UNITED STATES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JanuaryOctober 31, 2018
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number: 001-32839
AVID BIOSERVICES, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 95-3698422 | |
(State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) |
Identification No.) | |
| 2642 Michelle Drive, Suite 200, Tustin, California | 92780 | |
| (Address of principal executive offices) | (Zip Code) |
(714) 508-6100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesý Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):
| Large accelerated filer o | Accelerated filer | Non-accelerated filer o | Smaller reporting company |
| Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso No ý
As of March 7,December 3, 2018, there were 55,552,23356,067,867 shares of common stock, $0.001 par value, outstanding.
AVID BIOSERVICES, INC.
TheAs used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, the terms “we,” “us,” “our,” “the Company,” and “Avid,” as used in this Quarterly Report on Form 10-Q refer to Avid Bioservices, Inc. and its consolidated subsidiaries.
PART I - FINANCIAL INFORMATION
| Item 1. | Condensed Consolidated Financial Statements. |
avid bioservices, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
January 31, 2018 | April 30, 2017 | |||||||
| Unaudited | (Note 2) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 17,938,000 | $ | 46,799,000 | ||||
| Trade and other receivables | 7,967,000 | 7,742,000 | ||||||
| Inventories | 14,218,000 | 33,099,000 | ||||||
| Prepaid expenses | 906,000 | 1,460,000 | ||||||
| Total current assets | 41,029,000 | 89,100,000 | ||||||
| Property and equipment, net | 26,325,000 | 26,515,000 | ||||||
| Restricted cash | 1,150,000 | 1,150,000 | ||||||
| Other assets | 1,353,000 | 1,347,000 | ||||||
| Total assets | $ | 69,857,000 | $ | 118,112,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,911,000 | $ | 5,779,000 | ||||
| Accrued clinical trial and related fees | 5,503,000 | 4,558,000 | ||||||
| Accrued payroll and related costs | 3,876,000 | 6,084,000 | ||||||
| Deferred revenue | 6,633,000 | 28,500,000 | ||||||
| Customer deposits | 17,602,000 | 17,017,000 | ||||||
| Other current liabilities | 749,000 | 993,000 | ||||||
| Total current liabilities | 36,274,000 | 62,931,000 | ||||||
| Deferred rent, less current portion | 2,064,000 | 1,599,000 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock—$0.001 par value; authorized 5,000,000 shares; 1,647,760 issued and outstanding at January 31, 2018 and April 30, 2017, respectively | 2,000 | 2,000 | ||||||
| Common stock—$0.001 par value; authorized 500,000,000 shares; 45,257,180 and 44,014,040 issued and outstanding at January 31, 2018 and April 30, 2017, respectively | 45,000 | 44,000 | ||||||
| Additional paid-in capital | 593,621,000 | 590,971,000 | ||||||
| Accumulated deficit | (562,149,000 | ) | (537,435,000 | ) | ||||
| Total stockholders’ equity | 31,519,000 | 53,582,000 | ||||||
| Total liabilities and stockholders’ equity | $ | 69,857,000 | $ | 118,112,000 | ||||
October 31, 2018 | April 30, 2018 | |||||||
| Unaudited | (Note 1) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 32,694 | $ | 42,265 | ||||
| Trade and other receivables | 4,197 | 3,754 | ||||||
| Contract assets | 5,092 | – | ||||||
| Inventories | 9,736 | 16,129 | ||||||
| Prepaid expenses | 774 | 679 | ||||||
| Assets of discontinued operations | – | 5,000 | ||||||
| Total current assets | 52,493 | 67,827 | ||||||
| Property and equipment, net | 26,279 | 26,479 | ||||||
| Restricted cash | 1,150 | 1,150 | ||||||
| Other assets | 302 | 304 | ||||||
| Total assets | $ | 80,224 | $ | 95,760 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 3,223 | $ | 1,909 | ||||
| Accrued payroll and related costs | 1,829 | 2,564 | ||||||
| Contract liabilities | 17,307 | 27,935 | ||||||
| Other current liabilities | 433 | 905 | ||||||
| Liabilities of discontinued operations | 416 | 4,550 | ||||||
| Total current liabilities | 23,208 | 37,863 | ||||||
| Deferred rent, less current portion | 2,126 | 2,159 | ||||||
| Capital lease, less current portion | 93 | – | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock—$0.001 par value; 5,000,000 shares authorized; 1,647,760 shares issued and outstanding at October 31, 2018 and April 30, 2018, respectively | 2 | 2 | ||||||
| Common stock—$0.001 par value; 150,000,000 shares authorized; 56,063,488 and 55,689,222 shares issued and outstanding at October 31, 2018 and April 30, 2018, respectively | 56 | 55 | ||||||
| Additional paid-in capital | 614,541 | 614,810 | ||||||
| Accumulated deficit | (559,802 | ) | (559,129 | ) | ||||
| Total stockholders’ equity | 54,797 | 55,738 | ||||||
| Total liabilities and stockholders’ equity | $ | 80,224 | $ | 95,760 | ||||
See accompanying notes to condensed consolidated financial statements.
| 3 |
avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and comprehensive loss (UNAUDITED)
(in thousands, except share and per share information)
| Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Contract manufacturing revenue | $ | 10,178 | $ | 12,782 | $ | 22,767 | $ | 39,859 | ||||||||
| Cost of contract manufacturing | 9,844 | 16,242 | 21,241 | 36,690 | ||||||||||||
| Gross profit (loss) | 334 | (3,460 | ) | 1,526 | 3,169 | |||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 2,816 | 3,596 | 6,031 | 7,449 | ||||||||||||
| Restructuring charges | – | 1,258 | – | 1,258 | ||||||||||||
| Total operating expenses | 2,816 | 4,854 | 6,031 | 8,707 | ||||||||||||
| Operating loss | (2,482 | ) | (8,314 | ) | (4,505 | ) | (5,538 | ) | ||||||||
| Interest and other income, net | 119 | 13 | 181 | 37 | ||||||||||||
| Loss from continuing operations before income taxes | $ | (2,363 | ) | $ | (8,301 | ) | $ | (4,324 | ) | $ | (5,501 | ) | ||||
| Income tax benefit | 173 | – | 173 | – | ||||||||||||
| Loss from continuing operations | $ | (2,190 | ) | $ | (8,301 | ) | $ | (4,151 | ) | $ | (5,501 | ) | ||||
| Income (loss) from discontinued operations, net of tax | 739 | (4,323 | ) | 739 | (8,328 | ) | ||||||||||
| Net loss | $ | (1,451 | ) | $ | (12,624 | ) | $ | (3,412 | ) | $ | (13,829 | ) | ||||
| Comprehensive loss | $ | (1,451 | ) | $ | (12,624 | ) | $ | (3,412 | ) | $ | (13,829 | ) | ||||
| Series E preferred stock accumulated dividends | (1,442 | ) | (1,442 | ) | (2,523 | ) | (2,523 | ) | ||||||||
| Net loss attributable to common stockholders | $ | (2,893 | ) | $ | (14,066 | ) | $ | (5,935 | ) | $ | (16,352 | ) | ||||
| Basic and diluted weighted average common shares outstanding | 56,008,541 | 45,097,474 | 55,889,325 | 44,935,600 | ||||||||||||
| Basic and diluted net (loss) income per common share attributable to common stockholders: | ||||||||||||||||
| Continuing operations | $ | (0.06 | ) | $ | (0.21 | ) | $ | (0.12 | ) | $ | (0.18 | ) | ||||
| Discontinued operations | $ | 0.01 | $ | (0.10 | ) | $ | 0.01 | $ | (0.18 | ) | ||||||
| Net loss per share attributable to common stockholders | $ | (0.05 | ) | $ | (0.31 | ) | $ | (0.11 | ) | $ | (0.36 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and comprehensive lossCASH FLOWS (UNAUDITED)
(in thousands)
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Contract manufacturing revenue | $ | 6,819,000 | $ | 10,747,000 | $ | 46,678,000 | $ | 39,726,000 | ||||||||
| Cost of contract manufacturing | 10,951,000 | 7,974,000 | 47,641,000 | 26,477,000 | ||||||||||||
| Gross profit (loss) | (4,132,000 | ) | 2,773,000 | (963,000 | ) | 13,249,000 | ||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 4,824,000 | 4,365,000 | 12,273,000 | 13,602,000 | ||||||||||||
| Restructuring charges | – | – | 1,258,000 | – | ||||||||||||
| Total operating expenses | 4,824,000 | 4,365,000 | 13,531,000 | 13,602,000 | ||||||||||||
| Operating loss | (8,956,000 | ) | (1,592,000 | ) | (14,494,000 | ) | (353,000 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest and other income | 42,000 | 25,000 | 83,000 | 71,000 | ||||||||||||
| Interest and other expense | (14,000 | ) | (2,000 | ) | (18,000 | ) | (2,000 | ) | ||||||||
| Loss from continuing operations | $ | (8,928,000 | ) | $ | (1,569,000 | ) | $ | (14,429,000 | ) | $ | (284,000 | ) | ||||
| Loss from discontinued operations | (2,076,000 | ) | (6,205,000 | ) | (10,404,000 | ) | (22,603,000 | ) | ||||||||
| Net loss | $ | (11,004,000 | ) | $ | (7,774,000 | ) | $ | (24,833,000 | ) | $ | (22,887,000 | ) | ||||
| Comprehensive loss | $ | (11,004,000 | ) | $ | (7,774,000 | ) | $ | (24,833,000 | ) | $ | (22,887,000 | ) | ||||
| Series E preferred stock accumulated dividends | (1,442,000 | ) | (1,442,000 | ) | (3,604,000 | ) | (3,558,000 | ) | ||||||||
| Net loss attributable to common stockholders | $ | (12,446,000 | ) | $ | (9,216,000 | ) | $ | (28,437,000 | ) | $ | (26,445,000 | ) | ||||
| Basic and diluted weighted average common shares outstanding(1): | 45,225,804 | 37,258,794 | 45,032,335 | 35,486,782 | ||||||||||||
| Basic and diluted net loss per common share attributable to common stockholders(1): | ||||||||||||||||
| Continuing operations | $ | (0.23 | ) | $ | (0.08 | ) | $ | (0.40 | ) | $ | (0.11 | ) | ||||
| Discontinued operations | $ | (0.05 | ) | $ | (0.17 | ) | $ | (0.23 | ) | $ | (0.64 | ) | ||||
| Net loss per share attributable to common stockholders | $ | (0.28 | ) | (0.25 | ) | $ | (0.63 | ) | $ | (0.75 | ) | |||||
Six Months Ended October 31, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (3,412 | ) | $ | (13,829 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,325 | 1,300 | ||||||
| Stock-based compensation | 622 | 794 | ||||||
| Gain on sale of research and development assets | (1,000 | ) | – | |||||
| Changes in operating assets and liabilities: | ||||||||
| Trade and other receivables | (443 | ) | 4,234 | |||||
| Contract assets | (2,204 | ) | – | |||||
| Inventories | (1,478 | ) | 16,581 | |||||
| Prepaid expenses | (95 | ) | (300 | ) | ||||
| Other non-current assets | 2 | 9 | ||||||
| Accounts payable | 880 | (1,426 | ) | |||||
| Accrued payroll and related expenses | (735 | ) | (1,787 | ) | ||||
| Contract liabilities | (2,715 | ) | (24,906 | ) | ||||
| Other accrued expenses and current liabilities | (741 | ) | 172 | |||||
| Assets and liabilities of discontinued operations | (4,134 | ) | (882 | ) | ||||
| Deferred rent, less current portion | (33 | ) | 572 | |||||
| Net cash used in operating activities | (14,161 | ) | (19,468 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (446 | ) | (1,809 | ) | ||||
| Proceeds from sale of research and development assets | 6,000 | – | ||||||
| Net cash provided by (used in) investing activities | 5,554 | (1,809 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Dividends paid on Series E preferred stock | (2,162 | ) | (2,162 | ) | ||||
| Net proceeds from issuance of common stock | – | 4,193 | ||||||
| Proceeds from issuance of common stock under Employee Stock Purchase Plan | 114 | 216 | ||||||
| Proceeds from exercise of stock options | 1,158 | 112 | ||||||
| Principal payments on capital lease obligation | (74 | ) | (154 | ) | ||||
| Net cash (used in) provided by financing activities | (964 | ) | 2,205 | |||||
| Net decrease in cash, cash equivalents and restricted cash | (9,571 | ) | (19,072 | ) | ||||
| Cash, cash equivalents and restricted cash at beginning of period | 43,415 | 47,949 | ||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 33,844 | $ | 28,877 | ||||
| SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Accounts payable for purchase of property and equipment | $ | 434 | $ | 139 | ||||
| Property and equipment acquired under capital lease | $ | 245 | $ | – | ||||
(1) All shareThe following table provides a reconciliation of cash, cash equivalents and per sharerestricted cash reported within the unaudited condensed consolidated balance sheets to the total of the same amounts of our common stock for all prior fiscal year periods presented have been retroactively adjusted to reflect the one-for-seven reverse stock split of our issued and outstanding common stock, which took effect on July 10, 2017 (Note 1).shown above:
| October 31, 2018 | April 30, 2018 | October 31, 2017 | April 30, 2017 | |||||||||||||
| Cash and cash equivalents | $ | 32,694 | $ | 42,265 | $ | 27,727 | $ | 46,799 | ||||||||
| Restricted cash | 1,150 | 1,150 | 1,150 | 1,150 | ||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 33,844 | $ | 43,415 | $ | 28,877 | $ | 47,949 | ||||||||
See accompanying notes to condensed consolidated financial statements.
avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended January 31, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (24,833,000 | ) | $ | (22,887,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Share-based compensation | 1,206,000 | 2,591,000 | ||||||
| Depreciation and amortization | 1,945,000 | 1,850,000 | ||||||
| Loss on disposal of property and equipment | 401,000 | – | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade and other receivables | (225,000 | ) | (3,024,000 | ) | ||||
| Inventories | 18,881,000 | (17,643,000 | ) | |||||
| Prepaid expenses | 554,000 | (396,000 | ) | |||||
| Other non-current assets | 9,000 | 233,000 | ||||||
| Accounts payable | (3,895,000 | ) | (1,153,000 | ) | ||||
| Accrued clinical trial and related fees | 945,000 | (4,467,000 | ) | |||||
| Accrued payroll and related expenses | (2,208,000 | ) | (184,000 | ) | ||||
| Deferred revenue | (21,867,000 | ) | 16,337,000 | |||||
| Customer deposits | 585,000 | 1,998,000 | ||||||
| Other accrued expenses and current liabilities | (64,000 | ) | (801,000 | ) | ||||
| Deferred rent, less current portion | 465,000 | (70,000 | ) | |||||
| Net cash used in operating activities | (28,101,000 | ) | (27,616,000 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Property and equipment acquisitions | (2,129,000 | ) | (2,644,000 | ) | ||||
| (Increase) decrease in other assets | (15,000 | ) | 205,000 | |||||
| Net cash used in investing activities | (2,144,000 | ) | (2,439,000 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common stock, net of issuance costs of $111,000 and $340,000, respectively | 4,193,000 | 11,604,000 | ||||||
| Proceeds from issuance of Series E preferred stock, net of issuance costs of nil and $58,000, respectively | – | 1,576,000 | ||||||
| Proceeds from issuance of common stock under Employee Stock Purchase Plan | 217,000 | 254,000 | ||||||
| Proceeds from exercise of stock options | 398,000 | – | ||||||
| Dividends paid on Series E preferred stock | (3,244,000 | ) | (3,198,000 | ) | ||||
| Principal payments on capital lease | (180,000 | ) | (65,000 | ) | ||||
| Net cash provided by financing activities | 1,384,000 | 10,171,000 | ||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (28,861,000 | ) | (19,884,000 | ) | ||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 46,799,000 | 61,412,000 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 17,938,000 | $ | 41,528,000 | ||||
| SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Accounts payable for purchase of property and equipment | $ | 27,000 | $ | 420,000 | ||||
| Property and equipment acquired under capital lease | $ | – | $ | 319,000 | ||||
See accompanying notes to condensed consolidated financial statements.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE nine MONTHS ENDED january 31, 2018 (unaudited) (UNAUDITED)
(in thousands, except share and per share information)
1. ORGANIZATION AND BUSINESS
| 1. | DESCRIPTION OF COMPANY AND BASIS OF PRESENTATION |
Business Description—We are a contract development and manufacturing organization (“CDMO”) that provides a comprehensive range of services from process development to current Good Manufacturing Practices (“cGMP”) commercial manufacturing focused on biopharmaceutical products derived from mammalian cell culture for biotechnology and pharmaceutical companies.
Sale of Research and Development Assets—On February 12, 2018, we entered into an Asset Assignment and Purchase Agreement with a third-party oncology therapeutics company pursuant to which we sold to the third-party oncology therapeutics company the majority of our research and development assets, which included the assignment of certain exclusive licenses related to our former phosphatidylserine (PS)-targeting program (Note 10). As a result of (i) the sale of our PS-targeting program, (ii) the held for sale classification of our R84 technology, (iii) the abandonment of our remaining research and development assets (including our intent to return the exosome technology back to the original licensor), and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business, the operating results from our research and development segment are reported as a loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 2).
Corporate Name Change—Effective January 5, 2018, we changed our name from Peregrine Pharmaceuticals, Inc. to Avid Bioservices, Inc. in connection with the strategic shift in our corporate direction.
Reverse Stock Split—On July 7, 2017, we effected a reverse stock split of our outstanding shares of common stock at a ratio of one-for-seven pursuant to our filed Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware. The reverse stock split took effect with the opening of trading on July 10, 2017. The primary purpose of the reverse stock split, which was approved by our stockholders at our 2016 Annual Meeting on October 13, 2016, was to enable us to regain compliance with the $1.00 minimum bid price requirement for continued listing on The NASDAQ Capital Market. Pursuant to the reverse stock split, every seven shares of our issued and outstanding shares of common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par value per share of our common stock. All share and per share amounts of our common stock included in the accompanying unaudited condensed consolidated financial statements have been retrospectively adjusted to give effect to the reverse stock split for all periods presented, including reclassifying an amount equal to the reduction in par value to additional paid-in capital. No fractional shares were issued in connection with the reverse stock split. Any fractional share of common stock created by the reverse stock split was rounded up to the nearest whole share. The number of authorized shares of our common stock remained unchanged.
The reverse stock split affected all issued and outstanding shares of our common stock, as well as the shares of common stock underlying our stock options, employee stock purchase plan, warrants and the general conversion right with respect to our 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to quarterly reports on Form 10-Q. Accordingly,10-Q, and accordingly, they do not include all of the information and disclosures required by U.S. GAAP for a complete set ofannual financial statements. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017.2018. The condensed consolidated balance sheet at April 30, 20172018 has been derived from audited financial statements at that date. The unaudited financial information for the interim periods presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments. Results of operations for interim periods covered by this Quarterly Report on Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or any other interim period.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
The unaudited condensed consolidated financial statements include the accounts of Avid Bioservices, Inc., and its subsidiaries. All intercompany accounts and transactions among the consolidated entities have been eliminated in the unaudited condensed consolidated financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts, as well as disclosures of commitments and contingencies in the financial statements and accompanying notes. Actual results could differ materially from those estimates and assumptions.
Discontinued Operations
As of January 31, 2018, our research and development segment metFor all the conditions to be classified as a discontinued operation (Note 1). Accordingly,periods presented, the operating results of our former research and development segment arehave been excluded from continuing operations and reported as a lossincome (loss) from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. In addition, the assets and liabilities related to our discontinued research and development segment are reported as assets and liabilities of discontinued operations in the accompanying unaudited condensed consolidated balance sheets at October 31, 2018 and April 30, 2018. For additional information seeon the discontinuation of our research and development segment, refer to Note 10,11, “Sale of Research and Development Assets”.
Segment Reporting
Historically, our business had been organized into two reportable operating segments: (i) our research and development segment, and (ii) our contract manufacturing services segment. However, as a result of the aforementioned discontinued operation of our research and development segment (Note 11),management has determined that the Company now operates in only one operating segment. Accordingly, we reported our financial results for one reportable segment to reflect this new organizational structure.
| 6 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Restructuring
Restructuring charges consist of one-time termination benefits, including severance and other employee related costs related to a workforce reduction pursuant to a restructuring plan we implemented in August 2017 (fiscal year 2018). Under this restructuring plan, which we completed in October 2017, we incurred an aggregate of $1,588 in restructuring charges, of which $330 related to our discontinued research and development segment (Note 11) and $1,258 related to our contract manufacturing services segment.
Going Concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that we are unable to continue as a going concern.
At October 31, 2018, we had $32,694 in cash and cash equivalents. Our ability to fund our operations depends on the amount of cash on hand and our ability to generate sufficient revenue to cover our operations. We have expended substantial funds on our contract manufacturing business and, historically, on thelegacy research and development of pharmaceutical product candidates.candidates (discontinued operations) and our contract manufacturing business (continuing operations). As a result, we have historically experienced losses and negative cash flows from operations since our inception, and although we have discontinued our research and development segment, (Note 1), we expect negative cash flows from operations to continue for the foreseeable future until we can generate sufficient revenue to achieve profitability. Therefore, unless and until we are able to generate sufficient revenue, we expect such losses to continue during the remainder of fiscal year 2018 and in the foreseeable future.
Our ability to fund our operations is dependent on the amount ofpositive cash on hand and our ability to generate sufficient revenue to cover ourflow from operations. At January 31, 2018, we had $17,938,000 in cash and cash equivalents and during February 2018, we raised $23,163,000 in gross proceeds from the sale of our common stock pursuant to an underwritten public offering (Note 13). In addition, we expect to receive an aggregate of $8,000,000 in upfront payments over the next six (6) months from the recent sale of certain of our research and development assets (Note 10).
In the event we are unable to secureobtain sufficient business to support our operations beyond the next twelve months, we may need to raise additional capital in the future.capital. Our ability to raise additional capital in the equity markets to fund our obligations in future periods is dependentdepends on a number of factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties, including but not limited to, negative economic conditions, adverse market conditions, and adverse financial results. If we are unable to either raise sufficient capital in the equity markets or generate additional revenue, we may need to further restructure, or cease, our operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.
As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that our accompanying unaudited condensed consolidated financial statements are issued.
ReclassificationReclassifications
Certain prior year amounts related to other assetsdeferred revenue and customer deposits have been reclassified to property and equipmentcontract liabilities in our accompanying condensed consolidated balance sheet for the fiscal year ended April 30, 20172018 and in our accompanying unaudited condensed consolidated statement of cash flows for the ninesix months ended JanuaryOctober 31, 2017 to conform to the current period presentation.presentation (Note 2). This reclassification had no effect on previously reported net loss.
avid bioservices, inc.INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED) (UNAUDITED)
(in thousands, except share and per share information)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606):Revenue from Contracts with Customers(“ASC 606”), which, along with subsequent amendments issued after May 2014, replaced substantially all then relevant U.S. GAAP revenue recognition guidance. ASC 606, as amended, is based on the principle that revenue is recognized to depict the contractual transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services utilizing a new five-step revenue recognition model, which steps include (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
On May 1, 2018, we adopted ASC 606, as amended, to all contracts not completed as of May 1, 2018 using the modified retrospective method. Results for the reporting period beginning after May 1, 2018 are presented in accordance with ASC 606, while prior period amounts continue to be reported under the accounting standards that were in effect for the prior period. The accounting policy for revenue recognition for periods prior to May 1, 2018 is described in Note 2 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.
The cumulative effect of adopting ASC 606 resulted in a one-time adjustment of $2,739 to the opening balance of accumulated deficit. The cumulative effect adjustment relates to the recognition of revenue and related costs for customer contracts that transfer goods or services over time. Under ASC 606, the timing of the recognition of contract manufacturing revenue and the related cost of contract manufacturing associated with goods or services provided to customers with no alternative use are recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation. By contrast, in the prior period, contract manufacturing revenue and the related costs were recognized upon completion of the performance obligation in accordance with accounting standards that were in effect in the prior period. Under these customer contracts the customer retains control of the product as it is being created or enhanced by our services and/or we are entitled to compensation for progress to date that includes an element of profit margin.
The following table summarizes the cumulative effect of the adoption of ASC 606 on amounts previously reported in our consolidated balance sheet at April 30, 2018:
As Reported April 30, 2018 | ASC 606 Transition Adjustment |
Balance at May 1, 2018 | ||||||||||
| Contract assets | $ | – | $ | 2,888 | $ | 2,888 | ||||||
| Inventories | 16,129 | (7,871 | ) | 8,258 | ||||||||
| Contract liabilities | 27,935 | (7,913 | ) | 20,022 | ||||||||
| Other current liabilities | 905 | 191 | 1,096 | |||||||||
| Accumulated deficit | (559,129 | ) | 2,739 | (556,390 | ) | |||||||
In addition, certain amounts related to corporate overhead costs that were allocated to
| 8 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
The following tables summarize the researcheffect of the adoption of ASC 606 on our unaudited condensed consolidated balance sheet at October 31, 2018 and development segment have been reclassified from research and development expense to selling, general and administrative expense in our accompanying unaudited condensed consolidated statements of operations and comprehensive loss for all periods presented (Note 10)the three and six months ended October 31, 2018:
As Reported | Effect of Change Higher/(Lower) | Balance Without Adoption of ASC 606 | ||||||||||
| Contract assets | $ | 5,092 | $ | 5,092 | $ | – | ||||||
| Inventories | 9,736 | (16,244 | ) | 25,980 | ||||||||
| Contract liabilities | 17,307 | (17,506 | ) | 34,813 | ||||||||
| Three Months Ended October 31, 2018 | ||||||||||||
As Reported | Effect of Change Higher/(Lower) | Balance Without Adoption of ASC 606 | ||||||||||
| Contract manufacturing revenue | $ | 10,178 | $ | 1,215 | $ | 8,963 | ||||||
| Cost of contract manufacturing | 9,844 | (79 | ) | 9,923 | ||||||||
| Gross profit (loss) | 334 | 1,294 | (960 | ) | ||||||||
| Operating loss | (2,482 | ) | 1,294 | (3,776 | ) | |||||||
| Loss from continuing operations | (2,190 | ) | 1,294 | (3,484 | ) | |||||||
| Six Months Ended October 31, 2018 | ||||||||||||
As Reported |
Effect of Change Higher/(Lower) | Balance Without Adoption of ASC 606 | ||||||||||
| Contract manufacturing revenue | $ | 22,767 | $ | 11,831 | $ | 10,936 | ||||||
| Cost of contract manufacturing | 21,241 | 7,905 | 13,336 | |||||||||
| Gross profit (loss) | 1,526 | 3,926 | (2,400 | ) | ||||||||
| Operating loss | (4,505 | ) | 3,926 | (8,431 | ) | |||||||
| Loss from continuing operations | (4,151 | ) | 3,926 | (8,077 | ) | |||||||
Revenue Recognition
We derive revenue from contract manufacturing services provided under our customer contracts, which we have disaggregated into the following revenue streams:
Manufacturing revenue
The manufacturing revenue stream represents revenue from the manufacturing of customer product(s) derived from mammalian cell culture covering clinical through commercial manufacturing runs. Under a manufacturing contract, a quantity of manufacturing runs are ordered and the product is manufactured according to the customer’s specifications and typically only one performance obligation is included. Each manufacturing run represents a distinct service that is sold separately and has stand-alone value to the customer. The product(s) are manufactured exclusively for a specific customer and have no alternative use. The customer retains control of their product during the entire manufacturing process and can make changes to the process or specifications at their request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin. Revenue associated with this stream is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation.
| 9 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Process development revenue
The process development revenue stream represents revenue from non-manufacturing related services associated with the custom development of a customer’s product. Under a process development contract, the customer owns the product details and process, which has no alternative use. These process development projects are customized to each customer to meet their specifications and typically only one performance obligation is included. Each process represents a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of their product as the product is being created or enhanced by our services and can make changes to their process or specifications upon request. Revenue associated with this stream is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation.
The following table disaggregates our contract manufacturing revenue for the three and six months ended October 31, 2018 and 2017 by revenue stream. This reclassification had noContract manufacturing revenue for the three and six months ended October 31, 2017 has not been adjusted in accordance with our modified retrospective adoption of ASC 606 and continues to be reported under the accounting standards that were in effect prior to our adoption of ASC 606 on previously reported netMay 1, 2018:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Manufacturing revenue | $ | 7,243 | $ | 11,437 | $ | 17,543 | $ | 36,236 | ||||||||
| Process development revenue | 2,935 | 1,345 | 5,224 | 3,623 | ||||||||||||
| Total contract manufacturing revenue | $ | 10,178 | $ | 12,782 | $ | 22,767 | $ | 39,859 | ||||||||
Contract balances
The timing of revenue recognition, billings and cash collections results in billed trade receivables, contract assets (unbilled receivables), and contract liabilities (customer deposits and deferred revenue). Contract assets are recorded when our right to consideration is conditioned on something other than the passage of time. Contract assets are reclassified to trade receivables on the balance sheet when our rights become unconditional. Contract liabilities represent customer deposits and deferred revenue billed and/or received in advance of our fulfillment of performance obligations. Contract liabilities will convert to contract manufacturing revenue as we perform our obligations under the contract.
We recognized contract manufacturing revenue of $3,063 and $10,025, respectively, during the three and six months ended October 31, 2018 for which the contract liability was recorded in the prior year.
Practical expedients and contract costs
We apply the practical expedient available under ASC 606 that permits us not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. In addition, we currently do not have any unsatisfied performance obligations for contracts greater than one year.
Costs incurred to obtain or fulfill a contract are not material. These costs are generally employee sales commissions, which are expensed when incurred and included in selling, general and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive loss.
Restructuring
Restructuring charges consist of one-time termination benefits, including severance
| 10 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and other employee related costs related to a workforce reduction pursuant to a restructuring plan we implemented in August 2017 (Note 9). One-time termination benefits are expensed at the date we notified the employee, unless the employee was required to provide future service, in which case the benefits are expensed ratably over the future service period.per share information)
Cash and Cash Equivalents
We consider all short-term investments readily convertible to cash with an initial maturity of three months or less to be cash equivalents.
Restricted Cash
Under the terms of three separate operating leases related to our facilities, we are required to maintain, as collateral, letters of credit during the terms of such leases. At JanuaryOctober 31, 2018 and April 30, 2017,2018, restricted cash of $1,150,000$1,150 was pledged as collateral under these letters of credit.
Concentrations of Credit Risk and Customer Base
Financial instruments that potentially subject us to a significant concentration of credit risk consist of cash and cash equivalents, restricted cash and trade receivables. We maintain our cash and restricted cash balances primarily with one major commercial bank and our deposits held with the bank exceed the amount of government insurance limits provided on our deposits. We are exposed to credit risk in the event of default by the major commercial bank holding our cash and restricted cash balances to the extent of the cash and restricted cash amounts recorded on the accompanying unaudited condensed consolidated balance sheet.
Our trade receivables from amounts billed for contract manufacturing services have historically been derived from a small customer base. Most contracts require up-front payments and installment payments during the service period. We perform periodic evaluations of the financial condition of our customers and generally do not require collateral, but we can terminate any contract if a material default occurs. At January 31, 2018 and April 30, 2017, approximately 94% and 93%, respectively, of our trade receivables were due from four customers.
In addition, contract manufacturing revenue has historically been derived from a small customer base. Historically, these customers have not entered into long-term contracts because their need for drug supply depends on a variety of factors, including the product’s stage of development, the timing of regulatory filings and approvals, the product needs of their collaborators, if applicable, their financial resources and the market demand with respect to commercial products. During the three and nine months ended January 31, 2018, approximately, 53% and 78%, respectively, of our contract manufacturing revenue was derived from our two largest customers.
Based on our current commitments for manufacturing services from our two largest customers, we expect our future results of operations to be adversely affected until we are able to further expand and diversify our customer base.
Comprehensive Loss
Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss is equal to our net loss for all periods presented.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
Impairment
Long-lived assets are reviewed for impairment in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. Long-lived assets are reported at the lower of carrying amount or fair value less cost to sell. For the ninesix months ended JanuaryOctober 31, 2018 and 2017, there were no indicators of impairment of the value of our long-lived assets.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:
| · | Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities. |
| · | Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets or liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. |
| · | Level 3 – Unobservable inputs that are supported by little or no market activity and significant to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation techniques and assumptions. |
As of JanuaryOctober 31, 2018 and April 30, 2017,2018, we do not have any Level 2 or Level 3 financial assets or liabilities and our cash equivalents, which are primarily invested in money market funds with one major commercial bank, are carried at fair value based on quoted market prices for identical securities (Level 1 input). In addition, there were no transfers between any Levels of the fair value hierarchy during the three and ninesix months ended JanuaryOctober 31, 2018 and 2017.
Customer Deposits
Customer deposits primarily represent advance billings and/or payments received for services or raw materials from our third-party customers prior to the initiation of contract manufacturing services.
Revenue Recognition
We derive revenue from contract manufacturing services provided to our third-party customers. We recognize revenue in accordance with the authoritative guidance for revenue recognition when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. We also comply with the authoritative guidance for revenue recognition regarding arrangements with multiple elements.
Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units, which may require the use of significant judgement. Deliverables are considered separate units of accounting if (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.
Arrangement consideration is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (“VSOE”) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, we use our best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under any agreement.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
On occasion, we receive requests from customers to hold product that we have manufactured on a “bill-and-hold” basis. Revenue is recognized for these “bill-and-hold” arrangements in accordance with the authoritative guidance, which requires, among other things, the existence of a valid business purpose for the arrangement; the “bill-and-hold” arrangement is at the request of the customer; title and risk of ownership must pass to the customer; the product is complete and ready for shipment; a fixeddelivery date that is reasonable and consistent with the customer’s business practices; the product has been separated from our inventory; and no further performance obligations by us exist.
In addition, we also follow the authoritative guidance when reporting revenue as gross when we act as a principal versus reporting revenue as net when we act as an agent. For transactions in which we act as a principal, have discretion to choose suppliers, bear credit and inventory risk and perform a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.
Any amounts received prior to satisfying our revenue recognition criteria are recorded as deferred revenue or customer deposits in the accompanying unaudited condensed consolidated financial statements. We also record a provision for estimated contract losses, if any, in the period in which they are determined.
Share-basedStock-based Compensation
We account for stock options, restricted stock rights and other share-basedstock-based awards granted under our equity compensation plans in accordance with the authoritative guidance for share-basedstock-based compensation. The estimated fair value of share-based paymentsstock options granted to employees in exchange for services is measured at the grant date, using a fair value based method, such as a Black-Scholes option valuation model, and is recognized as expense on a straight-line basis over the requisite service periods. TheIn addition, the fair value of modifications to share-based awards, if any,restricted stock rights is generally estimated usingmeasured at the grant date based on the closing market price of our common stock on the date of grant, and is recognized as expense on a Black-Scholes option valuation model, unless a lattice model is required.straight-line basis over the period of vesting. Forfeitures are recognized as a reduction of share-basedstock-based compensation expense as they occur. As of JanuaryOctober 31, 2018, there were no outstanding share-basedstock-based awards with market or performance conditions.
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avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Income Taxes
OnDeferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. As a result of our cumulative losses, management has concluded that a full valuation allowance against our net deferred tax assets is appropriate.
The income tax benefit recognized in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss during the three and six months ended October 31, 2018 resulted from the “Intraperiod Tax Allocation” rules under ASC 740:Income Taxes, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in our case, discontinued operations. Accordingly, a tax benefit was recorded in continuing operations with an offsetting tax expense recorded in discontinued operations (Note 11).
In December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). was enacted. The Tax Act makes broad and complexincludes a number of changes to existing U.S. tax laws that impact us, most notably a reduction of the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate income tax rate from the maximum federal statutory rate of 35%35 percent to 21%. The Tax Act states that the 21% U.S. federal corporate tax rate is effective21 percent for tax years, beginning on or aftereffective January 1, 2018. However, existing tax law, which was not amended underWe performed a review of the Tax Act governs when a change in tax rate is effective. Existing tax law providesfor the fiscal year ended April 30, 2018, and based on the information available at that if the taxable year includes the effective date of any rate change (unless the change is the first date of the taxable year), taxes should be calculated by applying a blended ratetime, recorded certain provisional amounts related to the taxable income for the year. Section 15revaluation of the Internal Revenue Code stipulates that our blended federal rate is 29.73% for fiscal year 2018. We have not yet determined the impact the rate reduction will have on our gross deferred tax assetassets and liabilities, and offsettingwhich were fully offset by a valuation allowance. However, we have a full allowance against the deferred tax asset and as a result there was no impact to income tax expense for the quarter ended January 31, 2018.
In conjunction with the tax law changes,December 2017, the SEC staff issued interpretive guidance under Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As discussed above, for the fiscal year ended April 30, 2018, we recognized provisional tax impacts related to the revaluation of deferred tax assets and liabilities, which amounts were fully offset by a valuation allowance. The ultimate impact which is expected to be recorded by April 30, 2018, may differ from anythese provisional amounts, due to among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the tax Act, and the fact that we cannot definitively predict what our deferred tax balance will ultimately be as of April 30, 2018.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
Basic and Dilutive Net Loss Per Common Share
Basic net loss per common shareTax Act. The accounting for these provisions is computed by dividing our net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period excluding the dilutive effects of stock options, shares of common stock expected to be issued undercomplete when our Employee Stock Purchase Plan (the “ESPP”), warrants, and Series E Preferred Stock outstanding during2017 U.S. corporate income tax return is filed in the period. Diluted net loss per common share is computed by dividing our net loss attributable to common stockholders by the sumfirst quarter of the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effects of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Net loss attributable to common stockholders represents our net loss plus Series E Preferred Stock accumulated dividends. Series E Preferred Stock accumulated dividends include dividends declared for the period (regardless of whether or not the dividends have been paid) and dividends accumulated for the period (regardless of whether or not the dividends have been declared).calendar year 2019.
The potential dilutive effectAdoption of stock options, shares of common stock expected to be issued under our ESPP, and warrants outstanding during the period are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive effect of our Series E Preferred Stock outstanding during the period was calculated using the if-converted method assuming the conversion of Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but are excluded if their effect is anti-dilutive. However, because the impact of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per common share amounts for the three and nine months ended January 31, 2018 and 2017.
The calculation of weighted average diluted shares outstanding for the three and nine months ended January 31, 2018 and 2017 excludes the dilutive effect of the following weighted average outstanding stock options and shares of common stock expected to be issued under our ESPP as their impact are anti-dilutive during periods of net loss:
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Stock Options | 115,425 | – | 78,427 | – | ||||||||||||
| ESPP | 1,202 | 5,198 | 466 | 27,661 | ||||||||||||
| Total | 116,627 | 5,198 | 78,893 | 27,661 | ||||||||||||
The calculation of weighted average diluted shares outstanding for the three and nine months ended January 31, 2018 and 2017 also excludes the following weighted average outstanding stock options, warrants, shares of common stock expected to be issued under our ESPP, and Series E Preferred Stock (assuming the if-converted method), as their exercise price, purchase price and/or conversion price were greater than the average market price of our common stock during the respective periods, resulting in an anti-dilutive effect:
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Stock Options | 3,214,694 | 4,231,073 | 3,663,102 | 4,156,497 | ||||||||||||
| Warrants | 39,040 | 39,040 | 39,040 | 39,040 | ||||||||||||
| Series E Preferred Stock | 1,978,783 | 1,978,784 | 1,978,783 | 1,948,109 | ||||||||||||
| Total | 5,232,517 | 6,248,897 | 5,680,925 | 6,143,646 | ||||||||||||
During February 2018, we sold an aggregate of 10,294,445 shares of our common stock in connection with an underwritten public offering (Note 13), which are not included in the calculation of basic and dilutive net loss per common share for the three and nine months ended January 31, 2018.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
Recently AdoptedOther Recent Accounting Pronouncements
EffectiveIn November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):Restricted Cash, which clarifies the presentation requirements of restricted cash within the statement of cash flows. ASU 2016-18 will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We adopted ASU 2016-18 on May 1, 2017, we adopted Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330):Simplifying2018 and the Measurement of Inventory. ASU 2015-11 requires that inventory should be measuredcash and cash equivalents at the lowerbeginning-of-period and end-of-period total amounts in our condensed consolidated statements of cost and net realizable valuecash flows have been adjusted to include $1,150 of restricted cash for entities that measure inventory usingeach of the first-in, first-out method.periods presented.
In May 2017, the FASB issued ASU 2015-11 defines net realizable value as2017-09, Compensation - Stock Compensation (Topic 718):Scope of Modification Accounting,which provides guidance about which changes to the estimated selling pricesterms or conditions of a stock-based payment award require an entity to apply modification accounting in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. We adopted ASU 2017-09 on May 1, 2018. The adoption of this ASU 2015-11 did not have a material impact on our condensed consolidated financial statements.statements and related disclosures.
Effective May 1, 2017, we adopted ASU 2015-17, Income Taxes (Topic 740):Balance Sheet Classification of Deferred Taxes. Under existing standards, deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net long-term asset or liability. To simplify presentation, the new guidance will require that all deferred tax assets and liabilities, along with related valuation allowances, be classified as long-term on the balance sheet. As a result, each tax-paying jurisdiction will now only have one net long-term deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. Due to the full valuation allowance on our U.S. deferred tax assets, the adoption of ASU 2015-17 did not have a material impact on our condensed consolidated financial statements.
Effective May 1, 2017, we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 changes certain aspects of accounting for share-based payments to employees and involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Specifically, ASU 2016-09 requires that all income tax effects of share-based awards be recognized as income tax expense or benefit in the reporting period in which they occur. Additionally, ASU 2016-09 amends existing guidance to allow forfeitures of share-based awards to be recognized as they occur. Previous guidance required that share-based compensation expense include an estimate of forfeitures. Upon adoption of ASU 2016-09, we made a policy election to recognize forfeitures as they occur. The adoption of ASU 2016-09 did not have a material impact on our condensed consolidated financial statements.
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avid bioservices, INC.
Pending Adoption of Recent Accounting PronouncementsNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
In May 2014, the Financial
New Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606):Revenue from Contracts with Customers, which, along with subsequent amendments issued in 2015 and 2016, will replace substantially all current US GAAP revenue recognition guidance. ASU 2014-09, as amended, is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services utilizing a new five-step revenue recognition model. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09, as amended, is effective for our annual reporting period beginning May 1, 2018. The new guidance permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach where the new standard is applied in the financial statements starting with the year of adoption. Under both approaches, cumulative impact of the adoption is reflected as an adjustment to retained earnings (accumulated deficit) as of the earliest date presented in accordance with the new standard. We are continuing to assess the impact of the new guidance on our accounting policies and procedures and are evaluating the new requirements as applied to existing manufacturing contracts. While we continue to assess the impact of the new guidance, we believe the adoption of ASU 2014-09 will modify the way we analyze contracts. We have identified our revenue streams and based on our preliminary assessment, we believe the most significant impact may relate to the recognition of contract manufacturing revenue over a period of time rather than at a point in time. We plan to adopt ASU 2014-09, as amended, on May 1, 2018, on a modified retrospective basis.Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-2The new standard requires an entitylessees to recognize right-of-use assets and lease liabilities on its balance sheet for all leases with lease terms greater than 12 months and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, which will be our fiscal year 2020 beginning May 1, 2019. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of ASU 2016-02 on our condensed consolidated financial statements and related disclosures.
| 3. | Trade and other RECEIVABLEs |
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):Restricted Cash, which addresses diversity in practice related to the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, which will be our fiscal year 2019 beginning May 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-18 to have a material impact on our condensed consolidated financial statements and related disclosures.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718):Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, which will be our fiscal year 2019 beginning May 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-09 to have a material impact on our condensed consolidated financial statements and related disclosures.
3. Trade and other RECEIVABLEs
Trade receivables represent amounts billed for contract manufacturing services and are recorded at the invoiced amount net of an allowance for doubtful accounts, if necessary. Other receivables are reported at amounts expected to be collected net of an allowance for doubtful accounts, if necessary. Trade and other receivables consist of the following:
January 31, 2018 | April 30, 2017 | |||||||
| Trade receivables(1) | $ | 7,967,000 | $ | 7,274,000 | ||||
| Other receivables | – | 468,000 | ||||||
| Total trade and other receivables | $ | 7,967,000 | $ | 7,742,000 | ||||
______________
(1) Represents amounts billed for contract manufacturing services.
October 31, 2018 | April 30, 2018 | |||||||
| Trade receivables | $ | 4,183 | $ | 3,539 | ||||
| Other receivables | 14 | 215 | ||||||
| Total trade and other receivables | $ | 4,197 | $ | 3,754 | ||||
We continually monitor our allowance for doubtful accounts for all receivables. We apply judgment in assessing the ultimate realization of our receivables and we estimate an allowance for doubtful accounts based on various factors, such as, the aging of accounts receivable balances, historical experience, and the financial condition of our customers. Based on our analysis of our receivables as of JanuaryOctober 31, 2018 and April 30, 2017,2018, we determined no allowance for doubtful accounts was necessary.
| 4. | INVENTORIES |
4. PROPERTY AND EQUIPMENT
Inventories are recorded at the lower of cost or market (net realizable value) and include raw materials and work-in-process (comprised of raw materials, direct labor and overhead costs associated with in-process manufacturing services) associated with contract manufacturing services. Overhead costs allocated to work-in-process inventory are based on the normal capacity of our production facilities and do not include costs from abnormally low production or idle capacity, which are expensed directly to cost of contract manufacturing in the period incurred. During the three and six months ended October 31, 2018 and 2017, we expensed $2,923 and $4,652, respectively, and $4,938 and $5,838, respectively, in idle capacity costs directly to cost of contract manufacturing in the accompanying condensed consolidated financial statements. Subsequent to the adoption of ASC 606, manufacturing costs associated with work-in-process are recorded to cost of contract manufacturing in the accompanying condensed consolidated financial statements as incurred. Cost is determined by the first-in, first-out method. Inventories consist of the following:
October 31, 2018 | April 30, 2018 | |||||||
| Raw materials | $ | 9,648 | $ | 8,165 | ||||
| Work-in-process | 88 | 7,964 | ||||||
| Total inventories | $ | 9,736 | $ | 16,129 | ||||
| 13 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
| 5. | PROPERTY AND EQUIPMENT |
Property and equipment is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related asset, generally ranging from three to ten years. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the estimated useful life of the asset or the remaining lease term. Construction-in-progress, which represents direct costs related to the construction of various equipment and leasehold improvements associated with our manufacturing facilities, are not depreciated until the asset is completed and placed into service. No interest was incurred or capitalized as construction-in-progress as of January 31, 2018.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARYOctober 31, 2018 (unaudited) (CONTINUED)
and April 30, 2018. All of our property and equipment are located in the U.S.
Property and equipment, net, consists of the following:
January 31, 2018 | April 30, 2017 | October 31, 2018 | April 30, 2018 | |||||||||||||
| Leasehold improvements | $ | 20,579,000 | $ | 20,098,000 | $ | 20,738 | $ | 20,686 | ||||||||
| Laboratory equipment | 10,683,000 | 10,777,000 | 12,380 | 10,258 | ||||||||||||
| Furniture, fixtures, office equipment and software | 4,688,000 | 4,499,000 | 5,159 | 4,597 | ||||||||||||
| Construction-in-progress | 2,558,000 | 2,841,000 | 1,644 | 3,310 | ||||||||||||
| Total property and equipment | 38,508,000 | 38,215,000 | 39,921 | 38,851 | ||||||||||||
| Less accumulated depreciation and amortization | (12,183,000 | ) | (11,700,000 | ) | (13,642 | ) | (12,372 | ) | ||||||||
| Total property and equipment, net | $ | 26,325,000 | $ | 26,515,000 | $ | 26,279 | $ | 26,479 | ||||||||
Depreciation and amortization expense for the three and ninesix months ended JanuaryOctober 31, 2018 was $645,000$683 and $1,945,000,$1,325, respectively. Depreciation and amortization expense for the three and ninesix months ended JanuaryOctober 31, 2017 was $631,000$658 and $1,850,000,$1,300, respectively.
5. INVENTORIES
| 6. | Capital lease obligation |
Inventories are recorded at the lower of cost or market (net realizable value) and primarily include raw materials, work-in-process (comprised of raw materials, direct labor and overhead costs associated with in-process manufacturing services), and finished goods (representing manufacturing services completed and ready for shipment) associated with contract manufacturing services. Overhead costs allocated to work-in-process inventory are based on the normal capacity of our production facilities and do not include costs from abnormally low production or idle capacity, which are expensed directly to cost of contract manufacturing in the period incurred. During the three and nine months ended January 31,In June 2018, we expensed $5,344,000financed certain software under a capital lease agreement that bears interest at a rate of approximately 4.19% per annum. The gross value of software purchased under the capital lease of $245 and $11,182,000, respectively,the related accumulated amortization of $34 are included in idle capacity costs directly to cost of contract manufacturingproperty and equipment, net in the accompanying unaudited condensed consolidated financial statements. No idle capacity costs were incurred during the same prior year periods. Cost is determined by the first-in, first-out method. Inventories consist of the following:
January 31, 2018 | April 30, 2017 | |||||||
| Raw materials | $ | 8,799,000 | $ | 11,304,000 | ||||
| Work-in-process | 5,419,000 | 13,755,000 | ||||||
| Finished goods | – | 8,040,000 | ||||||
| Total inventories | $ | 14,218,000 | $ | 33,099,000 | ||||
6. STOCKHOLDERS’ EQUITYbalance sheet at October 31, 2018.
Our ability to continue to fund our operations is highly dependent onMinimum future lease payments under the amountcapital lease as of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity.October 31, 2018 are as follows:
On January 12, 2018, we filed a universal shelf registration statement with the SEC on Form S-3, File number 333-222548 (“January 2018 Shelf”), which was declared effective by the SEC on January 25, 2018, under which we may issue, from time to time, in one or more offerings, offer and sale either individually or in combination up to $125,000,000 of our securities, including common stock, preferred stock, debt securities and warrants. As of January 31, 2018, we had not issued any of our securities under the January 2018 Shelf. Subsequent to January 31, 2018, we issued securities under the January 2018 Shelf as further discussed in Note 13, “Subsequent Events”.
| Fiscal Year ending April 30,: | ||||
| 2019 (remainder of fiscal year) | $ | – | ||
| 2020 | 85 | |||
| 2021 | 97 | |||
| Total minimum lease payments | 182 | |||
| Amount representing interest | (11 | ) | ||
| Net present value minimum lease payments | 171 | |||
| Less current portion included in other current liabilities | (78 | ) | ||
| Long-term portion included in capital lease obligation, less current portion | $ | 93 | ||
avid bioservices, inc.INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED) (UNAUDITED)
(in thousands, except share and per share information)
| 7. | STOCKHOLDERS’ EQUITY |
Sale of Common Stock
On August 7, 2015, we entered into an At Market Issuance Sales Agreement (“AMI Sales Agreement”) with MLV & Co. LLC (“MLV”), pursuant to which we were able to sell shares of our common stock through MLV, as agent, for aggregate gross proceeds of up to $30,000,000, in registered transactions from our shelf registration statement on Form S-3 (File No. 333-201245), which was declared effective by the SEC on January 15, 2015. Sales of our common stock through MLV were made by any method that was deemed an “at the market offering” as defined in Rule 415 of the Securities Act. We paid MLV a commission equal to 2.5% of the gross proceeds from the sale of our common stock pursuant to the AMI Sales Agreement. During the quarter ended July 31, 2017, we sold 1,051,258 shares of our common stock at market prices under the AMI Sales Agreement, for aggregate gross proceeds of $4,304,000 before deducting commissions and other issuance costs of $111,000. As of July 31, 2017, we had raised the full amount of gross proceeds available to us under the AMI Sales Agreement.
Series E Preferred Stock Dividend
The following table summarizes the 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”) quarterly dividend activity during the ninesix months ended JanuaryOctober 31, 2018:
Declaration Date | Record Date | Payment Date | Dividends Paid | Dividend Per Share | ||||||||
| 6/6/2017 | 6/19/2017 | 7/3/2017 | $ | 1,081,000 | $ | 0.65625 | ||||||
| 9/5/2017 | 9/18/2017 | 10/2/2017 | $ | 1,081,000 | $ | 0.65625 | ||||||
| 12/7/2017 | 12/18/2017 | 1/2/2018 | $ | 1,081,000 | $ | 0.65625 | ||||||
Declaration Date | Record Date | Payment Date | Dividends Paid | Dividend Per Share | ||||||||
| 6/6/2018 | 6/18/2018 | 7/2/2018 | $ | 1,081,000 | $ | 0.65625 | ||||||
| 9/5/2018 | 9/17/2018 | 10/1/2018 | $ | 1,081,000 | $ | 0.65625 | ||||||
Shares of Common Stock Authorized and Reserved for Future Issuance
We areOn October 4, 2018, our stockholders approved an amendment to our Certificate of Incorporation to decrease our authorized to issue up tonumber of shares of common stock from 500,000,000 shares to 150,000,000 shares (the “Certificate of our common stock. Amendment”). The Certificate of Amendment became effective upon filing with the Secretary of State of the State of Delaware on October 4, 2018.
As of JanuaryOctober 31, 2018, 45,257,18056,063,488 shares of our common stock were issued and outstanding. In addition, our common stock outstanding as of JanuaryOctober 31, 2018 excluded the following shares of our common stock reserved for future issuance:
| · |
| · |
| · | 6,826,435 shares of common stock issuable upon conversion of our outstanding Series E Preferred Stock(1). |
_____________
| The Series E Preferred Stock is convertible into a number of shares of our common stock determined by dividing the liquidation preference of $25.00 per share by the conversion price, currently $21.00 per share. If all of our outstanding shares of Series E Preferred Stock were converted at the $21.00 per share conversion price, the holders of our Series E Preferred Stock would receive an aggregate of 1,961,619 shares of our common stock. However, we have reserved the maximum number of shares of our common stock that could be issued upon a change of control event assuming our shares of common stock are acquired for consideration of $5.985 per share or less. In this scenario, each outstanding share of our Series E Preferred Stock could be converted into 4.18 shares of our common |
7. equity compensation plans
| 15 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
| 8. | equity compensation plans |
Stock Incentive Plans
On October 4, 2018, our stockholders approved the Avid Bioservices, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”) which provides, among other things, the ability for us to grant stock options, restricted stock, stock appreciation rights, restricted stock units and other forms of share-based awards.
The number of shares of our common stock authorized for issuance under the 2018 Plan is the sum of (A) 2,350,000 and (B) the aggregate number of shares of common stock available for the grant of awards under our 2009, 2010, and 2011 Stock Incentive Plans (the “Prior Plans”) as of October 4, 2018 (the “Effective Date” of the 2018 Plan). The 2018 Plan replaced the Prior Plans, and no new awards will be granted under the Prior Plans as of the Effective Date. However, any awards outstanding under the Prior Plans on the Effective Date will remain subject to and be paid under the applicable Prior Plan, and any shares subject to outstanding awards under the Prior Plans that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the 2018 Plan.
As of JanuaryOctober 31, 2018, we had an aggregate of 5,433,6467,313,424 shares of our common stock reserved for issuance under our stock incentive plans, of which, 3,989,3563,146,713 shares were subject to outstanding options and 1,444,290restricted stock rights and 4,166,711 shares were available for future grants of share-basedstock-based awards.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
Stock Options
The following summarizes our stock option transaction activity for the ninesix months ended JanuaryOctober 31, 2018:
| Stock Options | Shares | Weighted Average Exercisable Price | Shares | Weighted Average Exercisable Price | ||||||||||||
| Outstanding, May 1, 2017 | 4,081,548 | $ | 8.77 | |||||||||||||
| Outstanding, May 1, 2018 | 3,597,738 | $ | 8.74 | |||||||||||||
| Granted | 679,497 | $ | 4.17 | 439,647 | $ | 5.05 | ||||||||||
| Exercised | (117,019) | $ | 3.40 | (334,556 | ) | $ | 3.47 | |||||||||
| Canceled or expired | (654,670) | $ | 8.42 | (679,366 | ) | $ | 11.26 | |||||||||
| Outstanding, January 31, 2018 | 3,989,356 | $ | 8.70 | |||||||||||||
| Outstanding, October 31, 2018 | 3,023,463 | $ | 8.22 | |||||||||||||
Restricted Stock Rights
On June 15, 2018, the Compensation Committee of the Board of Directors granted an aggregate of 128,050 restricted stock right (“RSR”) awards to substantially all of our employees, excluding executive officers, which entitles the employee the right to be issued a share of our common stock upon vesting of the RSR. The RSR’s were granted under our 2011 Stock Incentive Plan and vest annually in equal installments over a four-year period. The RSR’s have an aggregate grant date fair value of $464, based on the closing market price of our common stock on the date of grant, which is amortized as stock-based compensation expense on a straight-line basis over the period of vesting.
| 16 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
The following summarizes our restricted stock right transaction activity for the six months ended October 31, 2018:
| Restricted Stock Rights | Shares | Weighted Average Grant Date Fair Value | ||||||
| Outstanding, May 1, 2018 | – | $ | – | |||||
| Granted | 128,050 | 3.62 | ||||||
| Vested | – | – | ||||||
| Forfeited | (4,800 | ) | 3.62 | |||||
| Outstanding, October 31, 2018 | 123,250 | $ | 3.62 | |||||
Employee Stock Purchase Plan (ESPP)
We have reserved a total of 2,142,857 shares of our common stock to be purchased under our ESPP,Employee Stock Purchase Plan (“ESPP”), of which 1,303,7701,231,699 shares remained available to purchase at JanuaryOctober 31, 2018, and are subject to adjustment as provided in the ESPP for stock splits, stock dividends, recapitalizations and other similar events. Under the ESPP, we sell shares to participants at a price equal to the lesser of 85% of the fair market value of our common stock at the (i) beginning of a six-month offering period, or (ii) end of the six-month offering period. The ESPP provides for two six-month offering periods each year; the first offering period begins on the first trading day on or after each May 1; the second offering period begins on the first trading day on or after each November 1. During the ninesix months ended JanuaryOctober 31, 2018, 55,96639,710 shares of our common stock were purchased under the ESPP at a purchase price of $3.87$2.87 per share.
Share-BasedStock-Based Compensation
Total share-basedstock-based compensation expense related to share-basedstock-based awards issued under our equity compensation plans is included in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss as follows:
Three Months Ended January 31, | Nine Months Ended January 31, | Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
| Cost of contract manufacturing | $ | 139,000 | $ | 23,000 | $ | 277,000 | $ | 89,000 | $ | 85 | $ | 138 | $ | 170 | $ | 138 | ||||||||||||||||
| Selling, general and administrative | 259,000 | 389,000 | 589,000 | 1,183,000 | 240 | 125 | 452 | 330 | ||||||||||||||||||||||||
| Discontinued operations | 14,000 | 457,000 | 340,000 | 1,319,000 | – | 46 | – | 326 | ||||||||||||||||||||||||
| Total | $ | 412,000 | $ | 869,000 | $ | 1,206,000 | $ | 2,591,000 | $ | 325 | $ | 309 | $ | 622 | $ | 794 | ||||||||||||||||
| Share-based compensation from: | ||||||||||||||||||||||||||||||||
| Stock options | $ | 374,000 | $ | 815,000 | $ | 1,070,000 | $ | 2,369,000 | $ | 275 | $ | 287 | $ | 529 | $ | 696 | ||||||||||||||||
| Restricted stock rights | 27 | – | 42 | – | ||||||||||||||||||||||||||||
| ESPP | 38,000 | 54,000 | 136,000 | 222,000 | 23 | 22 | 51 | 98 | ||||||||||||||||||||||||
| $ | 412,000 | $ | 869,000 | $ | 1,206,000 | $ | 2,591,000 | |||||||||||||||||||||||||
| Total | $ | 325 | $ | 309 | $ | 622 | $ | 794 | ||||||||||||||||||||||||
| 17 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
As of JanuaryOctober 31, 2018, the total estimated unrecognized compensation cost related to non-vested employee stock options and non-vested restricted stock rights was $2,605,000. This cost is$3,118 and $404, respectively. These costs are expected to be recognized over a weighted average vesting periods of 2.93 years and 3.62 years, respectively.
| 9. | NET LOSS PER COMMON SHARE |
Basic net loss per common share is computed by dividing our net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period, excluding the dilutive effects of 2.67 years based on current assumptions.stock options, unvested RSRs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Diluted net loss per common share is computed by dividing our net loss attributable to common stockholders by the sum of the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effects of stock options, unvested RSRs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Net loss attributable to common stockholders represents our net loss plus Series E Preferred Stock accumulated dividends. Series E Preferred Stock accumulated dividends include dividends declared for the period (regardless of whether or not the dividends have been paid) and dividends accumulated for the period (regardless of whether or not the dividends have been declared).
8. WARRANTS
NoThe potential dilutive effect of stock options, unvested RSRs, shares of common stock expected to be issued under our ESPP, and warrants wereoutstanding during the period are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive effect of our Series E Preferred Stock outstanding during the period was calculated using the if-converted method assuming the conversion of Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but are excluded if their effect is anti-dilutive. However, because the impact of stock options, unvested RSRs, shares of common stock expected to be issued or exercisedunder our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per common share amounts for the three and ninesix months ended JanuaryOctober 31, 2018. As2018 and 2017.
The calculation of Januaryweighted average diluted shares outstanding for the three and six months ended October 31, 2018 and 2017 excludes the dilutive effect of the following weighted average outstanding stock options, unvested RSRs and shares of common stock expected to be issued under our ESPP as their impact is anti-dilutive during periods of net loss:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Stock Options | 234,763 | 31,877 | 185,996 | 69,065 | ||||||||||||
| RSRs | 55,963 | – | 30,645 | – | ||||||||||||
| ESPP | 16,401 | – | 9,090 | 133 | ||||||||||||
| Total | 307,127 | 31,877 | 225,731 | 69,198 | ||||||||||||
| 18 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
The calculation of weighted average diluted shares outstanding for the three and six months ended October 31, 2018 and 2017 also excludes the following weighted average outstanding stock options, warrants, and Series E Preferred Stock (assuming the if-converted method), as their exercise prices or conversion price were greater than the average market price of our common stock during the respective periods, resulting in an anti-dilutive effect:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Stock Options | 2,238,986 | 3,600,478 | 2,599,877 | 3,608,917 | ||||||||||||
| ESPP | – | 43,332 | – | – | ||||||||||||
| Warrants | 12,306 | 39,040 | 25,673 | 39,040 | ||||||||||||
| Series E Preferred Stock | 1,978,783 | 1,978,783 | 1,978,783 | 1,978,783 | ||||||||||||
| Total | 4,230,075 | 5,661,633 | 4,604,333 | 5,626,740 | ||||||||||||
| 10. | WARRANTS |
During the three and six months ended October 31, 2018, warrants to purchase 39,040 shares of our common stock at an exercise priceexpired unexercised. As of $17.29 were outstandingOctober 31, 2018, we had no warrants issued and are exercisable through August 30, 2018.outstanding.
| 11. | Sale of research and development assets |
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
9. RESTRUCTURING
On August 9, 2017, our Board of Directors approved, and our management implemented, a restructuring plan intended to reduce operating costs and improve cost efficiencies while we pursued strategic options for our research and development assets and focus our efforts on growing our CDMO business. Under this restructuring plan, which we completed in October 2017, we reduced our overall workforce by 57 employees. As a result, during the quarter ended October 31, 2017, we incurred an aggregate of $1,588,000 in restructuring costs consisting of one-time termination benefits, including severance, and other employee-related costs, of which $330,000 related to our research and development segment and $1,258,000 related to our contract manufacturing services segment. The restructuring costs associated with our research and development segment are included in loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for the nine months ended January 31, 2018 (Note 10). The restructuring costs associated with our contract manufacturing services segment are included in operating expenses in the accompanying unaudited condensed consolidated financial statements for the nine months ended January 31, 2018. All restructuring costs were paid as of January 31, 2018.
10. Sale of research and development assets
February 2018 Asset Assignment and Purchase Agreement
On February 12, 2018, we entered into an Asset Assignment and Purchase Agreement (the “Purchase“February 2018 Purchase Agreement”) with a third-party oncology therapeutics company (the “Buyer”Oncologie, Inc. (“Oncologie”) pursuant to which we sold to the BuyerOncologie the majority of our research and development assets, which included the assignment of certain exclusive licenses related to our former PS-targetingphosphatidylserine (PS)-targeting program, as well as certain other licenses and assets useful and/or necessary for the potential commercialization of bavituximab.
Pursuant to the February 2018 Purchase Agreement, we expect to receivereceived an aggregate of $8 million$8,000 from the Buyer, payable inOncologie, paid over three installments, over a period of approximately six and one-half months following the date of the Purchase Agreement, the first of which is due by$3,000 was received in March 14, 2018.2018 (first installment), $3,000 was received in June 2018 (second installment) and $2,000 was received in September 2018 (third installment). We are also eligible to receive up to an additional $95 million$95,000 in the event that the BuyerOncologie achieves certain development, regulatory and commercialization milestones with respect to bavituximab. In addition, we are eligible to receive royalties on net sales that are upward tiering into the mid-teens in the event that the BuyerOncologie commercializes and sells products utilizing bavituximab or the other transferred assets. The BuyerAs of October 31, 2018, no development, regulatory and commercialization milestones as defined in the February 2018 Purchase Agreement have been achieved by Oncologie. Oncologie is responsible for all future research, development and commercialization of bavituximab, including all related intellectual property costs and all other future liabilities and obligations arising out of the ownership of the transferred assets (i.e., we remain obligated for all liabilities associated with the research and development assets associated with the February 2018 Purchase Agreement incurred or arising prior to February 13, 2018). In addition, as part of the transaction,during May 2018, we and the Buyer agreedentered into a separate services agreement with Oncologie to diligently work in good faith to negotiate and enter into, within 90 days after the date of the Purchase Agreement, an agreement for us to provide future contract development and manufacturing activities to the Buyerservices, at our commercial rates, in support of bavituximab.the research and development assets sold under the February 2018 Purchase Agreement.
| 19 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
September2018 Asset Assignment and Purchase Agreement
On September 13, 2018, we entered into a separate Asset Assignment and Purchase Agreement (the “September 2018 Purchase Agreement”) with Oncologie pursuant to which we sold to Oncologie our r84 technology, which included the assignment of certain licenses, patents and other assets useful and/or necessary for the potential commercialization of the r84 technology.
Pursuant to the September 2018 Purchase Agreement, we received $1,000 from Oncologie, which amount was paid to us in October 2018. We are also eligible to receive up to an additional $21,000 in the event that Oncologie achieves certain development, regulatory and commercialization milestones with respect to r84. In addition, we are eligible to receive royalties on net sales ranging from the low to mid-single digits in the event that Oncologie commercializes and sells products utilizing the r84 technology. As of October 31, 2018, no development, regulatory and commercialization milestones as defined in the September 2018 Purchase Agreement have been achieved by Oncologie. Oncologie is responsible for all future research, development and commercialization of r84, including all related intellectual property costs and all other future liabilities and obligations arising out of the ownership of the transferred assets (i.e., we remain obligated for all liabilities associated with the research and development assets associated with the September 2018 Purchase Agreement incurred or arising prior to September 13, 2018).
Discontinued Operations
As a result of (i) the sale of our PS-targeting program (ii) the held for sale classification ofand our R84r84 technology, (iii) the abandonment of our remaining research and development assets, (including our intent to return the exosome technology back to the original licensor), and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business, that will have a major effect on our operations and financial results as we will no longer incur costs associated with research and development, the operating results from our former research and development segment are reportedand the related assets and liabilities have been presented as a loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 1). Accordingly, the accompanying unaudited condensed consolidated financial statements for the three and nine months ended January 31, 2018 and 2017 reflect the operations of our research and development segment as a discontinued operation. The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the former research and development segment. The allocations do not include amounts related to general corporate administrative expenses or interest expense. Therefore, the results of operations from the former research and development segment do not necessarily reflect what the results of operations would have been had the former research and development segment operated as a stand-alone segment.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
The following table summarizes the results of discontinued operations for the three and ninesix months ended JanuaryOctober 31, 2018 and 2017:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||||||||||||||||||
Three Months Ended January 31, | Nine Months Ended January 31, | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||
| Research and development | $ | 374,000 | $ | 5,912,000 | $ | 7,590,000 | $ | 21,347,000 | $ | – | $ | 3,650 | $ | – | $ | 7,216 | ||||||||||||||||
| Selling, general and administrative | 1,315,000 | 293,000 | 2,097,000 | 1,256,000 | – | 343 | – | 782 | ||||||||||||||||||||||||
| Restructuring charges | – | – | 330,000 | – | – | 330 | – | 330 | ||||||||||||||||||||||||
| Total operating expenses | 1,689,000 | 6,205,000 | 10,017,000 | 22,603,000 | $ | – | $ | 4,323 | $ | – | $ | 8,328 | ||||||||||||||||||||
| Other expense | 387,000 | – | 387,000 | – | ||||||||||||||||||||||||||||
| Loss from discontinued operations | $ | 2,076,000 | $ | 6,205,000 | $ | 10,404,000 | $ | 22,603,000 | ||||||||||||||||||||||||
| Gain on sale of research and development assets before income taxes | $ | 1,000 | – | $ | 1,000 | – | ||||||||||||||||||||||||||
| Income tax expense | (261 | ) | – | (261 | ) | – | ||||||||||||||||||||||||||
| Income (loss) from discontinued operations, net of tax | $ | 739 | $ | (4,323 | ) | $ | 739 | $ | (8,328 | ) | ||||||||||||||||||||||
We will complete the accounting for the Purchase Agreement during the fourth quarter of our current fiscal year ending April 30, 2018. In addition, we expect to use a portion of our net operating losses to offset the taxable gain from the Purchase Agreement, if any, which could result in a partial release of our valuation allowance.
Assets Held for Sale
| 20 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
The following table summarizes the assets and liabilities of discontinued operations as of October 31, 2018 and April 30, 2018:
| October 31, 2018 | April 30, 2018 | |||||||
| Assets: | ||||||||
| Other receivables | $ | – | $ | 5,000 | ||||
| Total assets of discontinued operations | $ | – | $ | 5,000 | ||||
| Liabilities: | ||||||||
| Accounts payable | $ | – | $ | 32 | ||||
| Accrued clinical trial and related fees | 117 | 3,613 | ||||||
| Accrued payroll and related costs | 174 | 614 | ||||||
| Other liabilities | 125 | 291 | ||||||
| Total liabilities of discontinued operations | $ | 416 | $ | 4,550 | ||||
The carrying value of the assets and liabilities deemed a component of the discontinued research and development segmentoperations were not classified as “assets held“held for sale” in the accompanying unaudited condensed consolidated balance sheetssheet at JanuaryOctober 31, 2018 and the accompanying condensed consolidated balance sheet at April 30, 2017 since there were no related assets reported2018, as Oncologie did not purchase or assume any of the respective balance sheet dates and the Buyer did not assume anyreported assets or liabilities under the aforementioned February 2018 Purchase Agreement and September 2018 Purchase Agreement.
11. SEGMENT REPORTING
Changes in our Organizational Structure
Historically, our business had been organized into two reportable operating segments: (i) our research and development segment, and (ii) our contract manufacturing services segment. However, as a result of the aforementioned discontinued operation (Note 10),management has determined that the Company now operates in only one operating segment. Accordingly, effective January 31, 2018, we reported our financial results for one reportable segment to reflect this new organizational structure.The accounting policies of our one reportable segment are the same as those described in Note 2.In addition, the financial results of our discontinued research and development segment are reflected as a loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 10).
12. commitments and contingencies
Legal Proceedings – In the ordinary course of business, we are at times subject to various legal proceedings and disputes. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case.
| 12. | SUBSEQUENT EVENTS |
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
On October 10, 2013, a derivative and class action complaint, captionedMichaeli v. Steven W. King, et al., C.A. No. 8994-VCL, was filed in the Court of Chancery of the State of Delaware (the “Court”), purportedly on behalf of the Company, which was named a nominal defendant, against certain of our executive officers and our three former non-employee directors (collectively, the “Defendants”). On December 1, 2015, the plaintiffs filed an amended and supplemental derivative and class action complaint (the “Amended Complaint”). The Amended Complaint alleged that the Defendants breached their respective fiduciary duties in connection with certain purportedly improper compensation decisions made by our board of directors during the past four fiscal years ended April 30, 2015 and that our directors breached their fiduciary duty of candor by filing and seeking stockholder action on the basis of an allegedly materially false and misleading proxy statement for our 2013 annual meeting of stockholders. On May 15, 2017, the parties filed with the Court a Stipulation and Agreement of Compromise, Settlement and Release (the “Settlement”) setting forth the terms of the proposed settlement of the claims in the Amended Complaint. At a hearing on July 27, 2017, the Court issued an order approving the Settlement, which provided, among other things, that the three former non-employee directors agreed to pay or cause to be paid $1,500,000 to us, which amount is included as a reduction to selling, general and administrative expense in the accompanying unaudited condensed consolidated financial statements for the nine months ended January 31, 2018. We received such payment in full in August 2017.
13. SUBSEQUENT EVENTS
Sale of Research and Development Assets
On February 12, 2018, we sold the majority of our research and development assets to a third-party oncology therapeutics company (Note 10).
Public Offering of Common Stock
On February 14, 2018, we entered into an underwriting agreement (the “Underwriting Agreement”) with Wells Fargo Securities, LLC, as representative for the underwriters identified therein (collectively, the “Underwriters”), relating to the issuance and sale in an underwritten public offering of 9,000,000 shares of our common stock, par value $0.001 per share, at a public offering price of $2.25 per share (the “Offering”). In addition, pursuant to the Underwriting Agreement, we also granted the Underwriters a 30-day option to purchase up to an additional 1,350,000 shares of our Common Stock under this Offering at the public offering price of $2.25 per share less the underwriting discounts and commissions to cover over-allotments, if any (the “Overallotment Option”).
On February 20, 2018, we completed the Offering pursuant to which we sold 10,294,445 shares of our Common Stock, including 1,294,445 shares sold pursuant to the Underwriter’s Overallotment Option at the public offering price of $2.25 per share. The aggregate gross proceeds we received from the Offering, including the shares sold pursuant to the Overallotment Option, was $23,163,000, before deducting underwriting discounts and commissions and other offering related expenses. We intend to use the net proceeds from the offering for the expansion of our contract manufacturing business and for general corporate purposes.
The Offering was made pursuant to a prospectus supplement filed with the SEC on February 14, 2018 under our January 2018 Shelf (Note 6). As of March 12, 2018, aggregate gross proceeds of up to $101,837,000 remained available to us under the January 2018 Shelf.
Series E Preferred Stock Dividend
On March 7,5, 2018, our Board of Directors declared a quarterly cash dividend of $0.65625 per share on our Series E Preferred Stock. The dividend payment is equivalent to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference, accruing from JanuaryOctober 1, 2018 through MarchDecember 31, 2018. The cash dividend is payable on AprilJanuary 2, 20182019 to holders of the Series E Preferred Stock of record on March 19,December 17, 2018.
| Item 2. | Management’s Discussion and Analysis of Financial Condition And Results of Operations. |
The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Avid Bioservices, Inc. included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements”forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results of operations to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are 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 (the “Exchange Act”), 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. Forward-looking statements are often identified by terminologythe use of words such as, “may”, “should”, “plans”but not limited to, “anticipate”, “believe”, “will”“can”, “anticipate”“continue”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “project”, “seek”, “should”, “target”, “will”, “would” and similar expressions or “intend”, including their opposites or similar phrases or expressions. You should be aware that thesevariations intended to identify forward-looking statements. These statements are projections or estimates asbased on the beliefs and assumptions of our management based on information currently available to future events andmanagement. These forward-looking statements are subject to a number of factors that may tend to influencenumerous risks and uncertainties, including the accuracy ofrisks and uncertainties described under the statements. These forward-looking statements should not be regarded as a representation by us or any other person that our events or plans 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 describesection titled “Risk Factors” in Part II, Section 1A of this Quarterly Report on Form 10-Q, Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2017,2018, those identified in this “Management’s Discussion and the reportsAnalysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q, and in other filings we file from time to timemay make with the Securities and Exchange Commission (“SEC”) afterfrom time to time. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the dateimpact of this Quarterly Report. Actualall factors on our business or the extent to which any factor, or combination of factors, may cause actual results mayto differ materially from those contained in any forward lookingforward-looking statement. We qualify all of our forward-looking statements by these cautionary statements and, except as required by law, assume no obligation and do not intend to update these forward-looking statements.
Overview
Avid Bioservices, Inc., (“Avid”), formerly known as Peregrine Pharmaceuticals, Inc., isWe are a dedicated contract development and manufacturing organization (“CDMO”) committed to improving the lives of patients by manufacturing and delivering high quality pharmaceutical products. We providethat provides a comprehensive range of services from process development to current Good Manufacturing Practices (“cGMP”) commercial manufacturing focused on biopharmaceutical products derived from mammalian cell culture. With 25 years of experience producing monoclonal antibodies and recombinant proteins in batch, fed-batch and perfusion modes, our services include cGMP clinical and commercial product manufacturing, purification, bulk packaging, stability testing and regulatory strategy, submissionsubmissions and support. We also provide a variety of process development services, including cell line development and optimization, cell culture and feed optimization, analytical methods development and product characterization.
We have experience in performing process development and manufacturing of biologics since 1993 in our Franklin biomanufacturing facility or (“Franklin Facility,Facility”), located at our headquarters in Tustin, California. In March 2016, we expanded our manufacturing capacity through the launchcommissioning of our Myford biomanufacturing facility or (“Myford Facility,Facility”), which more than doubled our manufacturing capacity. The 42,000 square foot facility, which is our second biomanufacturing facility, includes multiple single-use bioreactors up to the 2,000-liter manufacturing scale. The Myford Facility was designed to accommodate a fully disposable biomanufacturing process for products in clinical development to commercial. The Myford Facility is located adjacent to our Franklin Facility.
In February 2017, we leased an additional 42,000 square feet of vacant warehouse space within the same building as our existing Myford Facility to build a third biomanufacturing facility to support future revenue growth as demand warrants. The proximity of this space will allow us to utilize existing manufacturing infrastructure that we believe should enhance our manufacturing efficiencies and reduce the overall cost and timeframe to construct this third biomanufacturing facility.
In addition, we have a strong regulatory track record consisting of a 15-year inspection history with no significant impact on our business. We have been audited by several regulatory agencies, including the U.S. Food and Drug Administration (“FDA”), the European Medicines Agency, the Brazilian Health Surveillance Agency (“ANVISA”), the Canadian Health Authority and the California Department of Health. In addition, between 2005 and 2017, we completed six successful pre-approval inspections. We also completed four FDA inspections between 2013 to the most recently completed inspection in February 2018, none of which resulted in any Form 483 observations by the FDA. We have also been audited and qualified by large and small, domestic and foreign, pharmaceutical and biotechnology companies interested in the production of biologic material for clinical and commercial use.
Business Transition
In the fall of 2017, we announced our intent to cease our research and development activities and to transition our business to a dedicated CDMO. As partCDMO, which we completed at the beginning of calendar 2018. During our transition, efforts, we have completedestablished and began executing on the following initiatives:near-term strategic objectives:
| · |
Strategic Objectives
Now that we have completed the transition of our business to a dedicated CDMO, we have established the following near-term strategic objectives:
| · | Continue to invest in manufacturing facilities and infrastructure to maximize our facility utilization and support our customers’ clinical and commercial development and manufacturing |
ResultsWe are currently in the process of Operationsexpanding and optimizing our process development capabilities and laboratory space, which includes expanding our total available process development laboratory space to more than 6,000 square feet, upgrading the infrastructure and equipment within our existing process development laboratories, and implementing new state-of-the-art technologies and equipment designed to facilitate efficient, high-throughput development of innovative upstream and downstream manufacturing processes. We are strategically conducting this work in phases to avoid disruption to current customer programs.
In assessing the performance of our business, we consider a variety of performance and financial measures. The following table compareskey indicators of the unaudited condensed consolidated statementsfinancial condition and operating performance of operations from our continuing operations for the threebusiness are contract manufacturing revenue, gross profit, selling, general and nine months ended January 31, 2018administrative expenses and 2017.operating income.
Three Months Ended January 31, | Nine Months Ended January 31, | |||||||||||||||||||||||
| 2018 | 2017 | $ Change | 2018 | 2017 | $ Change | |||||||||||||||||||
| Contract manufacturing revenue | $ | 6,819,000 | $ | 10,747,000 | $ | (3,928,000 | ) | $ | 46,678,000 | $ | 39,726,000 | $ | 6,952,000 | |||||||||||
| Cost of contract manufacturing | 10,951,000 | 7,974,000 | 2,977,000 | 47,641,000 | 26,477,000 | 21,164,000 | ||||||||||||||||||
| Gross profit (loss) | (4,132,000 | ) | 2,773,000 | (6,905,000 | ) | (963,000 | ) | 13,249,000 | (14,212,000 | ) | ||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling, general & administrative | 4,824,000 | 4,365,000 | 459,000 | 12,273,000 | 13,602,000 | (1,329,000 | ) | |||||||||||||||||
| Restructuring charges | – | – | – | 1,258,000 | – | 1,258,000 | ||||||||||||||||||
| Total operating expenses | 4,824,000 | 4,365,000 | 459,000 | 13,531,000 | 13,602,000 | (71,000 | ) | |||||||||||||||||
| Operating loss | (8,956,000 | ) | (1,592,000 | ) | (7,364,000 | ) | (14,494,000 | ) | (353,000 | ) | (14,141,000 | ) | ||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Interest and other income | 42,000 | 25,000 | 17,000 | 83,000 | 71,000 | 12,000 | ||||||||||||||||||
| Interest and other expense | (14,000 | ) | (2,000 | ) | (12,000 | ) | (18,000 | ) | (2,000 | ) | (16,000 | ) | ||||||||||||
| Loss from continuing operations | $ | (8,928,000 | ) | $ | (1,569,000 | ) | $ | (7,359,000 | ) | $ | (14,429,000 | ) | $ | (284,000 | ) | $ | (14,145,000 | ) | ||||||
We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes.
Contract Manufacturing Revenue
Three Months: The decrease in contractContract manufacturing revenue of $3,928,000 (37%) during the three months ended January 31, 2018 compared to the same period in the prior year was primarily due to a decrease in the number ofis derived from services provided under our customer contracts and are disaggregated into manufacturing runs completed and shipped in the current year period compared to the same period in the prior year, which can primarily be attributed to a decrease in manufacturing demand from our second largest customer.
Nine Months:process development revenue streams. The increase in contract manufacturing revenue stream represents revenue from the manufacturing of $6,952,000 (17%) during the nine months ended January 31, 2018 compared to the same period in the prior year can primarily be attributed tocustomer product(s) derived from mammalian cell culture covering clinical through commercial manufacturing runs. The process development revenue stream represents revenue from non-manufacturing related services associated with several manufacturing runs in the aggregate amount of $9,924,000 used to support the process validationcustom development of a customer product, which product was ready for shipment in fiscal year 2017, but was deferred to fiscal year 2018 due to a shipping delay. This increase was offset partially offset by a decrease in manufacturing demand from our two largest customers. Excluding any future potential new business, we expect contract manufacturing revenue for the full fiscal year ending April 30, 2018 to decline in comparison to fiscal year 2017. Part of this decline is due to lower anticipated commitments from Halozyme, Inc., our largest customer, based on its most recent committed forecast (covering the three quarters ending September 30, 2018). As we seek to expand and diversify our customer base, we have secured five new customers since January 2017. These new customers are predominately in an earlier stage of development and, therefore, we expect that contract manufacturing revenue from these new customers during fiscal year 2018 will only partially offset the anticipated decrease in revenue from our other existing customers.
Therefore, based on our current commitments for manufacturing services and the anticipated completion of in-process manufacturing runs, we continue to expect contract manufacturing for the fiscal year ending April 30, 2018 to range from $50 to $55 million.customer’s product.
Gross Profit (Loss)
Three Months: During the three months ended January 31, 2018, gross margins declinedGross profit is equal to a negative 61% primarily driven by idle capacity costs in the current period, compared to gross margins of 26% for the same prior year three-month period, during which we incurred no idle capacity costs. Included withincontract manufacturing revenue less cost of contract manufacturing are idle capacity costs of $5,344,000, which negatively impacted gross margin by 78 percentage points for the three months ended January 31, 2018. This current period decline was further impacted by higher manufacturing costs associated with lower facility utilization in addition to the variability of manufacturing costs from product to product.
Nine Months: During the nine months ended January 31, 2018, gross margins declined to a negative 2%, primarily driven by idle capacity costs in the current period compared to 33% for the same prior year nine-month period, during which we incurred no idle capacity costs. Included within costmanufacturing. Cost of contract manufacturing arereflects the direct cost of labor, overhead and material costs. Direct labor costs include personnel costs within the manufacturing, process development, quality assurance, quality control, validation, supply chain and facilities functions. Overhead costs include the rent, common area maintenance, utilities, property taxes, security, materials and supplies, software, small equipment and deprecation costs of all manufacturing and laboratory locations.
We regularly analyze the components of gross profit as well as gross profit as a percentage of contract manufacturing revenue. Specifically we look at the gross profit margins of our manufacturing revenue and process development revenues, and the effects of idle capacity, costs of $11,182,000 which negatively impacted gross margin by 24 percentage points for the nine months ended January 31, 2018. This current period decline was further impacted by higher manufacturing costs associated with lower facility utilization in addition to the variability of manufacturing costs from product to product.if any, on these revenue streams.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consist primarilyare composed of payrollcorporate-level expenses including personnel and related expenses and share-based compensation expense (non-cash), for personnel insupport costs of corporate functions such as executive finance,management, legal, accounting, business development, legal, human resources, information technology, and other internal support functions. In addition,centralized services. SG&A expenses include corporate legal fees, audit and accounting fees, investor relation expenses, non-employee director fees, facility related expenses, and other expenses relating to our general management, administration, and business development activities. SG&A expenses are generally not directly proportional to revenues, but we expect such expenses increase over time to support the needs of our growing company.
Results of Operations(in thousands)
On May 1, 2018, we adopted ASU 2014-09, Revenue from Contracts (Topic 606):Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method applied to all contracts not completed as of May 1, 2018. Under the modified retrospective method, results for reporting periods beginning after May 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under the accounting standards in effect for the prior period. Refer to Note 2, “Summary of Significant Accounting Policies” for details regarding the adoption of ASC 606.
| 23 |
The following table compares the unaudited condensed consolidated statements of operations from our continuing operations for the three and six months ended October 31, 2018 and 2017, which are further discussed below.
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||||||||||
| 2018 | 2017 | $ Change | 2018 | 2017 | $ Change | |||||||||||||||||||
| Contract manufacturing revenue | $ | 10,178 | $ | 12,782 | $ | (2,604 | ) | $ | 22,767 | $ | 39,859 | $ | (17,092 | ) | ||||||||||
| Cost of contract manufacturing | 9,844 | 16,242 | (6,398 | ) | 21,241 | 36,690 | (15,449 | ) | ||||||||||||||||
| Gross profit (loss) | 334 | (3,460 | ) | 3,794 | 1,526 | 3,169 | (1,643 | ) | ||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling, general and administrative | 2,816 | 3,596 | (780 | ) | 6,031 | 7,449 | (1,418 | ) | ||||||||||||||||
| Restructuring charges | – | 1,258 | (1,258 | ) | – | 1,258 | (1,258 | ) | ||||||||||||||||
| Total operating expenses | 2,816 | 4,854 | (2,038 | ) | 6,031 | 8,707 | (2,676 | ) | ||||||||||||||||
| Operating loss | (2,482 | ) | (8,314 | ) | 5,832 | (4,505 | ) | (5,538 | ) | 1,033 | ||||||||||||||
| Interest and other income, net | 119 | 13 | 106 | 181 | 37 | 144 | ||||||||||||||||||
| Loss from continuing operations before income taxes | $ | (2,363 | ) | $ | (8,301 | ) | $ | 5,938 | $ | (4,324 | ) | $ | (5,501 | ) | $ | 1,177 | ||||||||
| Income tax benefit | 173 | – | 173 | 173 | – | 173 | ||||||||||||||||||
| Loss from continuing operations | $ | (2,190 | ) | $ | (8,301 | ) | $ | 6,111 | $ | (4,151 | ) | $ | (5,501 | ) | $ | 1,350 | ||||||||
Three Months:Months Ended October 31, 2018 Compared to the Three Months Ended October 31, 2017
Contract Manufacturing Revenue
Contract manufacturing revenue for the three months ended October 31, 2018 was $10,178 compared to $12,782 for the same period in the prior year, a decrease of $2,604 or 20%. The decline in revenue can primarily be attributed to fewer manufacturing runs completed in the current period compared to the prior period as a result of a decrease in the current manufacturing demand from our two largest customers. Revenue for the quarter was also impacted by our planned sequential shutdown of our Franklin and Myford manufacturing facilities, which halted manufacturing at each facility for several weeks in order to conduct both routine and non-routine maintenance and upgrades. The quarterly revenue decline was offset by a $1,215 favorable impact from the adoption of ASC 606. Refer to Note 2 “Summary of Significant Accounting Policies” in the accompanying notes to the unaudited condensed consolidated financial statements for details regarding the adoption of ASC 606.
Gross Profit
Gross profit for the three months ended October 31, 2018 was $334 compared to a loss of $3,460 for the same period in the prior year, an increase of $3,794, where gross margins were 3% and a negative 27%, respectively. The $3,794 increase in gross profit was primarily due to an improvement from manufacturing and process development project profit of $1,790 combined with a $2,004 decrease in idle capacity costs.
Selling, General and Administrative Expenses
SG&A expenses of $459,000 (11%)decreased $780, or 22%, during the three months ended JanuaryOctober 31, 2018 compared to the same prior year periodperiod. The decrease in SG&A was primarily due to decreases in facility-related expenses of $484 and legal, accounting and other professional fees of $334. As a percentage of revenue, SG&A expenses remained consistent at 28% for both the current year three-month period increases in legal and other related fees associated with a settlement agreement we entered into with certain investors during November 2018 regarding the composition of our board of directors and legal and advisory fees associated with the recent sale of our PS-targeting program (as described in Note 10 to the accompanying unaudited condensed consolidated financial statements).prior year periods.
Nine Months: The decrease in SG&A expenses of $1,329,000 (10%) during the nine months ended January 31, 2018 compared to the same prior year period was primarily due to current nine-month period decreases in payroll and related costs and non-employee director fees. The current period decrease in non-employee directors fees is attributed to the settlement terms of a derivative and class action complaint approved by the Court of Chancery of the State of Delaware on July 27, 2017, pursuant to which our former non-employee directors agreed to pay or cause to be paid $1,500,000 to us (as described in Note 12 to the accompanying unaudited condensed consolidated financial statements), which non-recurring amount was applied against non-employee director fees during the quarter ended July 31, 2017. This decrease during the nine months ended January 31, 2018 was offset by current year period increases in facility related expenses, legal fees, investor relation fees, audit and accounting fees and other general corporate expenses.
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Restructuring Charges
Restructuring charges of $1,588,000 incurred duringDuring the quarterthree months ended October 31, 2017, werewe incurred restructuring charges of $1,588 directly related to a restructuring plan we implemented in August 2017, pursuant to which we reduced our overall workforce by 57 employees in order to reduce operating costs and improve cost efficiencies while we pursued the license or sale of our research and development assets and focus our efforts on growing our CDMO business (as described in Note 98 of the Notes to the accompanying unaudited condensed consolidated financial statements). Of the total restructuring charges incurred, $330,000 was related to our research and development segment and $1,258,000 related to our contract manufacturing services segment. The restructuring costs associated with our research and development segment areConsolidated Financial Statements included in loss from discontinued operations in the accompanying unaudited condensed consolidated financial statementsour Annual Report on Form 10-K for the nine monthsfiscal year ended January 31, 2018.April 30, 2018). The costs incurred under this restructuring plan, which was completed in October 2017, consisted of one-time termination benefits, including severance, and other employee related costs. Of the total restructuring charges incurred, $1,258 was related to our contract manufacturing services segment and $330 was related to our discontinued research and development segment. The restructuring charges associated with our discontinued research and development segment are included in income (loss) from discontinued operations in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended October 31, 2017. We did not incur any restructuring charges during the three and ninesix months ended JanuaryOctober 31, 2017.2018.
Operating Loss
Operating loss was $2,482, or a negative 24% of revenue, for the three months ended October 31, 2018 compared to an operating loss of $8,314, or a negative 65% of revenue, for the same period in the prior year. Of this $5,832 improvement in year-over-year operating loss, approximately $3,794 was attributable to gross profit margin improvement, an SG&A decrease of $780 and the absence of restructuring charges in 2018 that resulted in a decrease of $1,258.
Income Tax Benefit
In September 2018, we recognized a $1,000 gain in discontinued operations, before taxes, for the sale of our r84 technology (as described in Note 11 to the accompanying unaudited condensed consolidated financial statements). In accordance with the “Intraperiod Tax Allocation” rules under ASC 740:Income Taxes, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in our case, discontinued operations, for the three months ended October 31, 2018, we recorded a tax benefit in continuing operations of $173 with an offsetting tax expense of $261 recorded in discontinued operations. The remaining deferred tax benefit of $88 will be allocated proportionally to continuing operations throughout the remainder of the fiscal year.
Six Months Ended October 31, 2018 Compared to the Six Months Ended October 31, 2017
Contract Manufacturing Revenue
Contract manufacturing revenue for the six months ended October 31, 2018 was $22,767 compared to $39,859 for the same period in the prior year, a decrease of $17,092 or 43%. Included in the $39,859 prior year revenue was $9,924 of revenue associated with several manufacturing runs that were completed in fiscal year 2017, but recognized in the first quarter of fiscal year 2018 due to a client-requested delay in shipment. The comparable period decline in revenue can primarily be attributed to fewer manufacturing runs completed in the current period compared to the prior period as a result of a decrease in the current manufacturing demand from our two largest customers. Revenue for the current period was also impacted by our planned sequential shutdown of our Franklin and Myford manufacturing facilities, which halted manufacturing at each facility for several weeks in order to conduct both routine and non-routine maintenance and upgrades. Finally, the current year decline in revenue as compared to the prior year period was offset by an $11,831 favorable impact from the adoption of ASC 606. Refer to Note 2 “Summary of Significant Accounting Policies” in the accompanying notes to the unaudited condensed consolidated financial statements for details regarding the adoption of ASC 606.
Gross Profit
Gross profit for the six months ended October 31, 2018 was $1,526 compared to $3,169 for the same period in the prior year, a decrease of $1,643, where gross margins were 7% and 8%, respectively. The $1,643 decrease in gross profit was comprised of a $2,818 decrease in manufacturing and process development project profit, offset by a favorable reduction to idle capacity costs of $1,175.
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Selling, General and Administrative Expenses
SG&A expense decreased $1,418, or 19%, during the six months ended October 31, 2018 compared to the same prior year period. The decrease in SG&A was attributed to the current year period decreases in payroll and related costs of $767, facility-related expenses of $1,232 and legal, accounting and other professional fees of $926. These current year period decrease in SG&A was offset by the July 2017 settlement of a derivative and class action lawsuit, pursuant to which our former non-employee directors agreed to pay or cause to be paid $1,500 to us (as described in Note 3 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018), which non-recurring amount was applied against non-employee director fees during the fiscal quarter ended July 31, 2017. As a percentage of revenue, SG&A expenses for the six months ended October 31, 2018 and 2017 were 26% and 19%, respectively.
Restructuring Charges
During the six months ended October 31, 2017, we incurred restructuring charges of $1,588 related to a restructuring plan we implemented in August 2017, as further described above. We did not incur any restructuring charges during the six months ended October 31, 2018.
Operating Loss
Operating loss was $4,505, or a negative 20% of revenue, for the six months ended October 31, 2018 compared to an operating loss of $5,538, or a negative 14% of revenue, for the same period in the prior year. Of this $1,033 improvement in year-over-year operating loss, approximately $1,643 was attributable to a gross profit decrease offset by a favorable SG&A expense reduction of $1,418 and the absence of restructuring charges in 2018 that resulted in a decrease of $1,258.
Income Tax Benefit
In September 2018, we recognized a $1,000 gain in discontinued operations, before taxes, for the sale of our r84 technology (as described in Note 11 to the accompanying unaudited condensed consolidated financial statements). In accordance with the “Intraperiod Tax Allocation” rules under ASC 740:Income Taxes, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in our case, discontinued operations, for the six months ended October 31, 2018, we recorded a tax benefit in continuing operations of $173 with an offsetting tax expense of $261 recorded in discontinued operations. The remaining deferred tax benefit of $88 will be allocated proportionally to continuing operations throughout the remainder of the fiscal year.
Discontinued Operations
As a result of (i) the sale of our PS-targeting programand r84 technologies in February 2018 and September 2018, respectively (as described in Note 1011 to the accompanying unaudited condensed consolidated financial statements), (ii) the held for sale classification of our R84 technology, (iii) the abandonment of our remaining research and development assets, (including our intent to return the exosome technology back to the original licensor), and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business, that will have a major effect on our operations and financial results as we will no longer incur costs associated with research and development, the operating results fromof our former research and development segment arehave been excluded from continuing operations and reported as a lossincome (loss) from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. The gain of $1,000 that was recorded in connection with the sale of our r84 technology in September 2018 is included in income from discontinued operations, net of tax, in the accompanying unaudited condensed consolidated statements and operations and comprehensive loss for the three and six months ended October 31, 2018.
Critical Accounting Policies and Estimates
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 (“U.S. 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. During the three and ninesix months ended JanuaryOctober 31, 2018, there were no significant changes in our critical accounting policies as previously disclosed by us in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2017, other than those related to discontinued operations2018, except for our critical accounting policies and estimates on revenue recognition as a result of our adoption of ASC 606, as described in Note 2, “Summary of Significant Accounting Policies” in the accompanying notes to the unaudited condensed consolidated financial statements.
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Liquidity and Capital Resources
We have expended substantial funds on our contract manufacturing business and, historically, on thelegacy research and development of pharmaceutical product candidates.candidates (discontinued operations) and our contract manufacturing business (continuing operations). As a result, we have historically experienced losses and negative cash flows from operations since our inceptioninception.
During fiscal year 2018, we refocused our corporate strategy, whereby we transitioned our business to operate solely as a dedicated CDMO and although we have discontinued our research and development segment (as described in Note 1 to the accompanying unaudited condensed consolidated financial statements),. Now that we expect negative cash flows from operationshave commenced our first full fiscal year as a dedicated CDMO, our ability to continue for the foreseeable future until we can generate sufficient revenue to achieve profitability. Therefore, unless and until we are able to generate sufficient revenue, we expect such losses to continue during the remainder of fiscal year 2018 and in the foreseeable future.
Our ability to fund our operations is dependentas a going concern depends on the amount of cash on hand and our ability to generate sufficient revenue to coverpositive cash flows from operations, primarily through securing new customers and diversifying our operations. customer base, and thereby reducing our reliance on a small customer base, increasing revenues, improving gross margins and managing our operating expenses.
At JanuaryOctober 31, 2018 we had $17,938,000$32,694 in cash and cash equivalents and in Februaryequivalents. In addition, as of October 31, 2018, we raised $23,163,000 in gross proceeds from the sale of our common stock pursuant to an underwritten public offering (as described in Note 13 to the accompanying unaudited condensed consolidated financial statements). At February 28, 2018, our cash and cash equivalents balance increased to $41,688,000.
Although it is difficult to predict all of our future liquidity requirements, we believe that our cash and cash equivalents on hand combined with the remaining projected cash receipts from manufacturing services under our current backlog andwas approximately $36 million (as further discussed in the aggregate of $8,000,000 in upfront payments“Backlog” section below). While we expect to receive overanticipate the next six (6) months from the recent salemajority of our PS-targeting program (as described in Note 10 to the accompanying unaudited condensed consolidated financial statements)backlog will be sufficientrecognized as revenue during the remainder of fiscal year 2019, our backlog is subject to fund our operations through March 2019 without securing any new businessa number of risks and uncertainties, including the risk that a customer may experience delays in its program(s) or raising any additional capital. In addition,otherwise, which could result in the eventpostponement of anticipated manufacturing services; the risk that a customer timely cancels its commitments prior to theour initiation of manufacturing services, in which case we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments,commitments; and the risk that we may not successfully execute on all customer projects, any of which wouldcould have a negative impact on our liquidity, our reported backlog and revenue guidance.future revenue. As such, we expecta result of these risks and uncertainties, our cash on hand as of October 31, 2018, together with our projected cash receipts under our current backlog, (as further discussed inmay not be sufficient to fund our operations beyond one year after the “Backlog” section below) to be insufficient to coverdate our operating costs over the near term unless wefinancial statements are able to generate new business or further restructure our operations.issued.
In the event we are unable to secure sufficient business to support our operations, we may need to raise additional capital in the future. Additional funding may include the financing or leasing of capital equipment or raising capital in the equity markets. Our ability to raise additional capital in the equity markets to fund our obligations in future periods is dependentdepends on a number of factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties, including but not limited to, negative economic conditions, adverse market conditions, and adverse financial results. If we are unable to either raise sufficient capital in the equity markets or generate additional revenue, we may need to further restructure, or cease, our operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.
As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that our accompanying unaudited condensed consolidated financial statements are issued.
Significant components of the changes in cash flows from operating, investing, and financing activities for the ninesix months ended JanuaryOctober 31, 2018 compared to the same prior year period are as follows:follows (in thousands):
Net Cash Used In Operating Activities. Net cash used in operating activities represents our (i) net loss, as reported, (ii) less non-cashadjustments to reconcile net loss to net cash used in operating expenses,activities 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:
| Nine Months Ended January 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss, as reported | $ | (24,833,000 | ) | $ | (22,887,000 | ) | ||
| Less non-cash operating expenses: | ||||||||
| Share-based compensation | 1,206,000 | 2,591,000 | ||||||
| Depreciation and amortization | 1,945,000 | 1,850,000 | ||||||
| Loss on disposal of property and equipment | 401,000 | – | ||||||
| Net cash used in operating activities before changes in operating assets and liabilities | $ | (21,281,000 | ) | $ | (18,446,000 | ) | ||
| Net change in operating assets and liabilities | $ | (6,820,000 | ) | $ | (9,170,000 | ) | ||
| Net cash used in operating activities | $ | (28,101,000 | ) | $ | (27,616,000 | ) | ||
| Six Months Ended October 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss, as reported | $ | (3,412 | ) | $ | (13,829 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,325 | 1.300 | ||||||
| Stock-based compensation | 622 | 794 | ||||||
| Gain on sale of research and development ass | (1,000 | ) | – | |||||
| Net cash used in operating activities before changes in operating assets and liabilities | $ | (2,465 | ) | $ | (11,735 | ) | ||
| Net change in operating assets and liabilities from: | ||||||||
| Continuing operations | $ | (7,562 | ) | $ | (6,851 | ) | ||
| Discontinued operations | (4,134 | ) | (882 | ) | ||||
| Net cash used in operating activities | $ | (14,161 | ) | $ | (19,468 | ) | ||
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Net cash used in operating activities increased $485,000decreased $5,307 to $28,101,000$14,161 for the ninesix months ended JanuaryOctober 31, 2018 compared to net cash used in operating activities of $27,616,000$19,468 for the ninesix months ended JanuaryOctober 31, 2017. This increasedecrease in net cash used in operating activities was due to an increasea decrease of $2,835,000$9,270 in our net loss reported for the current nine-monthsix-month period after deductingadjustments for non-cash operating expenses and gain on sale of research and development assets, as described in the above table, offset by a net change in operating assets and liabilities of $2,350,000$711 and $3,252 from continuing and discontinued operations, respectively. The net change in operating assets and liabilities from continuing operations was primarily due to the timing of cash receiptsdecreases in inventories and expenditurescontract liabilities (customer deposits and deferred revenue) associated with deferred revenue, customer deposits, inventories, tradethe application of ASC 606, which we adopted on May 1, 2018. The net change in operating assets and other receivables, accounts payable,liabilities from discontinued operations was primarily due to decreases in accrued payroll and related costs and accrued clinical trial and related fees.
Net Cash Used InProvided By (Used In) Investing Activities. Net cash provided by (used in) investing activities for the six months ended October 31, 2018 and 2017 was $5,554 and ($1,809), respectively.
Net cash provided by investing activities for the six months ended October 31, 2018 consisted of proceeds of $6,000 related to the sale of certain research and development assets associated with our discontinued research and development segment (as described in Note 11 to the accompanying condensed consolidated financial statements), offset by the purchase of property and equipment of $446.
Net cash used in investing activities for the ninesix months ended JanuaryOctober 31, 2018 and 2017 was $2,144,000 and $2,439,000, respectively, which amounts primarily consisteddirectly related to the purchase of property and equipment acquisitions related to our manufacturing operations.equipment.
Net Cash (Used In) Provided By Financing Activities. Net cash (used in) provided by financing activities for the ninesix months ended JanuaryOctober 31, 2018 and 2017 was $1,384,000($964) and $10,171,000,$2,205, respectively.
Net cash used in financing activities during the six months ended October 31, 2018 consisted of $2,162 in dividends paid on our issued and outstanding Series E Preferred Stock and $74 in principal payments on a capital lease obligation, which amounts were offset by $1,158 in net proceeds from stock option exercises and $114 in net proceeds from the purchase of shares of our common stock under our Employee Stock Purchase Plan.
Net cash provided by financing activities during the ninesix months ended JanuaryOctober 31, 20182017 consisted of (i) $4,193,000$4,193 in net proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement (ii) $217,000(as of July 31, 2017 we had raised the full amount of gross proceeds available to us under this At Market Issuance Sales Agreement), $216 in net proceeds from the purchase of shares of our common stock under our Employee Stock Purchase Plan, (“ESPP”), and (iii) $398,000$112 in net proceeds from stock option exercises, which amounts were offset by dividends paid on our issued and outstanding Series E Preferred Stock of $3,244,000$2,162 and principal payments on a capital lease obligation of $180,000.
Net cash provided by financing activities during the nine months ended January 31, 2017 consisted of (i) $7,800,000 in net proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement, (ii) $3,804,000 in net proceeds from the sale of shares of our common stock under an Equity Distribution Agreement, (iii) $1,576,000 in net proceeds from the sale of shares of our Series E Preferred Stock under a separate At Market Issuance Sales Agreement, and (iv) $254,000 in net proceeds from the purchase of shares of our common stock under our ESPP, which amounts were offset by dividends paid on our issued and outstanding Series E Preferred Stock of $3,198,000 and principal payments on a capital lease of $65,000.$154.
Backlog
Our backlog represents, as of a point in time, future contract manufacturing revenue from work not yet completed under signed contracts. As of JanuaryOctober 31, 2018, our backlog was approximately $39$36 million (ASC 606) as compared to approximately $33 million (ASC 605) as of October 31, 2017. While we anticipate the majority of our backlog will be recognized as revenue during the remainder of fiscal year 2019, our backlog is subject to a number of risks and uncertainties, including the risk that a customer may experience delays in its program(s) or otherwise, which we expect to recognize over the next twelve (12) months, compared to approximately $70 million as of January 31, 2017. In addition,could result in the eventpostponement of anticipated manufacturing services; the risk that a customer timely cancels its commitments prior to theour initiation of manufacturing services, in which case we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments,commitments; and the risk that we may not successfully execute on all customer projects, any of which wouldcould have a negative impact on our liquidity, our reported backlog and our future revenue.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Our cash and cash equivalents are primarily invested in money market funds with one major commercial bank with the primary objective to preserve our principal balance. Our deposits held with this bank exceed the amount of government insurance limits provided on our deposits and, therefore, we are exposed to credit risk in the event of default by the major commercial bank holding our cash balances. However, these deposits may be redeemed upon demand and, therefore, bear minimal risk. In addition, while changes in U.S. interest rates would affect the interest earned on our cash balances at JanuaryOctober 31, 2018, such changes would not have a material adverse effect on our financial position or results of operations based on historical movements in interest rates.
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| Item 4. | Controls And Procedures. |
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act that are designed to ensure that information required to be disclosed in our 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 our 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.
We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of JanuaryOctober 31, 2018, the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of JanuaryOctober 31, 2018.
There were no significant changes in our internal control over financial reporting, during the quarter ended JanuaryOctober 31, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - II—OTHER INFORMATION
| Item 1. | Legal Proceedings. |
TheIn the ordinary course of business, we are at times subject to various legal proceedings and disputes. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions, if any, are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information required by this Item is incorporated by referenceand events pertaining to Note 12, “Commitments and Contingencies,”a particular case. We currently are not a party to any legal proceedings, the adverse outcome of which, in Part I, Item 1, “Financial Information.”management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations or financial position
| Item 1A. | Risk Factors. |
There have been no material changes to the risk factors included in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended April 30, 2017, except for the following risk factors:2018.
If we cannot secure additional business, we may have to raise additional capital or further restructure, or cease, our operations.
We have expended substantial funds on our contract manufacturing business and, historically, on the research and development of pharmaceutical product candidates. As a result, we have historically experienced losses and negative cash flows from operations since our inception and, although we have discontinued our research and development segment (as described in Note 1 to the accompanying unaudited condensed consolidated financial statements), we expect negative cash flows from operations to continue for the foreseeable future until we can generate sufficient revenue to achieve profitability. Therefore, unless and until we are able to generate sufficient revenue, we expect such losses to continue during the remainder of fiscal year 2018 and in the foreseeable future.
Our ability to fund our operations is dependent on the amount of cash on hand and our ability to generate sufficient revenue to cover our operations. At January 31, 2018, we had $17,938,000 in cash and cash equivalents and in February 2018, we raised $23,163,000 in gross proceeds from the sale of our common stock pursuant to an underwritten public offering (as described in Note 13 to the accompanying unaudited condensed consolidated financial statements). At February 28, 2018, our cash and cash equivalents balance increased to $41,688,000.
Although it is difficult to predict all of our future liquidity requirements, we believe that our cash and cash equivalents on hand combined with the remaining projected cash receipts from manufacturing services under our current backlog and the aggregate of $8,000,000 in upfront payments we expect to receive over the next six (6) months from the recent sale of our PS-targeting program (as described in Note 10 to the accompanying unaudited condensed consolidated financial statements) will be sufficient to fund our operations through March 2019 without securing any new business or raising any additional capital. In addition, in the event a customer timely cancels its commitments prior to the initiation of manufacturing services, we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments, which would have a negative impact on our liquidity, our reported backlog and revenue guidance. As such, we expect our current backlog (as further discussed in the above “Backlog” section) to be insufficient to cover our operating costs over the near term unless we are able to generate new business or further restructure our operations.
In the event we are unable to secure sufficient business to support our operations, we may need to raise additional capital in the future. Our ability to raise additional capital in the equity markets to fund our obligations in future periods is dependent on a number of factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties, including but not limited to, negative economic conditions, adverse market conditions, and adverse financial results. If we are unable to either raise sufficient capital in the equity markets or generate additional revenue, we may need to further restructure, or cease, our operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.
As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that our accompanying unaudited condensed consolidated financial statements are issued.
Our operating results will be adversely affected if we are unable to maximize our facility capacity utilization.
We have recently experienced idle manufacturing capacity due primarily to unexpected declines in commitments from existing customers, and we may continue to experience such idle manufacturing capacity unless commitments from these existing customers return to historical levels and/or we secure new customers. Our operating results are significantly influenced by our capacity utilization and, as such, if we are unable to utilize our facilities to capacity, our margins could be adversely affected, and our results of operations and financial condition will continue to be adversely affected. Further, while we continue to expand our manufacturing infrastructure, our revenue volume may be insufficient to ensure the economical operation of any such expanded capacity, in which case our results of operations could be adversely affected.
We have had significant losses, anticipate future losses and may never achieve profitability.
We have incurred net losses in most fiscal years since we began operations in 1981, including net losses of $28,159,000 and $55,652,000 for the fiscal years ended April 30, 2017 and 2016, respectively. As of January 31, 2018, we had an accumulated deficit of $562,149,000. In addition, we expect negative cash flows from operations to continue for the foreseeable future until we can generate sufficient revenue to achieve profitability. Further, if we fail to generate sufficient revenue, we may never achieve profitability.
We depend on spending and demand from our customers for our contract manufacturing and development services and any reduction in spending or demand could have a material adverse effect on our business.
The amount that our customers spend on the development and manufacturing of their products or product candidates, particularly the amount our customers choose to spend on outsourcing these services to us, substantially impacts our revenue and profitability. The outcomes of our customers’ research, development and marketing also significantly influence the amount that our customers choose to spend on our services and offerings. Our customers determine the amounts that they will spend on our services based upon, among other things, the clinical and market success of their products, available resources, access to capital and their need to develop new products, which, in turn, depend upon a number of other factors, including their competitors’ research, development and product initiatives and the anticipated market for any new products, as well as clinical and reimbursement scenarios for specific products and therapeutic areas. Further, increasing consolidation in the pharmaceutical industry may impact such spending, particularly in the event that any of our customers choose to develop or acquire integrated manufacturing operations. Any reduction in customer spending on biologics development and related services as a result of these and other factors could have a material adverse effect on our business, results of operations and financial condition.
The consumers of the products we manufacture for our customers may significantly influence our business, results of operations and financial condition.
We depend on, and have no control over, consumer demand for the products we manufacture for our customers. Consumer demand for our customers’ products could be adversely affected by, among other things, delays in health regulatory approval, the inability of our customers to demonstrate the efficacy and safety of their products, the loss of patent and other intellectual property rights protection, the emergence of competing or alternative products, including generic drugs, the degree to which private and government payment subsidies for a particular product offset the cost to consumers and changes in the marketing strategies for such products. If the products we manufacture for our customers do not gain market acceptance, our revenues and profitability may be adversely affected.
We believe that continued changes to the healthcare industry, including ongoing healthcare reform, adverse changes in government or private funding of healthcare products and services, legislation or regulations governing the privacy of patient information or patient access to care, or the delivery, pricing or reimbursement of pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry participants to purchase fewer services from us or influence the price that others are willing to pay for our services. Changes in the healthcare industry’s pricing, selling, inventory, distribution or supply policies or practices could also significantly reduce our revenue and profitability.
If production volumes of key products that we manufacture for our customers continue to decline, results of operations and financial condition may continue to be adversely affected.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
Earlier in fiscal year 2018, we announced our intent to transition to a dedicated contract manufacturer and, in connection with such transition, pursue strategic options to license or divest our research and development assets. As a result of this transition, during the quarter ended October 31, 2017, we reduced our overall workforce as part of a series of strategic actions to reduce costs and better position us to achieve potential profitability. Now that we have completed our transition to a dedicated contract manufacturer, we intend to grow our business operations as demand increases and increase the number of our employees to accommodate such potential growth, which may cause us to experience periods of rapid growth and expansion. This potential future growth could create a strain on our organizational, administrative and operational infrastructure, including manufacturing operations, quality control, technical support and other administrative functions. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls.
As our commercial operations and sales volume grow, we will need to continue to increase our capacity for manufacturing, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. We may also need to purchase additional equipment, some of which can take several months or more to procure, set up and validate, and increase our manufacturing, maintenance, software and computing capacity to meet increased demand. These increases in scale, expansion of personnel, purchase of equipment or process enhancements may not be successfully implemented.
If we are unable to protect the confidentiality of our customers’ proprietary information, we may be subject to claims.
Many of the formulations used and processes developed by us in manufacturing our customers’ products are subject to trade secret protection, patents or other intellectual property protections owned or licensed by such customer. While we make significant efforts to protect our customers’ proprietary and confidential information, including requiring our employees to enter into agreements protecting such information, if any of our employees breaches the non-disclosure provisions in such agreements, or if our customers make claims that their proprietary information has been disclosed, our reputation may suffer damage and we may become subject to legal proceedings that could require us to incur significant expenses and divert our management’s time, attention and resources.
Our services and our customers’ products may infringe on or misappropriate the intellectual property rights of third parties.
Any claims that our services infringe the rights of third parties, including claims arising from any of our customer engagements, regardless of their merit or resolution, could be costly and may divert the efforts and attention of our management and technical personnel. We may not prevail in such proceedings given the complex technical issues and inherent uncertainties in intellectual property litigation. If such proceedings result in an adverse outcome, we could be required, among other things, to pay substantial damages, discontinue the use of the infringing technology, expend significant resources to develop non-infringing technology, license such technology from the third party claiming infringement (which license may not be available on commercially reasonable terms or at all) and/or cease the manufacture, use or sale of the infringing processes or offerings, any of which could have a material adverse effect on our business.
In addition, our customers’ products may be subject to claims of intellectual property infringement and such claims could materially affect our business if their products cease to be manufactured and they have to discontinue the use of the infringing technology which we may provide. Any of the foregoing could affect our ability to compete or could have a material adverse effect on our business, financial condition and results of operations.
If we do not enhance our existing or introduce new service offerings in a timely manner, our offerings may become obsolete or uncompetitive over time, customers may not buy our offerings and our revenue and profitability may decline.
Demand for our manufacturing services may change in ways that we may not anticipate due to evolving industry standards and customer needs that are increasingly sophisticated and varied, as well as the introduction by others of new offerings and technologies that provide alternatives to our offerings. In the event we are unable to offer or enhance our service offerings or expand our manufacturing infrastructure to accommodate requests from our customers and potential customers, our offerings may become obsolete or uncompetitive over time, in which case our revenue and operating results would suffer. For example, if we are unable to respond to changes in the nature or extent of the technological or other needs of our customers through enhancing our offerings, our competition may develop offerings that are more competitive than ours and we could find it more difficult to renew or expand existing agreements or obtain new agreements. Potential innovations intended to facilitate enhanced or new offerings generally will require a substantial capital investment before we can determine their commercial viability, and we may not have financial resources sufficient to fund all desired innovations. Even if we succeed in creating enhanced or new offerings, however, they may still fail to result in commercially successful offerings or may not produce revenue in excess of our costs of development, and they may be rendered obsolete by changing customer preferences or the introduction by our competitors of offerings embodying new technologies or features. Finally, the marketplace may not accept our innovations due to, among other things, existing patterns of clinical practice, the need for regulatory clearance and/or uncertainty over market access or government or third-party reimbursement.
We operate in a highly competitive market and competition may adversely affect our business.
We operate in a market that is highly competitive. Our competition in the contract manufacturing market includes full-service contract manufacturers and large pharmaceutical companies offering third-party manufacturing services to fill their excess capacity. We may also compete with the internal operations of those pharmaceutical companies that choose to source their product offerings internally. Additionally, several large pharmaceutical companies have recently sought to divest portions of their manufacturing capacity, and any such divested businesses may compete with us in the future. In addition, most of our competitors may have substantially greater financial, marketing, technical or other resources than we do. Moreover, additional competition may emerge, particularly in lower-cost jurisdictions such as India and China, which could, among other things, result in a decrease in the fees paid for our services, which may adversely affect our results of operations and financial condition.
We rely on third parties to supply most of the necessary raw materials and supplies for the products we manufacture on behalf of our customers and our inability to obtain such raw materials or supplies may adversely impact our business, results of operations and financial condition.
Our operations require various raw materials, including proprietary media, resins, buffers, filters, in addition to numerous additional raw materials supplied primarily by third parties. We or our customers specify the raw materials and other items required to manufacture their product and, in some cases, specify the suppliers from whom we must purchase these raw materials. In certain instances, the raw materials and other items can only be supplied by a limited number of suppliers or in limited quantities. If third-party suppliers do not supply raw materials or other items on a timely basis, it may cause a manufacturing run to be delayed or canceled which would adversely impact our results of operations and financial condition.
Furthermore, third-party suppliers may fail to provide us with raw materials and other items that meet the qualifications and specifications required by us or our customers. If third-party suppliers are not able to provide us with raw materials that meet our or our customers’ specifications on a timely basis, we may be unable to manufacture their product or it could prevent us from delivering products to our customers within required timeframes. Any such delay in delivering our products may create liability for us to our customers for breach of contract or cause us to experience order cancellations and loss of customers. In the event that we manufacture products with inferior quality components and raw materials, we may become subject to product liability claims caused by defective raw materials or components from a third-party supplier or from a customer, or our customer may be required to recall its products from the market.
If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.
Our contract manufacturing operations involve, and our prior activities with respect to our recently sold research and development assets involved, the controlled use of hazardous materials and chemicals. We are subject to federal, state and local laws and regulations in the U.S. governing the use, manufacture, storage, handling and disposal of hazardous materials and chemicals. Although we believe that our procedures for using, handling, storing and disposing of these materials comply with legally prescribed standards, we may incur significant additional costs to comply with applicable laws in the future. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials or chemicals. As a result of any such contamination or injury, we may incur liability or local, city, state or federal authorities may curtail the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our contract manufacturing operations, which could materially harm our business, financial condition and results of operations.
We are subject to product liability claims.
Our contract manufacturing services expose us to an inherent risk of liability, as the antibodies or other substances we manufacture, at the request and to the specifications of our customers, could possibly cause adverse effects or have product defects. We obtain agreements from our customers indemnifying and defending us from any potential liability arising from such risk. However, these indemnification agreements may not adequately protect us against potential claims relating to such contract manufacturing services or protect us from being named in a possible lawsuit. Although we have procured insurance coverage, we may not be able to maintain our existing coverage or obtain additional coverage on commercially reasonable terms, or at all, or such insurance may not provide adequate coverage against all potential claims to which we might be exposed. Additionally, any lawsuits in which we may be named could be costly to defend and could result in significant liabilities, adverse publicity and diversion of our management’s time, attention and resources. A partially successful or completely uninsured claim against us could materially harm our business, financial condition and results of operations.
If we lose qualified management, including manufacturing or scientific personnel or are unable to attract and retain such personnel, we may be unable to successfully manufacture our customers’ products.
Our success is dependent, in part, upon a limited number of key executive officers, each of whom is an at-will employee. For example, because of his extensive understanding of our contract manufacturing operations and technologies, the loss of Roger J. Lias, Ph.D, our President and Chief Executive Officer, would adversely affect our contract manufacturing operations during the six- to twelve-month period that we estimate it would take to find a qualified replacement.
We also believe that our future success will depend largely upon our ability to attract and retain highly-skilled manufacturing and process development personnel. We face intense competition in our recruiting activities, including competition from larger companies with greater resources. The loss of certain key employees or our inability to attract and retain other qualified employees could negatively affect our operations and financial performance.
U.S. federal income tax reform could adversely affect us and our stockholders.
The Tax Cuts and Jobs Act, or TCJA, significantly reforms the Internal Revenue Code of 1986, as amended, or the Code. The TCJA, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, effectuates the migration from a “worldwide” system of taxation to a territorial system and modifies or repeals many business deductions and credits. We continue to examine the impact the TCJA may have on our business. While we continue to evaluate the effect of the TCJA on our business, including our projection of minimal cash taxes and our net operating losses, the impact of such tax reform on holders of our common stock is uncertain and may be adverse.
We may face additional liabilities associated with our prior research and development activities.
We recently sold the majority of our research and development assets, including our development-stage immunotherapy product, bavituximab. As a result, we are no longer pursuing our prior research and development activities, including the clinical development associated therewith. We may still face unknown liabilities associated with these prior activities. For example, in the course of our prior development of our product candidate, bavituximab, we contracted with third parties to conduct a series of clinical trials and although we maintain product liability insurance for clinical studies in the amount of $10,000,000 per occurrence or $10,000,000 in the aggregate on a claims-made basis, as well as country-specific coverage where required for clinical sites located in foreign countries, our coverage may not be adequate in the event we face a product liability claim due to an adverse effect resulting from any of such trials. Any liabilities arising from our prior research and development activities that are not covered by our insurance coverage could negatively impact our financial position and results of operations.
We may be subject to various litigation claims and legal proceedings.
We, as well as certain of our directors and officers, may be subject to claims or lawsuits during the ordinary course of business. Regardless of the outcome, these lawsuits may result in significant legal fees and expenses and could divert management’s time and other resources. If the claims contained in these lawsuits are successfully asserted against us, we could be liable for damages and be required to alter or cease certain of our business practices. Any of these outcomes could cause our business, financial performance and cash position to be negatively impacted.
A significant number of shares of our common stock are issuable pursuant to outstanding options and convertible securities, and we may issue additional shares of common stock in the future. Sales or conversions of these shares will dilute the interests of other security holders and may depress the price of our common stock.
As of January 31, 2018, 5,433,646 shares of common stock reserved for issuance under outstanding option grants and available for issuance under our stock incentive plans and outstanding warrants to purchase up to 39,040 shares of common stock. Additionally, as of January 31, 2018, there were 1,303,770 shares of common stock reserved for and available for issuance under our ESPP and up to 6,826,435 shares of common stock issuable upon conversion of our outstanding Series E Preferred Stock. The issuance of additional shares of common stock upon the exercise or conversion, as applicable, of any of the foregoing securities, or the perception that such issuances may occur, would have a dilutive impact on other stockholders and could have a material negative effect on the market price of our common stock.
Our highly volatile stock price may adversely affect the liquidity of our common stock.
The market price of our common stock has generally been highly volatile and is likely to continue to be highly volatile. For instance, the market price of our common stock has ranged from $1.97 to $14.00 per share over the last three fiscal years ended April 30, 2017 (as adjusted to reflect the 1-for-7 reverse stock split of our issued and outstanding common stock that took effect on July 10, 2017).
In addition, the market price of our common stock may be significantly impacted by many factors, including, but not limited to:
These and other external factors have caused and may continue to cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock, and may otherwise negatively affect the liquidity of our common stock.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
NoneNone.
| Item 3. | Defaults Upon Senior Securities. |
NoneNone.
| Item 4. | MINE SAFETY DISCLOSURES. |
Not applicable
| Item 5. | Other Information. |
NoneNone.
| Item 6. | Exhibits. |
| (a) | Exhibits: |
| 3.1 | Certificate of Incorporation of Avid Bioservices, Inc., a Delaware corporation, as amended through |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.* |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.* |
| 32 | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350. * |
| 101.INS | XBRL Taxonomy Extension Instance Document. * |
| 101.SCH | XBRL Taxonomy Extension Schema Document. * |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. * |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. * |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. * |
| 101.PRE | XBRL Presentation Extension Linkbase Document. * |
__________
| * Filed herewith. | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AVID BIOSERVICES, INC. | ||
| Date: | By: | /s/ Roger J. Lias, Ph.D. |
| Roger J. Lias, Ph.D. | ||
President and Chief Executive Officer | ||
| Date: | By: | /s/ |
| Daniel R. Hart | ||
| ||
| (signed both as an officer duly authorized to sign on behalf of the Registrant and principal financial officer and chief accounting officer) |