In June 2007, the FASB ratified EITF Issue No. 07-3 (“EITF No. 07-3”), Accounting for Non-Refundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities, which requires nonrefundable advance payments for goods and services that will be used or rendered for future research and development activities be deferred and capitalized.  These amounts will be recognized as expense in the period that the related goods are delivered or the related services are performed.  EITF No. 07-3 will be effective for fiscal years beginning after November 15, 2007, which we would be required to implement no later than May 1, 2008.  Our adoption of EITF No. 07-3 is not expected to have a material impact on our consolidated financial statements.

3.             STOCK-BASED COMPENSATION

We currently maintain four equity compensation plans referred to as the 1996 Plan, the 2002 Plan, the 2003 Plan, and the 2005 Plan (collectively referred to as the “Option Plans”).  The Option Plans provide for the granting of options to purchase shares of our common stock at exercise prices not less than the fair market value of our common stock at the date of grant.  The options generally vest over a four year period and no options are exercisable after ten years from the date of grant.

On May 1, 2006, we adopted Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”), Share-Based Payment (Revised 2004), which requires the recognition of compensation expense, using a fair value based method, for costs related to all share-based payments including grants of employee stock options.  In addition, SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model.  The value of the portion of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service periods (vesting period).  We adopted SFAS No. 123R using the modified-prospective method and, accordingly, stock-based compensation cost recognized beginning May 1, 2006 includes:  (i) compensation cost for all share-based payments granted prior to, but not yet vested as of May 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (ii) compensation cost for all share-based payments granted on or subsequent to May 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.

8

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PEREGRINE PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2007 (unaudited) (continued)

---

 

Our net loss for the three and six-month periods ended October 31, 2007 and 2006, increased as a result of the application of SFAS No. 123R, which costs are included in the accompanying condensed consolidated statements of operations as follows:

		Three Months Ended October 31,								Six Months Ended October 31,
		2007				2006				2007				2006
Research and development		$	140,000			$	177,000			$	269,000			$	343,000
Selling, general and administrative			58,000				133,000				112,000				266,000
Total		$	198,000			$	310,000			$	381,000			$	609,000

 

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 (typically 4 years).  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 stock covering the estimated expected term.  The expected term of options granted is based on the expected time to exercise using the “simplified” method allowable under the Security and Exchange Commission’s Staff Accounting Bulletin No. 107 (“SAB No. 107”).  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 cash dividends on our common stock and currently do not anticipate paying such cash dividends.  In addition, SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  The fair value of stock options on the date of grant and the weighted-average assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model during the periods presented, were as follows:

 

		Three Months Ended October 31,								Six Months Ended October 31,
		2007				2006				2007				2006
Risk-free interest rate			4.31%				4.88%				4.45%				4.94%
Expected life (in years)			6.25				6.25				6.10				6.25
Expected volatility			88%				99%				87%				100%
Expected dividend yield			-				-				-				-

As of October 31, 2007, options to purchase up to 11,913,145 shares of our common stock were issued and outstanding under the Option Plans with a weighted average exercise price of $1.49 per share, and will expire at various dates through October 30, 2017.  Options to purchase up to 4,154,990 shares of common stock were available for future grant under the Option Plans as of October 31, 2007.

 

9

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PEREGRINE PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2007 (unaudited) (continued)

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The following summarizes all stock option transaction activity for the six months ended October 31, 2007:

Stock Options		Shares				Weighted Average Exercisable Price				Weighted Average Remaining Contractual Term (years)				Aggregate Intrinsic Value
Outstanding, May 1, 2007			11,537,946			$	1.54
Granted			866,040			$	0.76
Exercised			(45,000	)		$	0.60
Canceled or expired			(445,841	)		$	1.42
Outstanding, October 31, 2007			11,913,145			$	1.49				5.57			$	312,000
Exercisable and expected to vest			11,676,834			$	1.49				5.51			$	312,000
Exercisable, October 31, 2007			9,445,048			$	1.58				4.85			$	311,000

 

The weighted-average grant date fair value of options granted during the six-month periods ended October 31, 2007 and 2006 was $0.58 per share and $1.15 per share, respectively.  The aggregate intrinsic value of options exercised during the six-month periods ended October 31, 2007 and 2006 was $19,000 and $23,000, respectively.

Cash proceeds from stock options exercised during the six-month periods ended October 31, 2007 and 2006 totaled $27,000 and $53,000, respectively.

We issue shares of common stock that are reserved for issuance under the Option Plans upon the exercise of stock options, and we do not expect to repurchase shares of common stock from any source to satisfy our obligations under our compensation plans.

As of October 31, 2007, the total estimated unrecognized compensation cost related to non-vested stock options was $1,777,000.  This cost is expected to be recognized over a weighted average vesting period of 2.86 years based on current assumptions.

Periodically, we grant stock options to non-employee consultants.  The fair value of options granted to non-employees are measured utilizing the Black-Scholes option valuation model and are amortized over the estimated period of service or related vesting period in accordance with EITF 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services.  Stock-based compensation expense recorded during the three and six months ended October 31, 2007 associated with non-employees amounted to ­­­­­­­nil and $14,000, respectively. Stock-based compensation expense recorded during the three and six months ended October 31, 2006 associated with non-employees amounted to $26,000 and $52,000, respectively.

4.             STOCKHOLDERS’ EQUITY

On October 22, 2007, the stockholders of the Company approved an increase in the number of authorized shares of common stock from 250,000,000 to 325,000,000.  In November, we filed an amendment to our Certificate of Incorporation with the Secretary of State of Delaware which effected the foregoing increase.

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PEREGRINE PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2007 (unaudited) (continued)

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On June 28, 2007, we entered into a Securities Purchase Agreement with several institutional investors whereby we sold 30,000,000 shares of our common stock in exchange for gross proceeds of $22,500,000.  After deducting placement agent fees, legal fees and other costs associated with the offering, we received net proceeds of $20,859,000.  The shares of common stock were issued from our shelf registration statement on Form S-3, File Number 333-139975 (“January 2007 Shelf”), which allows us to issue, in one or more offerings, shares of common stock for proceeds up to $30,000,000.  As of October 31, 2007, we could raise up to $7,500,000 in remaining gross proceeds under the January 2007 Shelf.

In addition, as of October 31, 2007, an aggregate of 5,030,634 shares of common stock were available for issuance under two separate effective shelf registration statements.

As of October 31, 2007, we have reserved 21,458,769 additional shares of our common stock which may be issued under our shelf registration statements, stock option plans and outstanding warrants, excluding shares of common stock that could potentially be issued under the January 2007 Shelf, as further described in the following table:

 

	Number of Shares Reserved
Shares of common stock reserved for issuance under two registration statements	5,030,634
Shares of common stock reserved for issuance upon exercise of outstanding options	11,913,145
Shares of common stock reserved for future option grants under our Option Plans	4,154,990
Shares of common stock reserved for issuance under outstanding warrant arrangements	360,000
Total shares of common stock reserved for issuance	21,458,769

5.            WARRANTS

During the six months ended October 31, 2007, warrants to purchase 53,416 shares of our common stock were exercised for net proceeds of $46,000.  As of October 31, 2007, warrants to purchase up to 360,000 shares of our common stock were issued and outstanding at a weighted average exercise price of $1.50 per share and will expire in March 2008 if unexercised.

6.            SEGMENT REPORTING

Our business is organized into two reportable operating segments.  Peregrine is engaged in the research and development of targeted products for the treatment of cancer and viral infections using monoclonal antibodies.  Avid is engaged in providing contract manufacturing services for Peregrine and outside customers on a fee-for-service basis.

The accounting policies of the operating segments are the same as those described in Notes 1 and 2.  We primarily evaluate the performance of our segments based on net revenues, gross profit or loss (exclusive of research and development expenses, selling, general and administrative expenses, and interest and other income/expense) and long-lived assets.  Our segment net revenues shown below are derived from transactions with external customers.  Our segment gross profit or loss represents net revenues less the cost of sales.  Our long-lived assets consist of leasehold improvements, laboratory equipment, and furniture, fixtures and computer equipment and are net of accumulated depreciation.

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PEREGRINE PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2007 (unaudited) (continued)

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Segment information for the three-month periods is summarized as follows:

		Three Months Ended October 31,
		2007				2006
Net Revenues:
Contract manufacturing and development of biologics		$	1,863,000			$	636,000
Products in research and development			29,000				48,000
Total revenues, net		$	1,892,000			$	684,000
Gross Profit:
Contract manufacturing and development of biologics		$	461,000			$	142,000
Products in research and development			29,000				48,000
Total gross profit			490,000				190,000
Research and development expense			(5,100,000	)			(3,920,000	)
Selling, general and administrative expense			(1,943,000	)			(1,670,000	)
Other income, net			346,000				330,000
Net loss		$	(6,207,000	)		$	(5,070,000	)

 

Net revenues generated from Avid for the three-month periods were from the following customers:

		Three Months Ended October 31,
		2007				2006
Customer revenues as a % of net revenues:
United States (customer A)			89%				6%
United States (customer B)			0%				17%
Australia (one customer)			3%				19%
China (one customer)			0%				55%
Other customers			8%				3%
Total customer revenues as a % of net revenues			100%				100%

 

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PEREGRINE PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2007 (unaudited) (continued)

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Segment information for the six-month periods is summarized as follows:

		Six Months Ended October 31,
		2007				2006
Net Revenues:
Contract manufacturing and development of biologics		$	3,484,000			$	1,034,000
Products in research and development			33,000				71,000
Total revenues, net		$	3,517,000			$	1,105,000
Gross Profit:
Contract manufacturing and development of biologics		$	901,000			$	10,000
Products in research and development			33,000				71,000
Total gross profit			934,000				81,000
Research and development expense			(8,724,000	)			(7,961,000	)
Selling, general and administrative expense			(3,651,000	)			(3,311,000	)
Other income, net			578,000				664,000
Net loss		$	(10,863,000	)		$	(10,527,000	)

Net revenues generated from Avid for the six-month periods were from the following customers:

		Six Months Ended October 31,
		2007				2006
Customer revenues as a % of net revenues:
United States (customer A)			84%				4%
United States (customer B)			4%				11%
Australia (one customer)			1%				48%
China (one customer)			0%				34%
Other customers			11%				3%
Total customer revenues as a % of net revenues			100%				100%

Net revenues generated from products in research and development during the three and six months ended October 31, 2007 were from an annual license fee and the amortized portion of the up-front license fee received under the August 2005 license agreement with Medarex, Inc.  In September 2007, Medarex terminated the August 2005 license agreement and discontinued its internal research program covering our intellectual property under the agreement.  Net revenues generated from products in research and development during the three and six months ended October 31, 2006 were from the amortized portion of the up-front license fees received under the December 2002 license agreement with Schering A.G and the August 2005 license agreement with Medarex, Inc., combined with an annual license fee received under the August 2005 license agreement with Medarex, Inc.

 

13

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PEREGRINE PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED OCTOBER 31, 2007 (unaudited) (continued)

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Long-lived assets by segment consist of the following:

		October 31, 2007				April 30, 2007
Long-lived Assets, net:
Contract manufacturing and development of biologics		$	1,501,000			$	1,527,000
Products in research and development			300,000				313,000
Total long-lived assets, net		$	1,801,000			$	1,840,000

                7.            LITIGATION

 

In the ordinary course of business, we are at times subject to various legal proceedings and disputes.  Although we currently are not aware of any such legal proceedings or claim that we believe will have, individually or in the aggregate, a material adverse effect on our business, operating results or cash flows, we did file or are involved with a lawsuit against Cancer Therapeutics Laboratories (“CTL”).  The lawsuit alleges that CTL has breached various agreements with the Company by (i) failing to pay to the Company its contractual share of the proceeds received by CTL when it formed a joint venture with a company in China involving the Company’s technology that had been licensed to CTL pursuant to an earlier agreement (the “Agreement”), (ii) failing to procure a sublicense with the company in China prior to transferring the Company’s technology to such company in China, and (iii) failing to provide the Company with access to CTL’s books and records, as required by the Agreement.  Based on early discovery, we amended the complaint on May 4, 2007 to include claims against Shanghai MediPharm and its related entities, and Alan Epstein, M.D alleging that these defendants collaborated to interfere with the Agreement by entering into an economic relationship between themselves and designed not to share profits and know-how with the Company in violation of the Agreement, including proprietary technologies that they developed and are required to share with the Company.  The Company is seeking unspecified damages and declaratory relief with respect to the termination of the Agreement with CTL, the exclusion of certain technology from the Agreement, and an accounting of all monies, data and other items that should have been paid or given to the Company under the Agreement.

On March 28, 2007, CTL filed a cross-complaint, which they amended on May 30, 2007, alleging that the Company breached the Agreement, improperly terminated the Agreement, is interfering with CTL’s agreements with various MediPharm entities and is double-licensing the technology licensed to CTL to another party.  CTL’s cross-complaint, which seeks $20 million in damages, is in part predicated on the existence of a sublicense agreement between CTL and MediPharm.  While we are objecting to the cross-complaint on several grounds, we are challenging the cross-complaint on the basis that not only did CTL fail to allege an agreement with which the Company interfered, they have been unable to produce the alleged sublicense agreement with MediPharm despite our repeated demands.

The discovery phase on the aforementioned cases is ongoing.  Until we complete the initial discovery phase and our objections are considered, we cannot estimate the magnitude of the claims of the parties against each other or probable outcome of the litigation.

 

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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which represent our projections, estimates, expectations or beliefs concerning among other things, financial items that relate to management’s future plans or objectives or to our future economic and financial performance.  In some cases, you can identify these statements by terminology such as “may”, “should”, “plans”, “believe”, “will”, “anticipate”, “estimate”, “expect” “project”, or “intend”, including their opposites or similar phrases or expressions.  You should be aware that these statements are projections or estimates as to future events and are subject to a number of factors that may tend to influence the accuracy of the statements.  These forward-looking statements should not be regarded as a representation by the Company or any other person that the events or plans of the Company will be achieved.  You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report.  We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports we file from time to time with the Securities and Exchange Commission (“SEC”) after the date of this Quarterly Report. Actual results may differ materially from any forward looking statement.

Company Overview

We are a biopharmaceutical company developing a portfolio of clinical stage and pre-clinical product candidates using monoclonal antibodies (“MAb”) for the treatment of cancer and viral diseases.  We are advancing three separate clinical programs encompassing two platform technologies: Anti-PhosphatidylSerine (“Anti-PS”) Immunotherapeutics and Tumor Necrosis Therapy (“TNT”).  Our lead Anti-PS product, bavituximab, is in separate clinical trials for the treatment of solid cancers and hepatitis C virus (“HCV”) infection.  Under our TNT technology platform, our lead candidate, Cotara®, is advancing through two clinical studies for the treatment of brain cancer.

The following represents a summary of our clinical trials and the status of each clinical trial:

Product	Indication	Trial Design	Status
Bavituximab	Solid tumors	Phase I repeat dose monotherapy safety study to treat up to 28 patients.	Study is open for enrollment in the U.S.
Bavituximab plus chemotherapy agent docetaxel	Metastatic breast cancer	Phase II combination therapy study to treat up  to 46 patients.	Clinical protocol approved by regulatory authorities in the Republic of Georgia.  Patient enrollment is expected to initiate by early 2008.
Bavituximab plus chemotherapy agents carboplatin/paclitaxel	Metastatic breast cancer	Phase II combination therapy study to treat up to 46 patients.	Clinical protocol submitted with the regulatory authorities in India. We are awaiting regulatory clearance to initiate the clinical trial.
Bavituximab plus chemotherapy agents carboplatin/paclitaxel	Non-small cell lung cancer (NSCLC)	Phase II combination therapy study to treat up to 49 patients.	Clinical protocol submitted with the regulatory authorities in India. We are awaiting regulatory clearance to initiate the clinical trial.
Cotara®	Brain cancer (glioblastoma multiforme or GBM)	Dosimetry and dose confirmation study designed to treat up to 12 patients with recurrent GBM.	Study is open for enrollment in the U.S.
Cotara®	Brain cancer (glioblastoma multiforme or GBM)	Phase II safety and efficacy study to treat up to 40 patients at 1st relapse.	Study is open for enrollment in India.
Bavituximab	Chronic Hepatitis C Virus (“HCV”) infection (co-infected with HIV)	Phase Ib repeat dose safety study in 24 patients.	Study is open for enrollment in the U.S.

 

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In addition, Avid Bioservices, Inc. (“Avid”), our wholly owned subsidiary, is engaged in providing contract manufacturing services for Peregrine and outside customers on a fee-for-service basis.

Results of Operations

The following table compares the unaudited condensed consolidated statements of operations for the three and six-month periods ended October 31, 2007 and 2006.  This table provides you with an overview of the changes in the condensed consolidated statements of operations for the comparative periods, which are further discussed below.

 

		Three Months Ended October 31,												Six Months Ended October 31,
		2007				2006				$ Change				2007				2006				$ Change
		(in thousands)												(in thousands)
REVENUES:
Contract manufacturing revenue		$	1,863			$	636			$	1,227			$	3,484			$	1,034			$	2,450
License revenue			29				48				(19	)			33				71				(38	)
Total revenues			1,892				684				1,208				3,517				1,105				2,412
COST AND EXPENSES:
Cost of contract manufacturing			1,402				494				908				2,583				1,024				1,559
Research and development			5,100				3,920				1,180				8,724				7,961				763
Selling, general and administrative			1,943				1,670				273				3,651				3,311				340
Total cost and expenses			8,445				6,084				2,361				14,958				12,296				2,662
LOSS FROM OPERATIONS			(6,553	)			(5,400	)			(1,153	)			(11,441	)			(11,191	)			(250	)
OTHER INCOME (EXPENSE):
Interest and other income			353				339				14				592				688				(96	)
Interest and other expense			(7	)			(9	)			2				(14	)			(24	)			10
NET LOSS		$	(6,207	)		$	(5,070	)		$	(1,137	)		$	(10,863	)		$	(10,527	)		$	(336	)

 

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.

Total Revenues.

Three and Six Months:  The increases in total revenues of $1,208,000 and $2,412,000 during the three and six months ended October 31, 2007, respectively, compared to the same periods in the prior year were primarily due to an increases in contract manufacturing revenue of $1,227,000 and $2,450,000, respectively.  These increases in contract manufacturing revenue were due to an increase in services provided to unrelated entities on a fee-for-service basis associated with an increase in active projects including an increase in the number of completed manufacturing runs compared to the same three and six-month periods in the prior year.

We expect to continue to generate contract manufacturing revenue during the remainder of the current fiscal year based on the anticipated completion of in-process customer related projects and the anticipated demand for Avid’s services under outstanding proposals.  Avid is presently working on several active projects for existing clients and has submitted project proposals to various potential clients.  Since the timing to initiate and complete projects from existing clients and our ability to convert outstanding proposals into new contracts and new business is at the discretion of our clients or potential clients, we cannot reasonably estimate with a high degree of likelihood our revenues for the remainder of fiscal year 2008.

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Cost of Contract Manufacturing.

Three and Six Months:  The increases in cost of contract manufacturing of $908,000 and $1,559,000 during the three and six months ended October 31, 2007, respectively, compared to the same periods in the prior year were primarily related to the three and six-month period increases in contract manufacturing revenue.  These increases were offset by the prior year write-off of unusable work-in-process inventory and estimated contract loss provisions associated with two unrelated entities during the three and six months ended October 31, 2006, which amounts in the aggregate totaled $204,000 and $412,000, respectively.  We expect contract manufacturing costs to continue during the remainder of the current fiscal year based on the anticipated completion of customer projects under our current contract manufacturing agreements.

Research and Development Expenses.

Three and Six Months:  The increase in research and development (“R&D”) expenses of $1,180,000 and $763,000 during the three and six months ended October 31, 2007, respectively, compared to the same periods in the prior year were primarily due to increases in expenses associated with each of our following platform technologies under development:

 

		R&D Expenses – Three Months Ended October 31,												R&D Expenses – Six Months Ended October 31,
		2007				2006				$ Change				2007				2006				$ Change
		(in thousands)												(in thousands)
Technology Platform:
Anti-PS Immunotherapeutics     (bavituximab)		$	2,920			$	2,549			$	371			$	5,214			$	5,107			$	107
TNT (Cotara®)			969				696				273				1,678				1,528				150
VTA and Anti-Angiogenesis Agents			1,035				512				523				1,499				1,044				455
VEA			176				163				13				333				282				51
Total R&D Expenses		$	5,100			$	3,920			$	1,180			$	8,724			$	7,961			$	763

o

Anti-Phosphatidylserine (“Anti-PS”) Immunotherapeutics (bavituximab) – The increases in Anti-PS Immunotherapeutics program expenses of $371,000 and $107,000 during the three and six months ended October 31, 2007, respectively, compared to the same periods in the prior year are primarily due to increases in manufacturing expenses to support the current Phase I studies using bavituximab to treat patients with solid cancers and the Hepatitis C Virus infection and to support the initiation of our anticipated Phase II clinical studies using bavituximab for the treatment of various solid cancers in combination with chemotherapy.  During the current fiscal year, we submitted two separate Phase II clinical protocols in India, one to treat patients with non-small cell lung cancer (“NSCLC”) and one to treat patients with metastatic breast cancer in combination with chemotherapy.  In addition, during October 2007, we submitted a separate Phase II clinical protocol in the Republic of Georgia to treat patients with metastatic breast cancer in combination with chemotherapy, which was approved in November 2007.  The foregoing expenses were further supplemented by increases in pre-clinical development expenses to support the possible expansion of bavituximab to treat other viral infections.  These increases in Anti-PS program expenses were offset by decreases in clinical trial patient fees and related expenses due to the timing of initiating new studies.  The decreases in clinical trial related expenses were further supplemented by decreases in non-cash stock-based compensation expense associated with the amortization of the fair value of options granted to employees in accordance with the adoption of SFAS No. 123R and non-cash expenses associated with shares of common stock earned by employees under a stock bonus plan, which expired in the prior fiscal year.

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o

Tumor Necrosis Therapy (“TNT”) (Cotara®) – The increases in TNT program expenses of $273,000 and $150,000 during the three and six months ended October 31, 2007, respectively, compared to the same periods in the prior year are primarily due to increases in clinical trial patient fees and related expenses associated with the two ongoing Cotara® clinical trials for the treatment of brain cancer.

o

Vascular Targeting Agents (“VTAs”) and Anti-Angiogenesis Agents – The increases in VTA and Anti-Angiogenesis Agents program expenses of $523,000 and $455,000 during the three and six months ended October 31, 2007, respectively, compared to the same periods in the prior year are primarily due to increases in manufacturing expenses associated with manufacturing our clinical candidate to support the advancement of our anti-angiogenesis program.  These increases in manufacturing expenses were offset by decreases in technology license fees and sponsored research fees associated with our VTA program.

o

Vasopermeation Enhancement Agents (“VEAs”) – The increase in VEA program expenses of $13,000 and $51,000 during the three and six months ended October 31, 2007, respectively, compared to the same periods in the prior year are primarily due to increases in payroll and related expenses and outside research studies associated with our efforts to advance the pre-clinical development of our VEA program.

Looking beyond the current fiscal year, it is difficult for us to reasonably estimate all future research and development costs associated with each of our technologies due to the number of unknowns and uncertainties associated with pre-clinical and clinical trial development.  These unknown variables and uncertainties include, but are not limited to:

·	the uncertainty of future clinical trial results;

·	the uncertainty of the ultimate number of patients to be treated in any current or future clinical trial;

·	the uncertainty of the U.S. Food and Drug Administration allowing our studies to move forward from Phase I clinical studies to Phase II and Phase III clinical studies;

·	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 future costs associated with our pre-clinical candidates, including Vascular Targeting Agents, Anti-Angiogenesis Agents, and Vasopermeation Enhancement Agents, which costs are dependent on the success of pre-clinical development.  We are uncertain whether or not these product candidates will be successful and we are uncertain whether or not we will incur any additional costs beyond pre-clinical development;

·	the uncertainty of terms related to potential future partnering or licensing arrangements; and

·	the uncertainty of protocol changes and modifications in the design of our clinical trial studies, which may increase or decrease our future costs.

We or our potential partners will need to do additional development and clinical testing prior to seeking any regulatory approval for commercialization of our product candidates as all of our products are in discovery, pre-clinical or clinical development.  Testing, manufacturing, commercialization, advertising, promotion, exporting, and marketing, among other things, of our proposed products are subject to extensive regulation by governmental authorities in the United States and other countries.  The testing and approval process requires substantial time, effort, and financial resources, and we cannot guarantee that any approval will be granted on a timely basis, if at all.  Companies in the pharmaceutical and biotechnology industries have suffered significant setbacks in conducting advanced human clinical trials, even after obtaining promising results in earlier trials.  Furthermore, the United States Food and Drug Administration may suspend clinical trials at any time on various grounds, including a finding that the subjects or patients are being exposed to an unacceptable health risk.  Even if regulatory approval of a product is granted, such approval may entail limitations on the indicated uses for which it may be marketed.  Accordingly, we or our potential partners may experience difficulties and delays in obtaining necessary governmental clearances and approvals to market our products.

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Selling, General and Administrative Expenses.

Selling, general and administrative expenses consist primarily of payroll and related expenses, director fees, legal and accounting fees, stock-based compensation expense, investor and public relation fees, insurance, and other expenses relating to the general management, administration, and business development activities of the Company.

Three and Six Months:  The increases in selling, general and administrative expenses of $273,000 and $340,000 during the three and six months ended October 31, 2007, respectively, compared to the same periods in the prior year are primarily due to increases in payroll and related expenses, corporate legal fees, and travel and related expenses.  Payroll and related expenses increased $242,000 and $278,000 during the current year three and six-month periods, respectively, primarily due to an increase in headcount to support increased operations combined with an increase in consulting fees primarily associated with the expansion of our business development activities.  Corporate legal fees increased $136,000 and $177,000 during the current year three and six-month periods, respectively, primarily related to legal fees associated with the lawsuit described in this Quarterly Report on Form 10-Q under Part II, Item 1, “Legal Proceedings”, combined with legal fees associated with other corporate matters.  Travel and related expenses increased $48,000 and $74,000 during the current year three and six-month periods, respectively, primarily due to increased business development efforts in the U.S., Europe and Asia and increased participation in corporate and investor relation activities.  In addition, these current year three and six-month period increases were supplemented by incremental increases in other general corporate related expenses primarily associated with facility related expenses and tradeshow expenses associated with Avid.  These increases in selling, general and administrative expenses were offset with decreases in non-cash stock-based compensation expenses of $226,000 and $313,000 during the three and six-month periods, respectively, primarily associated with the amortization of the fair value of options granted to employees in accordance with the adoption of SFAS No. 123R and non-cash expenses associated with shares of common stock earned by employees under a stock bonus plan, which expired in the prior year.

Interest and Other Income.

Six Months:  The decrease in interest and other income of $96,000 during the six months ended October 31, 2007 compared to the same period in the prior year was due to a $131,000 decrease in other income primarily associated with the sale of a trademark name in the prior year quarter ended July 31, 2006 offset with a $35,000 increase in interest income as a result of higher prevailing interest rates during the current year period compared to the prior year period.

Critical Accounting Policies

The methods, estimates, and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our condensed consolidated financial statements. We evaluate our estimates and judgments on an ongoing basis.  We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances.  Our experience and assumptions 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 are the most critical to us, in that they are important to the portrayal of our financial statements and they require our most difficult, subjective or complex judgments in the preparation of our condensed consolidated financial statements:

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Revenue Recognition

We recognize revenues pursuant to the SEC’s Staff Accounting Bulletin No. 104 (“SAB No. 104”), Revenue Recognition.  In accordance with SAB No. 104, revenue is generally realized or realizable and earned when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable, and (iv) collectibility is reasonably assured.

In addition, we comply with Financial Accounting Standards Board’s Emerging Issues Task Force No. 00-21 (“EITF 00-21”), Revenue Arrangements with Multiple Deliverables.  In accordance with EITF 00-21, 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, revenue is deferred until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

Revenues associated with licensing agreements primarily consist of nonrefundable up-front license fees and milestone payments.  Revenues under licensing agreements are recognized based on the performance requirements of the agreement.  Nonrefundable up-front license fees received under license agreements, whereby continued performance or future obligations are considered inconsequential to the relevant licensed technology, are generally recognized as revenue upon delivery of the technology.  Nonrefundable up-front license fees, whereby we have an ongoing involvement or performance obligations, are recorded as deferred revenue and recognized as revenue over the term of the performance obligation or relevant agreement.  Milestone payments are generally recognized as revenue upon completion of the milestone assuming there are no other continuing obligations.  Under some license agreements, the obligation period may not be contractually defined.  Under these circumstances, we must exercise judgment in estimating the period of time over which certain deliverables will be provided to enable the licensee to practice the license.

Contract manufacturing revenues are generally recognized once the service has been provided and/or upon shipment of the product to the customer.  We also record a provision for estimated contract losses, if any, in the period in which they are determined.

In July 2000, the Emerging Issues Task Force (“EITF”) released Issue 99-19 (“EITF 99-19”), Reporting Revenue Gross as a Principal versus Net as an Agent.  EITF 99-19 summarized the EITF’s views on when revenue should be recorded at the gross amount billed to a customer because it has earned revenue from the sale of goods or services, or the net amount retained (the amount billed to the customer less the amount paid to a supplier) because it has earned a fee or commission.  In addition, the EITF released Issue 00-10 (“EITF 00-10”), Accounting for Shipping and Handling Fees and Costs, and Issue 01-14 (“EITF 01-14”), Income Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred.  EITF 00-10 summarized the EITF’s views on how the seller of goods should classify in the income statement amounts billed to a customer for shipping and handling and the costs associated with shipping and handling.  EITF 01-14 summarized the EITF’s views on when the reimbursement of out-of-pocket expenses should be characterized as revenue or as a reduction of expenses incurred.  Our revenue recognition policies are in compliance with EITF 99-19, EITF 00-10 and EITF 01-14 whereby we record revenue for the gross amount billed to customers (the cost of raw materials, supplies, and shipping, plus the related handling mark-up fee) and we record the cost of the amounts billed as cost of sales as we act as a principal in these transactions.

Stock-based Compensation Expense

We currently maintain four equity compensation plans which provide for the granting of options to purchase shares of our common stock at exercise prices not less than the fair market value of our common stock at the date of grant.  The granting of options are share-based payments and are subject to the fair value recognition provisions of Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”), Share-Based Payment (Revised 2004), which requires the recognition of compensation expense, using a fair value based method, for costs related to all share-based payments including grants of employee stock options.  On May 1, 2006, we adopted SFAS No. 123R using the modified-prospective method and, accordingly, stock-based compensation cost recognized beginning May 1, 2006 includes:  (a) compensation cost for all share-based payments granted prior to, but not yet vested as of May 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, and (b) compensation cost for all share-based payments granted on or subsequent to May 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R.  Under the modified-prospective method results for prior periods are not restated.

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The fair value of each option grant is estimated using the Black-Scholes option valuation model and are amortized as compensation expense on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period (typically 4 years).  Use of a valuation model requires us to make certain estimates and assumptions with respect to selected model inputs.  Expected volatility is based on daily historical volatility of our stock covering the estimated expected term.  The expected term of options granted is based on the expected time to exercise using the “simplified” method allowable under the Security and Exchange Commission’s Staff Accounting Bulletin No. 107 (“SAB No. 107”).  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.  In addition, SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Our losses from operations for the three and six-month periods ended October 31, 2007 included stock-based compensation expenses of $198,000 and $381,000, respectively. Our losses from operations for the three and six-month periods ended October 31, 2006 included stock-based compensation expenses of $310,000 and $609,000, respectively.  We believe that non-cash stock-based compensation expense for the remaining six months of fiscal year 2008 may be up to approximately $338,000 based on actual options granted and unvested as of October 31, 2007.  However, the actual expense may differ materially from this estimate as a result of changes in a number of factors that affect the amount of non-cash compensation expense, including the number of options granted by our Board of Directors during the remainder of the fiscal year, 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.

As of October 31, 2007, the total estimated unrecognized compensation cost related to non-vested stock options was $1,777,000.  This cost is expected to be recognized over a weighted average period of 2.86 years.

Allowance for Doubtful Accounts

We continually monitor our allowance for doubtful accounts for all receivables.  A considerable amount of judgment is required in assessing the ultimate realization of these receivables and we estimate an allowance for doubtful accounts based on these factors at that point in time.

Liquidity and Capital Resources

As of October 31, 2007, we had $26,138,000 in cash and cash equivalents on hand compared to $16,044,000 at April 30, 2007.  Although we have sufficient cash on hand to meet our planned obligations through at least September 2008 based on our current projections, our development efforts are highly dependent on our ability to raise additional capital to support our future operations.

We have expended substantial funds on the development of our product candidates and we have incurred negative cash flows from operations for the majority of years since our inception.  Since inception, we have financed our operations primarily through the sale of our common stock and issuance of convertible debt, which has been supplemented with payments received from various licensing collaborations and through the revenues generated by Avid.  We expect negative cash flows from operations to continue until we are able to generate sufficient revenue from contract manufacturing services provided by Avid and/or from the sale and/or licensing of our products under development.

Revenues earned by Avid during the six months ended October 31, 2007 and 2006 amounted to $3,484,000 and $1,034,000, respectively.  We expect that Avid will continue to generate revenues which should partially offset our consolidated cash flows used in operations, although we expect those near-term revenues will be insufficient to cover total anticipated cash flows used in operations.  Therefore, our ability to continue our clinical trials and development efforts 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.

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We may raise additional capital through the sale of shares of our common stock to fund our research, development, and clinical testing of our product candidates.   We have approximately 5,031,000 shares available for possible future registered transactions under two separate registration statements.  In addition, during January 2007, we filed a separate registration statement on Form S-3, File Number 333-139975, under which we may issue, from time to time, in one or more offerings, shares of our common stock for remaining gross proceeds of up to $7,500,000.  However, given uncertain market conditions and the volatility of our stock price and trading volume, we may not be able to sell our securities at prices or on terms that are favorable to us, if at all.

In addition to financing our operations through the sale of shares of common stock, we are actively exploring various other sources of capital by leveraging our many assets, including our intellectual property portfolio.  Our broad intellectual property portfolio allows us to develop products internally while at the same time we are able to out-license certain areas of the technology which would not interfere with our internal product development efforts.  We will continue to explore ways to leverage our broad intellectual property portfolio in addition to pursuing potential licensing and partnering collaborations for our products in clinical and pre-clinical development.  In addition, we have recently been approached by outside companies interested in a possible transaction related to our wholly owned subsidiary, Avid Bioservices, Inc.  In this regard, we have only initially begun to explore strategic alternatives for Avid as a means of raising additional capital.

Although we will continue to explore these potential opportunities, there can be no assurances that we will be successful in raising sufficient capital on terms acceptable to us, or at all, or that sufficient additional revenues will be generated from Avid or under potential licensing or partnering agreements or from a potential strategic transaction related to our subsidiary, Avid Bioservices, Inc. to complete the research, development, and clinical testing of our product candidates.

Significant components of the changes in cash flows from operating, investing, and financing activities for the six months ended October 31, 2007 compared to the same prior year period are as follows:

Cash Used In Operating Activities.  Cash used in operating activities is primarily driven by changes in our net loss.  However, cash used in operating activities generally differs from our reported net loss as a result of non-cash operating expenses or differences in the timing of cash flows as reflected in the changes in operating assets and liabilities.  During the six months ended October 31, 2007, cash used in operating activities slightly increased $4,000 to $10,176,000 compared to $10,172,000 for the six months ended October 31, 2006.  This increase in net cash used in operating activities was primarily due to an increase in net loss reported during the current six-month period after taking into consideration non-cash operating expenses in the amount of $1,219,000.  This amount was offset by a net change in operating assets and payment or reduction of liabilities in the aggregate amount of $1,215,000.  The increase in our current six-month period net loss was primarily due to current period increases in cost of contract manufacturing, research and development expenses and selling, general and administrative expenses, which were offset by an increase in contract manufacturing revenue.

 

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The changes in operating activities as a result of non-cash operating expenses or differences in the timing of cash flows as reflected by the changes in operating assets and liabilities are as follows:

		SIX MONTHS ENDED
		October 31, 2007				October 31, 2006
Net loss, as reported		$	(10,863,000	)		$	(10,527,000	)
Less non-cash expenses and adjustments to net loss:   Depreciation and amortization   Stock-based compensation and common stock issued under stock bonus plan   Amortization of expenses paid in shares of common stock			234,000  395,000  -				233,000 970,000 309,000
Net cash used in operating activities before changes in operating assets and liabilities		$	(10,234,000	)		$	(9,015,000	)
Net change in operating assets and liabilities		$	58,000			$	(1,157,000	)
Net cash used in operating activities		$	(10,176,000	)		$	(10,172,000	)

 

Cash Used In Investing Activities.  Net cash used in investing activities increased $372,000 to $429,000 for the six months ended October 31, 2007 compared to net cash used of $57,000 for the six months ended October 31, 2006.  This increase was primarily due to progress payments of $305,000 made on certain property related improvements associated with our manufacturing facility offset by the reclassification of a $67,000 security deposit from other long-term assets to other current assets during the current year period as such deposit becomes due and payable to us within the next twelve months.  The increase in net cash used in investing activities was further supplemented by a $138,000 increase in property acquisitions.

Cash Provided By Financing Activities.  Net cash provided by financing activities increased $4,258,000 to $20,699,000 for the six months ended October 31, 2007 compared to net cash provided of $16,441,000 for the six months ended October 31, 2006.  Cash provided by financing activities during the six months ended October 31, 2007 was due to proceeds received under a security purchase agreement whereby we sold and issued a total of 30,000,000 shares of our common stock in exchange for net proceeds of $20,859,000, which was supplemented with net proceeds of $73,000 from the exercise of stock options and warrants.  Cash provided by financing activities during the six months ended October 31, 2006 was due to net proceeds received from the sale of our common stock under a security purchase agreement in the amount of $12,970,000 supplemented with net proceeds of $3,689,000 from the exercise of stock options and warrants.

Commitments

At October 31, 2007, we had no material capital commitments.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Changes in United States interest rates would affect the interest earned on our cash and cash equivalents.  Based on our overall interest rate exposure at October 31, 2007, a near-term change in interest rates, based on historical movements, would not materially affect the fair value of interest rate sensitive instruments.  Our debt instruments have fixed interest rates and terms and, therefore, a significant change in interest rates would not have a material adverse effect on our financial position or results of operations.

 

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ITEM 4.

CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed in its reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

The Company carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of October 31, 2007, the end of the period covered by this Quarterly Report.  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures were effective at the reasonable assurance level as of October 31, 2007.

     

There were no significant changes in the Company’s internal controls over financial reporting, during the quarter ended October 31, 2007, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.