial is further discussed below. Product Indication; Trial Design Phase Status Candidate Bavituximab Second-line non-small cell III Trial initiated in December PS-Targeting lung cancer ("NSCLC"); 2013; patient enrollment Monoclonal randomized, double blind, ongoing. Antibody placebo-controlled, combined (oncology) with docetaxel (SUNRISE trial) Front-line NSCLC; randomized, Ib Patient enrollment complete; open-label, combined with Interim data described carboplatin and pemetrexed below. HER2-negative metastatic I Patient enrollment complete; breast cancer (MBC); single Interim data described arm, open-label, combined with below. paclitaxel Advanced liver cancer I/II Patient enrollment ongoing (hepatocellular carcinoma or in Phase II portion of HCC); single arm, open-label, trial; Interim safety data combined with sorafenib described below. Front-line rectal I Patient enrollment ongoing. adenocarcinoma; single arm, open-label, combined with capecitabine and radiation therapy Advanced melanoma; randomized, Ib Trial initiated in April open label, combined with 2014; Patient enrollment ipilimumab ongoing. PGN650 Imaging agent I* Patient enrollment ongoing. PS-targeting F(ab')2 fully human monoclonal antibody (imaging) ____________



* Filed under an exploratory Investigational New Drug Application ("IND").

42



Bavituximab for the Treatment of Solid Tumors

We believe our novel immunotherapy candidate bavituximab may have broad potential for the treatment of multiple types of cancer. We have recently initiated a randomized Phase III trial for bavituximab in combination with docetaxel in second-line NSCLC, our SUNRISE trial. In addition, we have investigator-sponsored trials evaluating different treatment combinations and additional oncology indications for bavituximab.

The following represents an overview of our company and investigator-sponsored bavituximab clinical trials by indication:

Bavituximab in Second-Line NSCLC

Bavituximab is our lead immunotherapy investigational candidate in Phase III development for the treatment of second-line NSCLC. In May 2013, we reached an agreement with the U.S. Food and Drug Administration ("FDA") on the design of the Phase III SUNRISE trial (Stimulating ImmUne RespoNse thRough BavItuximab in a PhaSE III Lung Cancer Study). The design of the SUNRISE trial was supported by promising data from our prior Phase IIb second-line NSCLC trial in the same indication, which final data was presented at the 2013 American Society of Clinical Oncology Annual Meeting. In December 2013, we initiated the Phase III SUNRISE trial and patient enrollment is ongoing. In addition, in January 2014, we announced that bavituximab received FDA Fast Track designation for combination with docetaxel in patients with previously-treated non-squamous NSCLC. The Phase III SUNRISE trial is a randomized, double-blind, placebo-controlled trial evaluating bavituximab plus docetaxel versus docetaxel plus placebo in approximately 600 patients at clinical sites worldwide. The trial is enrolling patients with stage IIIb/IV non-squamous NSCLC who have progressed after standard front-line treatment. Patients are randomized into one of two treatment arms. One treatment arm receives docetaxel (75 mg/m2), up to six 21-day cycles, in combination with bavituximab (3 mg/kg) weekly until progression or toxicity. The other treatment receives docetaxel (75 mg/m2), up to six 21-day cycles, in combination with placebo weekly until progression or toxicity. The primary endpoint of the trial is overall survival.



Bavituximab in Front-Line NSCLC

This investigator-sponsored Phase Ib trial is designed to assess bavituximab with pemetrexed and carboplatin in up to 25 patients with locally advanced or metastatic NSCLC. Interim data conducted on a small number of patients showed encouraging response rates with the combination of carboplatin, pemetrexed and bavituximab. Patient enrollment is complete and additional data is expected during fiscal year 2015.



Bavituximab in HER2-negative Metastatic Breast Cancer (MBC)

This investigator-sponsored Phase I trial was designed to assess bavituximab combined with paclitaxel in up to 14 patients with HER2-negative metastatic breast cancer. Interim data presented at ASCO in June 2013, reported that, from 13 evaluable patients, 85% of patients achieved an objective tumor response, including 15% of patients achieving a complete response measured in accordance with RECIST criteria. Patient enrollment is complete and final data from this study is anticipated during fiscal year 2015.



Bavituximab in Advanced Liver Cancer

This ongoing investigator-sponsored Phase I/II trial is designed to assess bavituximab combined with sorafenib in up to 48 patients with advanced liver cancer ("hepatocellular carcinoma" or "HCC"). Data presented at AACR in April 2012 showed that of the nine patients enrolled in the Phase I portion of the study, no dose-limiting toxicities or serious adverse events were observed and the trial is currently enrolling the Phase II part of the study. 43



Bavituximab in Rectal Adenocarcinoma

This ongoing investigator-sponsored Phase I trial is designed to assess bavituximab in combination with capecitabine and radiation therapy in up to 18 patients with Stage II or III rectal adenocarcinoma. The primary endpoint is to determine the safety, feasibility and tolerability with a standard platform of capecitabine and radiation therapy. Secondary endpoints include overall response rate and histopathological response in patients. This trial continues to enroll and dose patients.



Bavituximab in Advanced Melanoma

In April 2014, we announced the opening of an investigator-sponsored Phase Ib trial designed to assess bavituximab in combination with ipilimumab in up to 24 patients with advanced melanoma. The primary endpoint is to determine safety, feasibility and tolerability. Secondary endpoints include measurements of disease control rate and overall survival. This trial is open for enrollment.



PS-Targeting Molecular Imaging Program (PGN650)

In addition to the potential for our PS-targeting antibodies to treat cancer, we believe these antibodies may have broad potential for the imaging and diagnosis of multiple diseases, including cancer. PS-targeting antibodies are able to target diseases that present PS on the surface of distressed cells, which we believe is present in multiple disease settings. In oncology, PS is a molecule usually located inside the membrane of healthy cells, but "flips" and becomes exposed on the outside of cells in the tumor microenvironment, creating a specific target for the imaging of multiple solid tumor types. Our initial clinical candidate is PGN650, a first-in-class PS-targeting F(ab')2 fully human monoclonal antibody fragment joined to the positron emission tomography ("PET") imaging radio-isotope iodine-124 that represents a potential new approach to imaging cancer. In preclinical studies, PGN650 accumulates in tumors and provides exceedingly clear in vivo tumor images. The initial goal for the PGN650 program is to further validate the broad nature of the PS-targeting platform in the clinic. Our current PGN650 clinical trial evaluating PGN650 imaging in multiple solid tumor types in up to 12 patients was filed under an exploratory IND with the FDA. The primary goal of the trial is to estimate radiation dosimetry in critical and non-critical organs and secondary trial objectives include tumor imaging and safety. Results from this study may open the door for multiple applications including the development of antibody drug conjugates, the use of PGN650 to monitor the effectiveness of current standard cancer treatments, and the ability to potentially select patients that may benefit from bavituximab-based treatment. Patients receive an imaging dose followed by three PET images. Successful results from this trial could support several promising new areas of research in the imaging and diagnostic fields. This trial continues to enroll and dose patients.



Integrated Biomanufacturing Subsidiary

In addition to our clinical research and development efforts, we operate a wholly-owned (current Good Manufacturing Practices ("cGMP")) contract manufacturing subsidiary, Avid Bioservices, Inc. ("Avid"). Avid is a Contract Manufacturing Organization that provides fully integrated services from cell line development to commercial cGMP biomanufacturing for us and its third-party clients. In addition to generating revenue from providing a broad range of biomanufacturing services to third-party clients, Avid is strategically integrated with us to manufacture all clinical products to support our company-sponsored and investigator-sponsored clinical trials while also preparing for potential commercial launch of bavituximab. 44 Results of Operations

The following table compares the consolidated statements of operations and comprehensive loss for the fiscal years ended April 30, 2014, 2013 and 2012. This table provides you with an overview of the changes in the statements of operations and comprehensive loss for the comparative periods, which are further discussed below. Years Ended April 30, Years Ended April 30, 2014 2013 $ Change 2013 2012 $ Change REVENUES: Contract manufacturing $ 22,294,000$ 21,333,000



$ 961,000$ 21,333,000$ 14,783,000$ 6,550,000 License revenue

107,000 350,000 (243,000 ) 350,000 450,000 (100,000 ) Total revenues 22,401,000 21,683,000 718,000 21,683,000 15,233,000 6,450,000 COST AND EXPENSES: Cost of contract manufacturing 13,110,000 12,595,000



515,000 12,595,000 10,153,000 2,442,000 Research and development

27,723,000 24,306,000



3,417,000 24,306,000 35,688,000 (11,382,000 ) Selling, general and administrative 17,274,000 13,134,000

4,140,000 13,134,000 11,462,000 1,672,000 Total cost and expenses 58,107,000 50,035,000 8,072,000 50,035,000 57,303,000 (7,268,000 )

LOSS FROM OPERATIONS (35,706,000 ) (28,352,000 )



(7,354,000 ) (28,352,000 ) (42,070,000 ) 13,718,000

OTHER INCOME (EXPENSE): Interest and other income 349,000 322,000 27,000 322,000 41,000 281,000 Interest and other expense (5,000 ) (54,000 ) 49,000 (54,000 ) (90,000 ) 36,000 Loss on early extinguishment of debt - (1,696,000 )

1,696,000 (1,696,000 ) - (1,696,000 ) NET LOSS $ (35,362,000 )$ (29,780,000 )$ (5,582,000 )$ (29,780,000 )$ (42,119,000 )$ 12,339,000

COMPREHENSIVE LOSS $ (35,362,000 )$ (29,780,000 )

$ (5,582,000 )$ (29,780,000 )$ (42,119,000 )$ 12,339,000



Contract Manufacturing Revenue

Year Ended April 30, 2014 Compared to the Year Ended April 30, 2013:

Contract manufacturing revenue is derived from our wholly owned subsidiary, Avid . The increase in contract manufacturing revenue of $961,000 (or 5%) during the year ended April 30, 2014 compared to prior year is primarily due to an increase in process development related services combined with an increase in pricing associated with manufacturing runs. Based on the current commitments for manufacturing services from Avid's third-party customers and the anticipated completion of in-process third-party customer manufacturing runs, we expect contract manufacturing revenue for fiscal year 2015 to be in-line with fiscal year 2014.



Year Ended April 30, 2013 Compared to the Year Ended April 30, 2012:

The increase in contract manufacturing revenue of $6,550,000 (or 44%) during the year ended April 30, 2013 compared to fiscal year 2012 was primarily due to an increase in the number of completed manufacturing runs in the year ended April 30, 2013 compared to fiscal year 2012, which can be attributed to an increase in demand for manufacturing services. 45 License Revenue



Years Ended April 30, 2014 and 2013 Compared to the Years Ended April 30, 2013 and 2012:

The changes in license revenue in fiscal years 2014 and 2013 compared to fiscal years 2013 and 2012, respectively, were directly related to revenue recognized in accordance with the terms of our existing license agreements. Based on our existing license agreements, we do not expect license revenue to be a significant source of revenue in fiscal year 2015.



Cost of Contract Manufacturing

Year Ended April 30, 2014 Compared to the Year Ended April 30, 2013:

The increase in cost of contract manufacturing of $515,000 (or 4%) during the year ended April 30, 2014 compared to prior year was directly related to the current year increase in contract manufacturing revenue. In addition, our gross margin on contract manufacturing revenue for the years ended April 30, 2014 and 2013 remained consistent during each of the fiscal years at 41%.



Year Ended April 30, 2013 Compared to the Year Ended April 30, 2012:

The increase in cost of contract manufacturing of $2,442,000 (or 24%) during the year ended April 30, 2013 compared to fiscal year 2012 was primarily due to the fiscal year 2013 increase in contract manufacturing revenue. In addition, we saw an improvement in our gross margins, which increased from 31% in fiscal year 2012 to 41% in fiscal year 2013. This improvement was primarily attributed to the increase in the number of completed manufacturing runs in fiscal year 2013 compared to fiscal year 2012 and the higher gross margins associated with these services.



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. For the years ended April 30, 2014, 2013 and 2012, approximately 94%, 86% and 90%, respectively, of our total research and development expenses related to our PS-Targeting platform, which includes our lead immunotherapy candidate, bavituximab, and our lead molecular imaging agent, PGN650. The remainder of our research and development expenses during the years ended April 30, 2014, 2013 and 2012 was primarily attributable to our novel brain cancer therapy Cotara, for which we are currently seeking a partner in order to further advance this program.



Year Ended April 30, 2014 Compared to the Year Ended April 30, 2013:

The increase in research and development expenses of $3,417,000 (or 14%) during the year ended April 30, 2014 compared to the prior year was due to the following changes associated with each of the following technologies under development: 46 Research and Development Expenses - Fiscal Year Ended April 30, 2014 2013 $ Change Technology Platform: PS-Targeting $ 26,117,000$ 20,984,000$ 5,133,000 Cotara 1,606,000 3,322,000 (1,716,000 )

Total Research and Development Expenses $ 27,723,000$ 24,306,000

$ 3,417,000



o PS-Targeting - The increase in PS-targeting program expenses of $5,133,000

during the year ended April 30, 2014 compared to the prior year was primarily

attributed to increases in third-party vendor costs associated with the

preparation and initiation of our Phase III SUNRISE trial, which was initiated

during December 2013, combined with an increase in share-based compensation

expense and increases in payroll and related expenses and manufacturing costs

associated with our lead PS-targeting molecular imaging agent, PGN650. These

increases in PS-targeting program expenses were offset by decreases in

third-party costs associated with previously completed Phase II bavituximab

trials.



o Cotara - The decrease in Cotara related expenses of $1,716,000 during the year

ended April 30, 2014 compared to the prior year was primarily attributed to

decreases in payroll and related expenses, manufacturing costs and technology

license fees as our current year research and development efforts were primarily focused on initiating our Phase III SUNRISE trial. Further development of Cotara is dependent on our finding a partner. Based on our current projections, we expect research and development expenses in fiscal year 2015 to increase in comparison to fiscal year 2014 as we advance our Phase III SUNRISE trial and continue to evaluate bavituximab's broad potential in the treatment and diagnosis of cancer in other indications and combinations. These projections include a number of uncertainties, including but not limited to (i) the uncertainty of the rate at which patients will be enrolled in any current or future clinical trials, including, our Phase III SUNRISE trial, (ii) the uncertainty of future clinical and preclinical studies, which are dependent upon the results of current clinical and preclinical studies, (iii) the uncertainty of obtaining regulatory approval to advance our current exploratory IND clinical program to Phase I or to commence any future trials, and (iv) the uncertainty of terms related to any potential future partnering or licensing arrangement. During fiscal year 2015, we expect to continue to direct the majority of our research and development expenses towards our PS-targeting technology platform as we are seeking potential partners to further advance

the Cotara clinical program.



Year Ended April 30, 2013 Compared to the Year Ended April 30, 2012:

The decrease in research and development expenses of $11,382,000 (or 32%) during the year ended April 30, 2013 compared to fiscal year 2012 was due to the following changes associated with each of the following technologies under development: Research and Development Expenses - Fiscal Year Ended April 30, 2013 2012 $ Change Technology Platform: PS-Targeting $ 20,984,000$ 32,009,000$ (11,025,000 ) Cotara 3,322,000 3,679,000 (357,000 )



Total Research and Development

Expenses $ 24,306,000$ 35,688,000$ (11,382,000 ) 47



o PS-Targeting - The decrease in PS-targeting program expenses of $11,025,000

during the year ended April 30, 2013 compared to fiscal year 2012 was primarily

due to decreases in third-party vendor costs regarding our three separate

company-sponsored Phase II bavituximab trials in oncology. In addition, the

fiscal year 2013 decrease was supplemented with a decrease in third-party

vendor costs associated with a prior completed Phase II bavituximab trial using

bavituximab for the treatment of patients with previously untreated genotype-1

hepatitis C virus (HCV) infection that completed enrollment in September 2011.

These decreases in clinical trial expenses were further supplemented with a

decrease in manufacturing costs incurred in fiscal year 2013 associated with

preparing bavituximab for potential later-stage clinical trials combined with a

decrease in sponsored research fees associated with our preclinical anti-viral

program. These decreases in PS-targeting program expenses were offset by

increases in payroll and related expenses associated with our lead PS-targeting

molecular imaging agent, PGN650, combined with an increase in share-based

compensation expense.

o Cotara - The decrease in Cotara related expense of $357,000 during the year

ended April 30, 2013, compared to fiscal year 2012 was primarily due to a

decrease in third-party vendor costs associated with our Phase II trial for the

treatment of recurrent glioblastoma multiforme ("GBM" or brain cancer), which

trial completed patient enrollment during fiscal year 2011 combined with the

fiscal year 2013 decrease in payroll and related expenses as our in-house

development efforts were focused primarily on our PS-targeting program. These

decreases in Cotara related expenses were offset by an increase in

manufacturing costs associated with preparing Cotara for potential later-stage

clinical trials for the treatment of GBM.

Looking beyond the next twelve months, we expect to continue to direct the majority of our research and development expenses towards our PS-targeting technology platform although it is extremely difficult for us to reasonably estimate all future research and development costs associated with each of our technologies due to the number of unknowns and uncertainties associated with preclinical and clinical trial development. These unknown variables and uncertainties include, but are not limited to:



the uncertainty of the progress and results of our ongoing preclinical and

clinical studies, and any additional preclinical and clinical studies we may

initiate in the future based on their results;

the uncertainty of the ultimate number of patients to be treated in any current

or future clinical study;

the uncertainty of the FDA allowing our non-lead indication oncology studies to

move forward from Phase I clinical studies to Phase II clinical studies or

Phase II clinical studies to Phase III clinical studies;

the uncertainty of the FDA allowing our lead molecular imaging agent, PGN650,

to move forward from an exploratory study to a Phase I or Phase II clinical

study;

the uncertainty of the rate at which patients are enrolled into any current or

future study. Any delays in clinical trials could significantly increase the

cost of the study and would extend the estimated completion dates;

the uncertainty of terms related to potential future partnering or licensing

arrangements;

the uncertainty of protocol changes and modifications in the design of our

clinical trial studies, which may increase or decrease our future costs; and

the uncertainty of our ability to raise additional capital to support our

future research and development efforts beyond the next twelve months. 48



Selling, General and Administrative Expenses

Year Ended April 30, 2014 Compared to the Year Ended April 30, 2013:

Selling, general and administrative ("SG&A") expenses consist primarily of payroll and related expenses, including share-based compensation expense, for personnel in executive, finance, accounting, business development, legal, human resources and other internal support functions. In addition, SG&A expenses include legal fees, audit and accounting fees, patent fees, investor relation expenses, director fees, insurance expense, and other expenses relating to the general management, administration, and business development activities of

the Company.

The increase in SG&A expenses of $4,140,000 (or 32%) during the year ended April 30, 2014 compared to the prior year was primarily due to increases in share-based compensation expense of $1,635,000 (non-cash), payroll and related expenses of $1,305,000, and legal fees of $649,000. The increase in share-based compensation expense (non-cash) was primarily related to the amortization of the fair value of stock options under a non-routine broad based grant during December 2012 and a routine annual broad based grant during May 2013. The increase in payroll and related expenses is primarily attributed to compensation increases associated with annual employee merit increases, bonuses, and increased employee headcount combined with an increase in severance expense associated with a former employee. The increase in legal fees is primarily attributable to general corporate legal matters combined with an increase in legal fees associated with certain lawsuits described in this Annual Report under Part I, Item 4, "Legal Proceedings." These increases in SG&A expenses were further supplemented with incremental current year increases in non-employee director fees, travel and related expenses, insurance expense and other corporate related expenses. We expect SG&A expenses in fiscal year 2015 to increase in comparison to fiscal year 2014 as we continue to increase our infrastructure to support our clinical development activities and our commercial manufacturing business.



Year Ended April 30, 2013 Compared to the Year Ended April 30, 2012:

The increase in SG&A expenses of $1,672,000 (or 15%) during the year ended April 30, 2013 compared to fiscal year 2012 was primarily due to increases in payroll and related expenses and legal fees of $957,000 and $330,000, respectively. The increase in payroll and related expenses was attributed to increases in compensation and other employee-related benefits and the increase in legal fees was primarily attributable to the lawsuits described in this Annual Report under Part I, Item 4, "Legal Proceedings." These increases in SG&A expenses were further supplemented with incremental fiscal year 2013 increases in audit and accounting fees, market research fees, business development related expenses, and other corporate related expenses. Interest and Other Income



Years Ended April 30, 2014 and 2013 Compared to the Years Ended April 30, 2013 and 2012:

The increases in interest and other income of $27,000 and $281,000 during the years ended April 30, 2014 and 2013, respectively, compared to fiscal year 2013 and 2012, respectively, was due to increases in interest income of $14,000 and $52,000, respectively, combined with increases in other income of $13,000 and $229,000, respectively.



Loss on Early Extinguishment of Debt

The loss on early extinguishment of debt of $1,696,000 in fiscal year 2013 is related to a term loan we entered into during August 2012 that was subsequently repaid in full and terminated in September 2012 under an event of default (as described in Note 3 to the accompanying audited consolidated financial statements). Upon the termination of the term loan during fiscal year 2013, we recorded a loss on the early extinguishment of debt of $1,696,000, which consisted of a final payment fee of $975,000, the unamortized debt discount associated with the fair value of the warrants issued to the lenders under the term loan of $470,000, and unamortized aggregate debt issuance costs of $251,000. We did not incur any such related losses during fiscal years 2014

and 2012. 49 Critical Accounting Policies Our discussion and analysis of our consolidated financial position and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We review our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate, and different assumptions or estimates about the future could change our reported results. We believe the following accounting policies to be critical to the assumptions and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition



We currently derive revenue from the following two sources: (i) contract manufacturing services provided by Avid, and (ii) licensing revenue related to agreements associated with our technologies under development.

We recognize revenue in accordance with the authoritative guidance for revenue recognition. We recognize revenue when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery (or passage of title) 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 deliverables.



Contract Manufacturing Revenue

Revenue associated with contract manufacturing services provided by Avid is recognized once the service has been rendered and/or upon shipment (or passage of title) of the product to the customer. On occasion, we recognize revenue on a "bill-and-hold" basis in accordance with the authoritative guidance. Under "bill-and-hold" arrangements, revenue is recognized once the product is complete and ready for shipment, title and risk of loss has passed to the customer, management receives a written request from the customer for "bill-and-hold" treatment, the product is segregated from other inventory, and no further performance obligations 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 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 in the accompanying consolidated financial statements. We also record a provision for estimated contract losses, if any, in the period in which they are determined. License Revenue Revenue associated with licensing agreements primarily consists of non-refundable upfront license fees, non-refundable annual license fees and milestone payments. Non-refundable upfront license fees received under license agreements, whereby continued performance or future obligations are considered inconsequential to the relevant license technology, are recognized as revenue upon delivery of the technology. If a licensing agreement has multiple elements, we analyze each element of our licensing agreements and consider a variety of factors in determining the appropriate method of revenue recognition of each element. 50 Multiple Element Arrangements. Prior to the adoption of Accounting Standards Update ("ASU") No. 2009-13 on May 1, 2011, if a license agreement has multiple element arrangements, we analyze and determine whether the deliverables, which often include performance obligations, can be separated or whether they must be accounted for as a single unit of accounting in accordance with the authoritative guidance. Under multiple element arrangements, we recognize revenue for delivered elements only when the delivered element has stand-alone value and we have objective and reliable evidence of fair value for each undelivered element. If the fair value of any undelivered element included in a multiple element arrangement cannot be objectively determined, the arrangement would then be accounted for as a single unit of accounting, and revenue is recognized over the estimated period of when the performance obligation(s)

are performed. In addition, under certain circumstances, when there is objective and reliable evidence of the fair value of the undelivered items in an arrangement, but no such evidence for the delivered items, we utilize the residual method to allocate the consideration received under the arrangement. Under the residual method, the amount of consideration allocated to delivered items equals the total arrangement consideration less the aggregate fair value of the undelivered items, and revenue is recognized upon delivery of the undelivered items based on the relative fair value of the undelivered items. For licensing agreements or material modifications of existing licensing agreements entered into after May 1, 2011, we follow the provisions of ASU No. 2009-13. If a licensing agreement includes multiple elements, we identify which deliverables represent separate units of accounting, and then determine how the arrangement consideration should be allocated among the separate units of accounting, which may require the use of significant judgment.



If a licensing agreement includes multiple elements, a delivered item is considered a separate unit of accounting if both of the following criteria are met:

1. The delivered item has value to the licensing partner on a standalone basis

based on the consideration of the relevant facts and circumstances for each

agreement; 2. If the arrangement includes a general right of return relative to the



delivered item, delivery or performance of the undelivered item is considered

probable and substantially in the Company's 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. Milestone Payments. Effective May 1, 2011, we adopted on a prospective basis the Milestone Method under ASU No. 2010-17 for new licensing agreements or material modifications of existing licensing agreements entered into after May 1, 2011. Under the Milestone Method, we recognize consideration that is contingent upon the achievement of a milestone in its entirety as revenue in the period in which the milestone is achieved only if the milestone is substantive in its entirety. A milestone is considered substantive when it meets all of the following criteria: 51 1. The consideration is commensurate with either the entity's performance to



achieve the milestone or the enhancement of the value of the delivered item(s)

as a result of a specific outcome resulting from the entity's performance to

achieve the milestone; 2. The consideration relates solely to past performance; and 3. The consideration is reasonable relative to all of the deliverables and payment terms within the arrangement. A milestone is defined as an event (i) that can only be achieved based in whole or in part on either the entity's performance or on the occurrence of a specific outcome resulting from the entity's performance, (ii) for which there is substantive uncertainty at the date the arrangement is entered into that the event will be achieved and (iii) that would result in additional payments being due to the Company.

The provisions of ASU No. 2010-17 do not apply to contingent consideration for which payment is either contingent solely upon the passage of time or the result of a counterparty's performance. We will assess the nature of, and appropriate accounting for, these payments on a case-by-case basis in accordance with the applicable authoritative guidance for revenue recognition.



Any milestone payments received prior to satisfying these revenue recognition criteria were recorded as deferred revenue in the accompanying consolidated financial statements.

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 are a significant component of our research and development expenses. We have a history of contracting with third parties that perform various clinical trial activities on our behalf in the ongoing development of our product candidates. 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 consolidated financial statements in any of the three years ended April 30, 2014. 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 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 (as described in Note 5 to the accompanying audited consolidated financial statements). These milestone payments have no alternative future uses (in other research and development projects or otherwise) and therefore have no separate economic values 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.

52 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, and is recognized as expense on a straight-line basis over the requisite service periods. Share-based compensation expense recognized during the period is based on the value of the portion of the share-based payment that is ultimately expected to vest during the period. Share-based compensation expense for a share-based payment with a performance condition is recognized on a straight-line basis over the requisite service period when the achievement of the performance condition is determined to be probable. If a performance condition is not determined to be probable or is not met, no share-based compensation is recognized and any previously recognized compensation expense is reversed. The fair value of each option grant is estimated using the Black-Scholes option valuation model and is amortized as compensation expense on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The use of a valuation model requires us to make certain estimates and assumptions with respect to selected model inputs. The expected volatility is based on the daily historical volatility of our common stock covering the estimated expected term. The expected term of options granted reflects actual historical exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options. The risk-free interest rate is based on U.S. Treasury notes with terms within the contractual life of the option at the time of grant. The expected dividend yield assumption is based on our expectation of future dividend payouts. We have never declared or paid any cash dividends on our common stock and currently do not anticipate paying such cash dividends. In addition, guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. If factors change and we employ different assumptions in the determination of fair value in future periods, the share-based compensation expense that we record may differ significantly from what we have recorded in the current period. There are a number of factors that affect the amount of share-based compensation expense, including the number of employee options granted during subsequent fiscal years, the price of our common stock on the date of grant, the volatility of our stock price, the estimate of the expected life of options granted and the risk-free interest rates. In addition, we periodically grant stock options and other share-based awards to non-employee consultants, which we account for in accordance with the authoritative guidance for share-based compensation. The cost of non-employee services received in exchange for share-based awards are measured based on either the fair value of the consideration received or the fair value of the share-based award issued, whichever is more reliably measurable. In addition, guidance requires share-based compensation related to unvested options and awards issued to non-employees to be recalculated at the end of each reporting period based upon the fair market value on that date until the share-based award has vested, and any cumulative catch-up adjustment to share-based compensation resulting from the re-measurement is recognized in the current period.



Liquidity and Capital Resources

At April 30, 2014, we had $77,490,000 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 negative cash flows from operations since our inception and we expect negative cash flows from operations to continue in the foreseeable future. Our net losses incurred during the past three fiscal years ended April 30, 2014, 2013 and 2012, amounted to $35,362,000, $29,780,000, and $42,119,000, respectively. Therefore, unless and until we are able to generate sufficient revenues from Avid's contract manufacturing services and/or from the sale and/or licensing of our product candidates under development, we expect such losses to continue in the foreseeable future. 53 Therefore, our ability to continue to fund our operations, including our SUNRISE trial, 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, raising additional capital in the equity markets, securing debt financing, licensing or partnering our product candidates in development, or generating additional revenue from Avid. Historically, we have funded a significant portion of our operations through the issuance of equity. During fiscal year 2014, we raised $55,424,000 in aggregate gross proceeds from the sale of shares of our common stock under an At Market Sales Issuance Agreement (as described in Note 6 to the accompanying audited consolidated financial statements) and we raised an additional $19,375,000 in aggregate gross proceeds in connection with a firm commitment underwritten public offering of our newly designated 10.50% Series E Convertible Preferred Stock (the "Series E Preferred Stock") (as described in Note 6 to the accompanying audited consolidated financial statements). In addition, on June 13, 2014, we entered into two separate At Market Issuance Sales Agreements (as described in Note 13 to the accompanying audited consolidated financial statements), pursuant to which we may issue and sell shares of our Series E Preferred Stock for aggregate gross proceeds of up to $30,000,000 (the "Series E AMI Agreement") and may issue and sell shares of our common stock for aggregate gross proceeds of up to $25,000,000 (the "June 2014 AMI Agreement"). Subsequent to June 13, 2014 and through July 14, 2014, we raised an additional $10,000,000 in aggregate gross proceeds under the Series E AMI Agreement. With these additional proceeds raised, we currently estimate that we have sufficient cash resources to meet our anticipated cash needs to fund our operations through at least the next twelve months based on our current projections, which include projected costs associated with our Phase III SUNRISE trial, projected cash outflows for the payment of dividends on our Series E Preferred Stock, projected cash inflows under signed contracts with existing customers of Avid and assuming we raise no additional capital from the capital markets or other potential sources. While we will continue to explore various ways to fund our operations, we may not be successful in (i) raising additional capital in the equity markets, (ii) securing debt financing, (iii) licensing or partnering our products in development, or (iv) generating additional revenue from Avid, to complete the research, development, and clinical testing of our product candidates, including the SUNRISE trial. Significant components of the changes in cash flows from operating, investing and financing activities for the year ended April 30, 2014 compared to the

prior year are as follows: Cash Used In Operating Activities. Net cash used in operating activities represents our (i) net loss, as reported, (ii) less non-cash operating expenses, and (iii) net changes in the timing of cash flows as reflected by the changes in operating assets and liabilities, as described in the below table: 54 Year Ended April 30, 2014 2013 Net loss, as reported $ (35,362,000 )$ (29,780,000 ) Less non-cash operating expenses: Share-based compensation 6,207,000



3,435,000

Depreciation and amortization 986,000



1,087,000

Loss on early extinguishment of debt -



1,696,000

Loss on disposal of property and equipment 4,000



8,000

Net cash used in operating activities before changes in operating assets and liabilities

$ (28,165,000 )$ (23,554,000 ) Net change in operating assets and liabilities $ (89,000 )$ 2,628,000 Net cash used in operating activities $ (28,254,000 )

$ (20,926,000 )

Net cash used in operating activities for the year ended April 30, 2014 was $28,254,000 compared to $20,926,000 for the year ended April 30, 2013, representing an increase of $7,328,000. This increase in net cash used in operating activities was due to an increase of $4,611,000 in net loss reported for fiscal year 2014 after deducting non-cash operating expenses combined with a net change in operating assets and liabilities of $2,717,000. The increase in our fiscal year net loss was primarily due to current year increases in research and development expenses, selling, general and administrative expenses and cost of contract manufacturing, offset by an increase in total revenues and a decrease in loss on early extinguishment of debt. The net change in operating assets and liabilities between fiscal year 2014 and fiscal year 2013 was primarily due to decreases in customer deposits and accrued payroll combined with increase in prepaid expenses and other current assets, which were primarily offset by an increase in accrued clinical trial and related fees. Cash Used In Investing Activities. Net cash used in investing activities for the year ended April 30, 2014 was $2,522,000 compared to $751,000 for the year ended April 30, 2013, representing an increase of $1,771,000. The current year increase was primarily related to current year deposits and progress payments related to information technology improvements and certain additional laboratory equipment to support internal product development efforts and business opportunities at Avid. Cash Provided By Financing Activities. Net cash provided by financing activities increased $34,214,000 to $73,062,000 for the year ended April 30, 2014 compared to net cash provided by financing activities of $38,848,000 for the year ended April 30, 2013. Net cash provided by financing activities during fiscal year 2014 consisted of (i) $53,920,000 in net proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement, (ii) $17,917,000 in net proceeds in connection with an underwritten public offering of our Series E Preferred Stock at a public offering price of $25.00 per share, (iii) $944,000 in net proceeds from stock option exercises, and (iv) $545,000 in net proceeds from the purchase of shares of our common stock under our Employee Stock Purchase Plan, which amounts were offset by dividends paid on our Series E Preferred of $232,000 and principal payments on capital leases of $32,000. Net cash provided by financing activities during fiscal year 2013 consisted of $39,522,000 in net proceeds from the sale of shares of our common stock under two separate At Market Issuance Sales Agreements combined with $534,000 in net proceeds from the purchase of shares of our common stock from the purchase of shares under our Employee Stock Purchase Plan and $96,000 in net proceeds from the exercise of stock options, which amounts were offset with principal payments on capital leases of $78,000. In addition, during fiscal year 2013, we received gross proceeds of $15,000,000 under a term loan, excluding debt issuance costs of $251,000, which principal amount was subsequently repaid in full during fiscal year 2013 upon the termination of the term loan agreement (as described in Note 3 to the accompanying audited consolidated financial statements). In addition, we paid a final payment fee of $975,000 upon the termination of the term loan. 55 Contractual Obligations Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contingent liabilities for which we cannot reasonably predict future payments. The following chart represents our contractual obligations as of April 30, 2014, aggregated by type: Payments Due by Period Total < 1 year 2-3 years 4-5 years After 5 years

Operating leases, net (1) $ 3,956,000$ 1,079,000$ 2,147,000$ 730,000 $ - Capital lease obligation (2) 13,000 13,000 - - - Purchase obligation (3) 351,000 351,000 - - - Other long-term liabilities - minimum license obligations (4) 279,000 279,000 - - - Total contractual obligations $ 4,599,000$ 1,722,000$ 2,147,000$ 730,000 $ - ______________



(1) Represents our facility operating leases and various office equipment leases.

(2) Represents capital lease agreements to finance certain equipment. Amounts

include principal and interest.

(3) Represents remaining contractual obligation associated with the purchase of

certain laboratory equipment to support both Avid's business opportunities

and our internal product development efforts.

(4) Represents licensing agreements we periodically enter into with third parties

to obtain exclusive or non-exclusive licenses for certain technologies. The

terms of certain of these agreements require us to pay annual maintenance

fees and potential future milestone payments based on product development

success. Amounts exclude milestone or contractual payment obligations if the

amount and timing of such obligations are unknown or uncertain, which

potential obligations are further described in Note 5 to the accompanying

audited consolidated financial statements.



Off Balance Sheet Arrangements.

We do not have any off balance sheet arrangements, as defined in Item 303 of Regulation S-K.

Recently Issued Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies - Adoption of Recent Accounting Pronouncements and Pending Adoption of Recent Accounting Pronouncements, in the accompanying Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on our consolidated financial statements.


For more stories on investments and markets, please see HispanicBusiness' Finance Channel



Source: Edgar Glimpses


Story Tools






HispanicBusiness.com Facebook Linkedin Twitter RSS Feed Email Alerts & Newsletters