Table of Contents

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 January 31, 20182020

 

OR

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

incorporation or organization)

95-3698422

(I.R.S. Employer

Identification No.)

  

2642 Michelle Drive, Suite 200, Tustin, California

92780

(Address of principal executive offices)offices and zip code)

(Zip Code)

 

(714) 508-6100

(Registrant’s telephone number, including area code)

______________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.001 par value per shareCDMOThe NASDAQ Stock Market LLC
10.50% Series E Convertible Preferred Stock, $0.001 par value per shareCDMOPThe NASDAQ Stock Market LLC

 

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 (§ 232.405 of this chapter) 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”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):

 

Large accelerated filer oAccelerated filer xýNon-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company oý
   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, 2018, there were 55,552,2332, 2020, the number of shares of registrant’s common stock $0.001 par value, outstanding.outstanding was 56,482,154.

 

   

 

 

AVID BIOSERVICES, INC.

 

Form 10-Q

For The Quarter Ended January 31, 2020

TABLE OF CONTENTS

 

 Page
No.
PART I - FINANCIAL INFORMATION1
Item 1.   Condensed Consolidated Financial Statements.Statements (Unaudited)1
Item 2.   Management’s Discussion and Analysis of Financial Condition And Results of Operations.Operations1819
Item 3.   Quantitative and Qualitative Disclosures About Market Risk.Risk2427
Item 4.   Controls And Procedures.Procedures2428
PART II - OTHER INFORMATION2429
Item 1.   Legal Proceedings.Proceedings2429
Item 1A.   Risk Factors.Factors24
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds.30
Item 3.   Defaults Upon Senior Securities.30
Item 4.   Mine Safety Disclosures.30
Item 5.   Other Information.3029
Item 6.   Exhibits.Exhibits3129
SIGNATURES3230

The terms “we,” “us,” “our,” “the Company,” and “Avid,” asAs used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, the terms “we,” “us,” “our,” and the “Company” refer to Avid Bioservices, Inc. and its consolidated subsidiaries.

 i 

 

PART I - I—FINANCIAL INFORMATION

 

Item 1.Condensed Consolidated Financial Statements.Statements (Unaudited)

 

avid bioservices, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands, except par value)

  

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 

 

  

January 31,

2020

  

April 30,

2019

 
ASSETS        
Current assets:        
Cash and cash equivalents $30,687  $32,351 
Accounts receivable  10,151   7,374 
Contract assets  6,111   4,327 
Inventory  9,565   6,557 
Prepaid expenses and other current assets  763   709 
Total current assets  57,277   51,318 
Property and equipment, net  26,850   25,625 
Operating lease right-of-use assets  20,437   – 
Restricted cash  350   1,150 
Other assets  302   302 
Total assets $105,216  $78,395 
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $5,332  $4,352 
Accrued payroll and related costs  2,985   3,540 
Contract liabilities  26,355   14,651 
Operating lease liabilities  1,172   – 
Other current liabilities  710   619 
Total current liabilities  36,554   23,162 
         
Operating lease liabilities, less current portion  21,584   – 
Deferred rent, less current portion  –   2,072 
Other long-term liabilities  –   93 
Total liabilities  58,138   25,327 
         
Commitments and contingencies        
         
Stockholders’ equity:        
Preferred stock, $0.001 par value; 5,000 shares authorized; 1,648 shares issued and outstanding at January 31, 2020 and April 30, 2019, respectively  2   2 
Common stock, $0.001 par value; 150,000 shares authorized; 56,479 and 56,136 shares issued and outstanding at January 31, 2020 and April 30, 2019, respectively  56   56 
Additional paid-in capital  613,323   613,615 
Accumulated deficit  (566,303)  (560,605)
Total stockholders’ equity  47,078   53,068 
Total liabilities and stockholders’ equity $105,216  $78,395 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 1 

 

 

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and comprehensive loss (UNAUDITED)

(Unaudited) (In thousands, except per share information)

 

 

Three Months Ended

January 31,

 

Nine Months Ended

January 31,

  

Three Months Ended

January 31,

 

Nine Months Ended

January 31,

 
 2018  2017  2018   2017  2020  2019  2020  2019 
                
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 
Revenues $13,585  $13,781  $47,152  $36,548 
Cost of revenues  12,800   11,731   41,921   32,972 
Gross profit
  785   2,050   5,231   3,576 
                             
Operating expenses:                             
Selling, general and administrative  4,824,000   4,365,000   12,273,000  13,602,000   2,996   3,242   10,989   9,273 
Restructuring charges  –   –   1,258,000   – 
Loss on lease termination  –   –   355   – 
Total operating expenses  4,824,000   4,365,000   13,531,000   13,602,000   2,996   3,242   11,344   9,273 
                             
Operating loss  (8,956,000)  (1,592,000)  (14,494,000) (353,000)  (2,211)  (1,192)  (6,113)  (5,697)
             
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)
Interest and other income, net  107   9   415   190 
Loss from continuing operations before income taxes  (2,104)  (1,183)  (5,698)  (5,507)
Income tax benefit  –   44   –   217 
Loss from continuing operations, net of tax  (2,104)  (1,139)  (5,698)  (5,290)
Income from discontinued operations, net of tax  –   –   –   739 
Net loss $(11,004,000) $(7,774,000) $(24,833,000) $(22,887,000) $(2,104) $(1,139) $(5,698) $(4,551)
                             
Comprehensive loss $(11,004,000) $(7,774,000) $(24,833,000) $(22,887,000) $(2,104) $(1,139) $(5,698) $(4,551)
                             
Series E preferred stock accumulated dividends  (1,442,000)  (1,442,000)  (3,604,000)  (3,558,000)  (1,442)  (1,442)  (3,604)  (3,604)
                             
Net loss attributable to common stockholders $(12,446,000) $(9,216,000) $(28,437,000) $(26,445,000) $(3,546) $(2,581) $(9,302) $(8,155)
                             
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):             
Basic and diluted net (loss) income per common share attributable to common stockholders:                
Continuing operations $(0.23) $(0.08) $(0.40) $(0.11) $(0.06) $(0.05) $(0.17) $(0.16)
Discontinued operations $(0.05) $(0.17) $(0.23) $(0.64)  –   –   –   0.01 
Net loss per share attributable to common stockholders $(0.28)  (0.25) $(0.63) $(0.75) $(0.06)  (0.05) $(0.17) $(0.15)
                
Weighted average basic and diluted shares outstanding
  56,404   56,069   56,275   55,949 

 

(1) All share andSee accompanying notes to condensed consolidated financial statements.

2

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS of STOCKHOLDERs’ EQUITY

(Unaudited) (In thousands, except per share amountsinformation)

  Three Months Ended January 31, 2020 
  Preferred Stock  Common Stock  

Additional

Paid-In

  Accumulated  

Total

Stockholders’

 
  Shares  Amount  Shares  Amount  Capital  

Deficit

  Equity 
Balance at October 31, 2019  1,648  $2   56,338  $56  $613,325  $(564,199) $49,184 
Series E preferred stock dividends paid
($0.65625 per share)		  –   –   –   –   (1,081)  –   (1,081)
Exercise of stock options  –   –   120   –   484   –   484 
Vesting of restricted stock units  –   –   21   –   –   –   – 
Stock-based compensation expense  –   –   –   –   595   –   595 
Net loss  –   –   –   –   –   (2,104)  (2,104)
Balance at January 31, 2020  1,648  $2   56,479  $56  $613,323  $(566,303) $47,078 

  Three Months Ended January 31, 2019 
  Preferred Stock  Common Stock  Additional Paid-In  Accumulated  

Total

Stockholders’

 
  Shares  Amount  Shares  Amount  Capital  

Deficit

  Equity 
Balance at October 31, 2018  1,648  $2   56,063  $56  $614,541  $(559,802) $54,797 
Series E preferred stock dividends paid
($0.65625 per share)		  –   –   –   –   (1,081)  –   (1,081)
Exercise of stock options  –   –   9   –   29   –   29 
Stock-based compensation expense  –   –   –   –   458   –   458 
Net loss  –   –   –   –   –   (1,139)  (1,139)
Balance at January 31, 2019  1,648  $2   56,072  $56  $613,947  $(560,941) $53,064 

3

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS 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).STOCKHOLDERs’ EQUITY (Continued)

(Unaudited) (In thousands, except per share information)

 

  Nine Months Ended January 31, 2020 
  Preferred Stock  Common Stock  Additional
Paid-In		  Accumulated  Total
Stockholders’		 
  Shares  Amount  Shares  Amount  Capital  

Deficit

  Equity 
Balance at April 30, 2019  1,648  $2   56,136  $56  $613,615  $(560,605) $53,068 
Series E preferred stock dividends paid
($1.96875 per share)		  –   –   –   –   (3,244)  –   (3,244)
Common stock issued under employee stock purchase plan  –   –   47   –   187   –   187 
Exercise of stock options  –   –   247   –   916   –   916 
Vesting of restricted stock units  –   –   49   –   –   –   – 
Stock-based compensation expense  –   –   –   –   1,849   –   1,849 
Net loss  –   –   –   –   –   (5,698)  (5,698)
Balance at January 31, 2020  1,648  $2   56,479  $56  $613,323  $(566,303) $47,078 

  Nine Months Ended January 31, 2019 
  Preferred Stock  Common Stock  

Additional

Paid-In

  Accumulated  

Total

Stockholders’

 
  Shares  Amount  Shares  Amount  Capital  

Deficit

  Equity 
Balance at April 30, 2018  1,648  $2   55,689  $55  $614,810  $(559,129) $55,738 
Series E preferred stock dividends paid
($1.96875 per share)		  –   –   –   –   (3,244)  –   (3,244)
Cumulative-effect adjustment pursuant to adoption of ASC 606  –   –   –   –   –   2,739   2,739 
Common stock issued under employee stock purchase plan  –   –   40   –   114   –   114 
Exercise of stock options  –   –   343   1   1,187   –   1,188 
Stock-based compensation expense  –   –   –   –   1,080   –   1,080 
Net loss  –   –   –   –   –   (4,551)  (4,551)
Balance at January 31, 2019  1,648  $2   56,072  $56  $613,947  $(560,941) $53,064 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 24 

 

 

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(Unaudited) (In thousands)

 

  

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 
  

 

Nine Months Ended

January 31,

 
  2020  2019 
       
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(5,698) $(4,551)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:        
Depreciation and amortization  2,276   2,006 
Stock-based compensation  1,849   1,080 
Loss on lease termination  355   – 
Loss on disposal of assets  13   104 
Gain on sale of research and development assets  –   (1,000)
Changes in operating assets and liabilities:        
Accounts receivable  (2,777)  (4,131)
Contract assets  (1,784)  (1,024)
Inventory  (3,008)  (402)
Prepaid expenses and other assets  (54)  114 
Accounts payable  491   993 
Accrued payroll and related expenses  (555)  (15)
Contract liabilities  11,704   (5,402)
Other accrued expenses and current liabilities  (32)  (590)
Assets and liabilities of discontinued operations  –   (4,425)
Net cash provided by (used in) operating activities  2,780   (17,243)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of property and equipment  (3,025)  (1,248)
Proceeds from sale of research and development assets  –   6,000 
Net cash (used in) provided by investing activities  (3,025)  4,752 
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from exercise of stock options  916   1,188 
Proceeds from issuance of common stock under employee stock purchase plan  187   114 
Dividends paid on preferred stock  (3,244)  (3,244)
Principal payments on finance lease  (78)  (74)
Net cash used in financing activities  (2,219)  (2,016)
         
Net decrease in cash, cash equivalents and restricted cash  (2,464)  (14,507)
Cash, cash equivalents and restricted cash, beginning of period  33,501   43,415 
Cash, cash equivalents and restricted cash, end of period $31,037  $28,908 
         
Supplemental disclosures of non-cash activities:        
Decapitalization of right-of-use assets upon lease termination and/or modification $1,469  $– 
Unpaid purchases of property and equipment $489  $14 
Property and equipment acquired under finance lease $–  $245 

See accompanying notes to condensed consolidated financial statements.

 

 

 35 

 

 

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE nine MONTHS ENDED january 31, 2018 (unaudited)

(UNAUDITED)

 

1.       ORGANIZATION AND BUSINESSNote 1 – Description of Company and Basis of Presentation

 

Business Description—We areAvid Bioservices, Inc. is a contract development and manufacturing organization (“CDMO”) that provides a comprehensive range of services from process development to currentCurrent Good Manufacturing Practices (“cGMP”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. The condensed consolidated balance sheet at April 30, 2017 has been derived from audited financial statements at that date.2019, as filed with the SEC on June 27, 2019. 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.

 

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avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR 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 met all the conditions to be classified as a discontinued operation (Note 1). Accordingly, the operating results of our research and development segment are reported as a loss from discontinued operations inCertain prior period amounts within the accompanying unaudited condensed consolidated financial statements for all periods presented. For additional information, see Note 10, “Sale of Research and Development Assets”.

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.

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 (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 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 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 secure sufficient business to support our operations beyond the next twelve months, 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.

Reclassification

Certain prior year amounts related to other assets have been reclassified to property and equipment in our accompanying condensed consolidated balance sheet for the fiscal year ended April 30, 2017 and in our accompanying unaudited condensed consolidated statement of cash flows for the nine months ended January 31, 2017 to conform to the current period presentation. This reclassification had no effect on previously reportedThese reclassifications did not affect our financial position, net loss.loss, cash flows as of and for the periods presented.

 

Discontinued Operations

 

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avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

In addition, certain amounts related to corporate overhead costs that were allocated toFor all periods presented, the operating results of our former research and development segment have been reclassifiedexcluded from researchcontinuing operations and development expense to selling, general and administrative expensereported as income from discontinued operations, net of tax, in ourthe accompanying unaudited condensed consolidated statements of operations and comprehensive loss for all periods presented (Note 10)7). This reclassification had no effect on previously reported net loss.

 

RestructuringNote 2 – Summary of Significant Accounting Policies

 

Restructuring charges consistInformation regarding our significant accounting policies is contained in Note 2, “Summary of one-time termination benefits, including severanceSignificant Accounting Policies”, of the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019.

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avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Revenue Recognition

Revenue is recognized from services provided under our customer contracts, which we have disaggregated into manufacturing and process development revenue streams.

Manufacturing revenue

Manufacturing revenue generally represents revenue from the manufacturing of customer products 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. 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 products are manufactured exclusively for a specific customer and have no alternative use. The customer retains control of its product during the entire manufacturing process and can make changes to the process or specifications at its request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin.

Process development revenue

Process development revenue generally represents revenue from services associated with the custom development of a manufacturing process and analytical methods for a customer’s product. Process development revenue 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. 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 its 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 its product as the product is being created or enhanced by our services and can make changes to its process or specifications upon request.

The following table summarizes our manufacturing and process development revenue streams for the three and nine months ended January 31, 2020 and 2019 (in thousands):

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2020  2019  2020  2019 
Manufacturing revenue $11,525  $10,770  $40,422  $28,313 
Process development revenue  2,060   3,011   6,730   8,235 
  Total revenues $13,585  $13,781  $47,152  $36,548 

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 employee related costs relatedthan the passage of time. Contract assets are reclassified to accounts receivable 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 convert to revenue as we perform our obligations under the contract.

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avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

During the three and nine months ended January 31, 2020, we recognized revenue of $0.6 million and $13.2 million, respectively, for which the contract liability was recorded in 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 serviceprior period.

 

CashDuring the three and Cash Equivalentsnine months ended January 31, 2019, we recognized revenue of $2.2 million and $12.2 million, respectively, for which the contract liability was recorded in a prior period.

 

We consider all short-term investments readily convertibleapply the practical expedient available under ASC 606 that permits us not to cashdisclose the value of unsatisfied performance obligations for contracts with an initial maturityoriginal expected length of three monthsone year or lessless. In addition, we do not have any unsatisfied performance obligations for contracts greater than one year as of January 31, 2020.

Leases

On May 1, 2019, we adopted the Accounting Standards Update (“ASU”) No. 2016-02,Leases (“ASC 842”) using the modified retrospective approach. Accordingly, prior period financial information and disclosures have not been adjusted and will continue to be cash equivalents.reported in accordance with our historical accounting under the previous lease standard. In addition, we elected the package of practical expedients available for existing contracts, which allowed us to carry forward our historical assessments of lease identification, lease classification, and initial direct costs. As a result of adopting ASC 842, we recognized right-of-use assets and lease liabilities of $23.3 million and $25.5 million, respectively, on May 1, 2019, which are primarily related to our facility operating leases (Note 3). The difference between the right-of-use assets and lease liabilities is primarily attributed to the elimination of deferred rent. There was no adjustment to the opening balance of accumulated deficit as a result of the adoption of ASC 842.

We determine if an arrangement is or contains a lease at inception. Our operating leases with a term greater than one year are included in operating lease right-of-use assets, operating lease liabilities and operating lease liabilities, less current portion in our condensed consolidated balance sheet at January 31, 2020. Right-of-use assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present value of lease payments, we use our incremental borrowing rate which represents an estimated rate of interest that we would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date.

Our operating leases may include options to extend the lease which are included in the lease term when it is reasonably certain that we will exercise a renewal option(s). Operating lease expense is recognized on a straight-line basis over the expected lease term.

We elected the post-transition practical expedient to not separate lease components from non-lease components for all existing leases. We also elected a policy to not apply the recognition requirements of ASC 842 for short-term leases.

 

Restricted Cash

 

Under the terms of three separate operating leases related to our facilities (Note 3), we are required to maintain, as collateral, letters of credit. During the quarter ended October 31, 2019, $0.8 million of restricted cash that was pledged as collateral under two such letters of credit during the termswas released back to us. Accordingly, as of such leases. At January 31, 20182020 and April 30, 2017,2019, restricted cash of $1,150,000$0.4 million and $1.2 million, respectively, was pledged as collateral under these lettersletter(s) 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.

 

 

 

 68 

 

 

avid bioservices, inc.INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY (UNAUDITED)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows (in thousands):

  

January 31,

2020

  

April 30,

2019

  

January 31,

2019

  

April 30,

2018

 
Cash and cash equivalents $30,687  $32,351  $27,758  $42,265 
Restricted cash  350   1,150   1,150   1,150 
Total cash, cash equivalents and restricted cash $31,037  $33,501  $28,908  $43,415 

Inventory

Inventory consists of raw materials inventory and is valued at the lower of cost, determined by the first-in, first-out method, or net realizable value. We periodically review raw materials inventory for potential impairment and adjust inventory to its net realizable value based on the estimate of future use and reduce the carrying value of inventory as deemed necessary.

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 assets, 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 primarily associated with our manufacturing facilities, is 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 (unaudited) (CONTINUED)2020 and April 30, 2019.

All of our property and equipment are located in the U.S. Property and equipment consist of the following (in thousands):

  January 31, 2020  April 30, 2019 
Leasehold improvements $21,130  $20,574 
Laboratory and manufacturing equipment  14,968   12,858 
Computer equipment and software  4,931   4,644 
Furniture, fixtures and office equipment  685   528 
Construction-in-progress  1,963   1,590 
Total property and equipment, gross $43,677  $40,194 
Less: accumulated depreciation and amortization  (16,827)  (14,569)
Total property and equipment, net $26,850  $25,625 

Depreciation and amortization expense for the three and nine months ended January 31, 2020 was $0.8 million and $2.3 million, respectively.

Depreciation and amortization expense for the three and nine months ended January 31, 2019 was $0.7 million and $2.0 million, respectively.

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avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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 whichthat 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.sell if impairment indicators exist. For the nine months ended January 31, 20182020 and 2017,2019, there were no indicators of impairment of the value of our long-lived assets.assets and no cumulative impairment losses recognized as of January 31, 2020.

Stock-Based Compensation

We account for stock options, restricted stock units and other stock-based awards granted under our equity compensation plans in accordance with the authoritative guidance for stock-based compensation. The estimated fair value of stock 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. The fair value of restricted stock units is measured 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 straight-line basis over the period of vesting. Forfeitures are recognized as a reduction of stock-based compensation expense as they occur. As of January 31, 2020, there were no outstanding stock-based awards with market or performance conditions.

Comprehensive Loss

Comprehensive loss is 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.

 

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 January 31, 20182020 and April 30, 2017,2019, 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 nine months ended January 31, 20182020 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.2019.

 

 

 

 710 

 

 

avid bioservices, inc.INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

(UNAUDITED)

 

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.Income Taxes

 

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 depositsThe income tax benefit recognized in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss during the three and nine months ended January 31, 2019 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 for the nine months ended January 31, 2019 (Note 7).

Recent Accounting Standards Not Yet Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This standard update requires that certain financial statements. We also record a provisionassets be measured at amortized cost net of an allowance for estimated contractcredit losses if any, insuch that the period in which they are determined.

Share-based Compensation

We account for stock options and other share-based awards granted under our equity compensation plans in accordance withnet receivable represents the authoritative guidance for share-based compensation. The estimated fairpresent value of share-based payments to employees in exchange for services isexpected cash collection. In addition, this standard update requires that certain financial assets be 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 basisamortized cost reflecting an allowance for estimated credit losses expected to occur over the requisite service periods.life of the assets. The fair valueestimate of modifications to share-based awards, if any, is generally estimated using a Black-Scholes option valuation model, unless a lattice model is required. Forfeitures are recognized as a reductioncredit losses must be based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of share-based compensation expense as they occur. As of January 31, 2018, there were no outstanding share-based awards with market or performance conditions.

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from the maximum federal statutory rate of 35% to 21%. The Tax Act states that the 21% U.S. federal corporate tax rateamounts. ASU 2016-13 is effective for taxfiscal years, and interim periods within those years, beginning on or after January 1, 2018. However, existing tax law,December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326),Derivatives and Hedging (Topic 815) and Leases (Topic 842):Effective Dates, which was not amended under the Tax Act, governs when a change in tax rate is effective. Existing tax law provides that if the taxable year includesdefers the effective date of any rate change (unless the change is the first date of the taxable year), taxes shouldASU 2016-13 to fiscal years beginning after December 15, 2022 for all entities except SEC reporting companies that are not smaller reporting companies. As a smaller reporting company, ASU 2016-13 will now be calculated by applying a blended rate to the taxable incomeeffective for the year. Section 15 of the Internal Revenue Code stipulates that our blended federal rate is 29.73% for fiscal year 2018.2024 beginning May 1, 2023; however, early adoption is permitted. We have not yet determinedare currently evaluating the timing and impact the rate reduction will haveof adopting ASU 2016-13 on our gross deferred tax asset and liabilities and offsetting 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.consolidated financial statements.

 

In conjunction withAugust 2018, the tax law changes,FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):Disclosure Framework—Changes to the SEC staffDisclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements in Topic 820 by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, primarily surrounding Level 3 fair value measurements and transfers between Level 1 and Level 2. ASU 2018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, which will be our fiscal year 2021 beginning May 1, 2020. Early adoption is permitted for any removed or modified disclosures. We are currently evaluating the new guidance and do not expect the adoption of ASU 2018-13 to have a material impact on our consolidated financial statements and related disclosures.

In December 2019, the FASB issued StaffASU 2019-12, Income Taxes (Topic 740):Simplifying the Accounting Bulletin No. 118 (“SAB 118”)for Income Taxes,which is intended 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 detailsimplify various aspects related to complete the accounting for income taxes. ASU 2019-12 removes certain income tax effectsexceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, which will be our fiscal year 2022 beginning May 1, 2021. Early adoption is permitted. We are currently evaluating the timing and impact of the Tax Act. The ultimate impact, which is expected to be recorded by April 30, 2018, may differ from any provisional amounts, due to, among other things, additional analysis, changes in interpretationsadopting ASU 2019-12 on our consolidated financial statements 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.related disclosures.

 

 

 

 811 

 

avid bioservices, inc.INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY (UNAUDITED)

Note 3 – Leases

We currently lease office, manufacturing and warehouse space in four buildings under three separate non-cancellable operating lease agreements. All of our leased facilities are located in close proximity in Tustin, California, have original lease terms ranging from 7 to 12 years, contain two multi-year renewal options, and scheduled rent increases of 3% on either an annual or biennial basis. With respect to multi-year renewal options, a multi-year renewal option was included in determining the right-of-use asset and lease liability for two of our leases as we considered it reasonably certain that we would exercise such renewal options. In addition, two of our leases provide for periods of free rent, lessor improvements and tenant improvement allowances, of which, certain of these improvements have been classified as leasehold improvements and are being amortized over the shorter of the estimated useful life of the improvements or the remaining life of the lease. The operating lease right-of-use assets and liabilities on our January 31, 2018 (unaudited) (CONTINUED)

2020 condensed consolidated balance sheet primarily relate to these facility leases.

In September 2019, we entered into a lease amendment to terminate an operating lease for one of our non-manufacturing facilities that was primarily utilized for warehouse space. The lease termination was primarily driven by our efforts to reduce costs by leveraging available warehouse space in our other facilities, which in aggregate will save us approximately $1.3 million over a period of four years. In connection with the termination of this lease, we removed the corresponding operating lease right-of-use asset and liability balances from our balance sheet and recognized a loss of $0.4 million, which is included in loss on lease termination in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for the nine months ended January 31, 2020. Additionally, the lease termination released $0.3 million of restricted cash that was pledged as collateral under a letter of credit required by the terminated lease.

Certain of our facility leases require us to pay property taxes, insurance and common area maintenance. While these payments are not included as part of our lease liabilities, they are recognized as variable lease cost in the period they are incurred.

The components of lease cost, which are included in our accompanying unaudited condensed consolidated statements of operations and comprehensive loss as either cost of revenues or selling, general and administrative expense, depending on the leased asset, were as follows (in thousands):

  

Three Months Ended

January 31, 2020

  

Nine Months Ended

January 31, 2020

 
Operating lease cost $798  $2,570 
Short-term lease cost  83   83 
Variable lease cost  155   488 
Total lease cost $1,036  $3,141 

Cash paid for amounts included in the measurement of lease liabilities for the nine months ended January 31, 2020 was $2.3 million and is included in net cash used in operating activities in our accompanying unaudited condensed consolidated statements of cash flows.

 

 

Basic

12

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of January 31, 2020, the maturities of our operating lease liabilities were as follows (in thousands):

Fiscal Year Ending April 30,  Total 
2020 (remaining period)  $735 
2021   2,972 
2022   2,995 
2023   3,010 
2024   3,086 
Thereafter   21,938 
Total lease payments  $34,736 
Less: imputed interest   (11,980)
Total operating lease liabilities  $22,756 

The balance sheet classification of our operating lease liabilities was as follows (in thousands):

  January 31, 2020 
Operating lease liabilities $1,172 
Operating lease liabilities, less current portion  21,584 
Total operating lease liabilities $22,756 

As of January 31, 2020, the weighted average remaining lease term and Dilutiveweighted average discount rate of our operating leases was 10.7 years and 8.0%, respectively.

Note 4–Stockholders’ Equity

Termination of Rights Agreement (Series D Preferred Stock)

On March 16, 2006, we entered into a Rights Agreement with Rights Agent named therein, which agreement was subsequently amended and restated on March 16, 2016 (as amended, the “Rights Agreement”). The Rights Agreement was designed to strengthen the ability of our Board of Directors to protect the interests of our stockholders against potential abusive or coercive takeover tactics and to enable all stockholders to receive the full and fair value of their investment in the event that an unsolicited attempt is made to acquire us. Under the Rights Agreement, our Board of Directors declared a dividend of one preferred share purchase right (the “Right”) for each share of our common stock held by our stockholders of record as of the close of business on March 27, 2006, each of which Right entitled the holder thereof to purchase a fraction of a share of our Series D Participating Preferred Stock, par value $0.001 per share, at the price specified in the Rights Agreement. The Rights were only exercisable if a person or group acquired 15% or more of our outstanding common stock or announced a tender offer or exchange offer which, if consummated, would have resulted in ownership by a person or group of 15% or more of our outstanding stock.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On September 23, 2019, the Rights Agreement was further amended to accelerate the scheduled expiration date of the Rights Agreement from the close of business on March 16, 2021 to the close of business on September 23, 2019, and effectively terminate the Rights Agreement and the Rights granted thereunder as of such expiration date. Our Board of Directors elected to terminate the Rights Agreement and the Rights granted thereunder based on their recent evaluation of the effectiveness of, and the need for, a stockholder rights plan and consideration of current corporate governance practices and proxy advisory guidelines. In connection with the termination of the Rights Agreement, we filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities Exchange Act on Form 25 with the SEC on September 23, 2019, in order to withdraw the Rights from registration under Section 12(b) of the Securities Exchange Act of 1934, as amended, which deregistration was effective 90 days after the filing date.

Series E Preferred Stock

Each share of issued and outstanding 10.50% Series E Convertible Preferred Stock $0.001 par value per share (“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 Series E Preferred Stock by the then-current conversion price per share, currently $21.00 per share, rounded down to the nearest whole number. As of January 31, 2020, if all of our issued and outstanding shares of Series E Preferred Stock were converted at the conversion price of $21.00 per share, the holders of our Series E Preferred Stock would receive an aggregate of 1,961,619 shares of our common stock. However, because the conversion price of our Series E Preferred Stock is subject to adjustment from time to time in accordance with the applicable provisions of our certificate of incorporation, we have reserved the maximum number of shares of our common stock that could be issued upon the conversion of our Series E Preferred Stock 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 would be converted into 4.14 shares of our common stock, or 6,826,435 shares in the aggregate.

Dividends

Holders of our Series E Preferred Stock are entitled to receive cumulative dividends at the rate of 10.50% per annum based on the liquidation preference of $25.00 per share, or $2.625 per annum per share, which dividends are payable quarterly in cash, on or about the 1st day of each January, April, July and October. For the three and nine months ended January 31, 2020 and 2019, we paid aggregate cash dividends of $1.1 million and $3.2 million, respectively, for issued and outstanding shares of our Series E Preferred Stock.

Note 5–Equity Compensation Plans

Stock Incentive Plans

As of January 31, 2020, we had an aggregate of 6,944,895 shares of our common stock reserved for issuance under our stock incentive plans, of which 3,686,129 shares were subject to outstanding stock options and restricted stock units (“RSUs”) and 3,258,766 shares were available for future grants of stock-based awards.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Stock Options

The following summarizes our stock option transaction activity for the nine months ended January 31, 2020:

  Stock Options  Grant Date Weighted Average Exercise Price 
   (in thousands)     
Outstanding at May 1, 2019  3,274  $7.51 
Granted  845  $5.95 
Exercised  (247) $3.72 
Canceled or expired  (931) $10.45 
Outstanding at January 31, 2020  2,941  $6.45 

Restricted Stock Units

The following summarizes our RSUs transaction activity for the nine months ended January 31, 2020:

  Shares  Weighted Average Grant Date Fair Value 
   (in thousands)     
Outstanding at May 1, 2019  200  $4.32 
Granted  194  $5.91 
Vested  (49) $4.30 
Forfeited  (27) $5.15 
Outstanding at January 31, 2020  318  $5.22 

Employee Stock Purchase Plan

The Avid Bioservices, Inc. 2010 Employee Stock Purchase Plan (the “ESPP”) is a stockholder-approved plan under which eligible employees are allowed to purchase shares of our common stock through payroll deductions at a price equal to 85% of the lower of the fair market value our common stock as of the first trading day of the offering period or on the last trading day of the six-month offering period. Employee participants are limited to purchase no more than $25,000 of stock in any one calendar year. On October 9, 2019, our stockholders approved an amendment to the ESPP to extend its term for an additional five years to October 21, 2025 and to change the commencement dates of the offering periods from May 1 and November 1 of each year, to January 1 and July 1 of each year.

During the nine months ended January 31, 2020, 47,526 shares of our common stock were purchased under the ESPP at a purchase price of $3.94 per share. As of January 31, 2020, we had 1,148,735 shares of our common stock reserved for issuance under the ESPP.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Stock-Based Compensation

Stock-based compensation expense for the three and nine months ended January 31, 2020 and 2019 was comprised of the following (in thousands):

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2020  2019  2020  2019 
Cost of revenues $248  $147  $679  $317 
Selling, general and administrative  347   311   1,170   763 
    Total stock-based compensation $595  $458  $1,849  $1,080 

As of January 31, 2020, the total estimated unrecognized compensation cost related to non-vested employee stock options and non-vested RSUs was $4.6 million and $1.4 million, respectively. These costs are expected to be recognized over weighted average vesting periods of 2.82 years and 3.06 years, respectively.

Note 6 – Net Loss Per Common Share

 

Basic net loss per common share is computed by dividing our net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period excluding the dilutive effects of stock options, shares of common stock expected to be issued under our Employee Stock Purchase Plan (the “ESPP”), warrants, and Series E Preferred Stock outstanding during the period. Diluted net loss per common share is computed by dividing our net loss attributable to common stockholders by the sum of the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effects of stock options, unvested RSUs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period.

Net loss attributable to common stockholders represents our net loss plus Series E Preferred Stock accumulated dividends. Series E Preferred Stock accumulated dividends include dividends declared for the period (regardless of whether or not the dividends have been paid) and dividends accumulated for the period (regardless of whether or not the dividends have been declared).

 

The potential dilutive effect of stock options, unvested RSUs, 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 wasis 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, becauseSince the impact of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock arepotentially dilutive securities is 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, 20182020 and 2017.2019.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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, unvested RSUs and shares of common stock expected to be issued under our ESPP as their impact areis anti-dilutive during periods of net loss:loss (in thousands):

 

 

Three Months Ended

January 31,

 

Nine Months Ended

January 31,

  

Three Months Ended

January 31,

 

Nine Months Ended

January 31,

 
 2018  2017  2018  2017  2020  2019  2020  2019 
         
Stock Options  115,425   –   78,427   – 
Stock options  245   117   152   161 
RSUs  102   38   73   33 
ESPP  1,202   5,198   466   27,661   –   1   7   10 
Total  116,627   5,198   78,893   27,661   347   156   232   204 

 

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, unvested RSUs, 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/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:effect (in thousands):

 

 

Three Months Ended

January 31,

 

Nine Months Ended

January 31,

  

Three Months Ended

January 31,

 

Nine Months Ended

January 31,

 
 2018  2017  2018  2017  2020  2019  2020  2019 
         
Stock Options  3,214,694   4,231,073   3,663,102   4,156,497 
Stock options  2,106   2,779   2,721   2,659 
RSUs  –   47   8   16 
Warrants  39,040   39,040   39,040   39,040   –   –   –   17 
Series E Preferred Stock  1,978,783   1,978,784   1,978,783   1,948,109   1,979   1,979   1,979   1,979 
Total  5,232,517   6,248,897   5,680,925   6,143,646   4,085   4,805   4,708   4,671 

 

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.Note 7 – Discontinued Operations

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

Recently Adopted Accounting Pronouncements

Effective May 1, 2017, we adopted Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330):Simplifying the Measurement of Inventory.  ASU 2015-11 requires that inventory should be measured at the lower of cost and net realizable value for entities that measure inventory using the first-in, first-out method. ASU 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  The adoption of ASU 2015-11 did not have a material impact on our condensed consolidated financial statements.

Effective May 1, 2017, we adopted ASU 2015-17, Income Taxes (Topic 740):Balance Sheet Classification of Deferred Taxes. Under existing standards, deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net long-term asset or liability. To simplify presentation, the new guidance will require that all deferred tax assets and liabilities, along with related valuation allowances, be classified as long-term on the balance sheet. As a result, each tax-paying jurisdiction will now only have one net long-term deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. Due to the full valuation allowance on our U.S. deferred tax assets, the adoption of ASU 2015-17 did not have a material impact on our condensed consolidated financial statements.

Effective May 1, 2017, we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 changes certain aspects of accounting for share-based payments to employees and involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Specifically, ASU 2016-09 requires that all income tax effects of share-based awards be recognized as income tax expense or benefit in the reporting period in which they occur. Additionally, ASU 2016-09 amends existing guidance to allow forfeitures of share-based awards to be recognized as they occur. Previous guidance required that share-based compensation expense include an estimate of forfeitures. Upon adoption of ASU 2016-09, we made a policy election to recognize forfeitures as they occur. The adoption of ASU 2016-09 did not have a material impact on our condensed consolidated financial statements.

Pending Adoption of Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606):Revenue from Contracts with Customers, which, along with subsequent amendments issued in 2015 and 2016, will replace substantially all current US GAAP revenue recognition guidance. ASU 2014-09, as amended, is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services utilizing a new five-step revenue recognition model. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09, as amended, is effective for 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.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-2 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, which will be our fiscal year 2020 beginning May 1, 2019. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of ASU 2016-02 on our condensed consolidated financial statements and related disclosures.

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avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR 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 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.

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 January 31, 2018 and April 30, 2017, we determined no allowance for doubtful accounts was necessary.

4.       PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related asset, generally ranging from three to ten years. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the estimated useful life of the asset or the remaining lease term. Construction-in-progress, which represents direct costs related to the construction of various equipment and leasehold improvements associated with our manufacturing facilities, are not depreciated until the asset is completed and placed into service. No interest was incurred or capitalized as construction-in-progress as of January 31, 2018.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

Property and equipment, net, consists of the following:

  

January 31,

2018

  

April 30,

2017

 
Leasehold improvements $20,579,000  $20,098,000 
Laboratory equipment  10,683,000   10,777,000 
Furniture, fixtures, office equipment and software  4,688,000   4,499,000 
Construction-in-progress  2,558,000   2,841,000 
Total property and equipment  38,508,000   38,215,000 
Less accumulated depreciation and amortization  (12,183,000)  (11,700,000)
Total property and equipment, net $26,325,000  $26,515,000 

Depreciation and amortization expense for the three and nine months ended January 31, 2018 was $645,000 and $1,945,000, respectively. Depreciation and amortization expense for the three and nine months ended January 31, 2017 was $631,000 and $1,850,000, respectively.

5.       INVENTORIES

Inventories are recorded at the lower of cost or market (net realizable value) and primarily include raw materials, work-in-process (comprised of raw materials, direct labor and overhead costs associated with in-process manufacturing services), and finished goods (representing manufacturing services completed and ready for shipment) associated with 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, 2018, we expensed $5,344,000 and $11,182,000, respectively, in idle capacity costs directly to cost of contract manufacturing in the accompanying condensed consolidated financial statements. No idle capacity costs were incurred during the same prior year periods. Cost is determined by the first-in, first-out method. Inventories consist of the following:

  

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’ EQUITY

Our ability to continue to fund our operations is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity.

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”.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

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 Series E Preferred Stock quarterly dividend activity during the nine months ended January 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 
             

Shares of Common Stock Authorized and Reserved for Future Issuance

We are authorized to issue up to 500,000,000 shares of our common stock. As of January 31, 2018, 45,257,180 shares of our common stock were issued and outstanding. In addition, our common stock outstanding as of January 31, 2018 excluded the following shares of our common stock reserved for future issuance:

·5,433,646 shares of common stock reserved for issuance under outstanding option grants and available for issuance under our stock incentive plans;
·1,303,770 shares of common stock reserved for and available for issuance under our ESPP;
·39,040 shares of common stock issuable upon exercise of outstanding warrants; and
·6,826,435 shares of common stock issuable upon conversion of our outstanding Series E Preferred Stock(1).

      _____________

(1)The Series E Preferred Stock is convertible into a number of shares of our common stock determined by dividing the liquidation preference of $25.00 per share by the conversion price, currently $21.00 per share. If all of our outstanding Series E Preferred Stock were converted at the $21.00 per share conversion price, the holders of our Series E Preferred Stock would receive an aggregate of 1,961,619 shares of our common stock. However, we have reserved the maximum number of shares of our common stock that could be issued upon a change of control event assuming our shares of common stock are acquired for consideration of $5.985 per share or less. In this scenario, each outstanding share of our Series E Preferred Stock could be converted into 4.18 shares of our common stock, representing the Share Cap.

7.       equity compensation plans

Stock Incentive Plans

As of January 31, 2018, we had an aggregate of 5,433,646 shares of our common stock reserved for issuance under our stock incentive plans, of which, 3,989,356 shares were subject to outstanding options and 1,444,290 shares were available for future grants of share-based awards.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

The following summarizes our stock option transaction activity for the nine months ended January 31, 2018:

Stock Options Shares  

Weighted Average

Exercisable Price

 
Outstanding, May 1, 2017  4,081,548  $8.77 
Granted  679,497  $4.17 
Exercised  (117,019)  $3.40 
Canceled or expired  (654,670)  $8.42 
Outstanding, January 31, 2018  3,989,356  $8.70 

Employee Stock Purchase Plan (ESPP)

We have reserved a total of 2,142,857 shares of our common stock to be purchased under our ESPP, of which 1,303,770 shares remained available to purchase at January 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 nine months ended January 31, 2018, 55,966 shares of our common stock were purchased under the ESPP at a purchase price of $3.87 per share.

Share-Based Compensation

Total share-based compensation expense related to share-based awards issued under our equity compensation plans is included in the accompanying unaudited condensed consolidated statements of operations as follows:

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2018  2017  2018  2017 
Cost of contract manufacturing $139,000  $23,000  $277,000  $89,000 
Selling, general and administrative  259,000   389,000   589,000   1,183,000 
Discontinued operations  14,000   457,000   340,000   1,319,000 
    Total $412,000  $869,000  $1,206,000  $2,591,000 
                 
Share-based compensation from:                
Stock options $374,000  $815,000  $1,070,000  $2,369,000 
ESPP  38,000   54,000   136,000   222,000 
  $412,000  $869,000  $1,206,000  $2,591,000 

As of January 31, 2018, the total estimated unrecognized compensation cost related to non-vested employee stock options was $2,605,000. This cost is expected to be recognized over a weighted average vesting period of 2.67 years based on current assumptions.

8.       WARRANTS

No warrants were issued or exercised during the three and nine months ended January 31, 2018. As of January 31, 2018, warrants to purchase 39,040 shares of our common stock at an exercise price of $17.29 were outstanding and are exercisable through August 30, 2018.

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avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR 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

Asset Assignment and Purchase Agreement

On February 12, 2018, we entered into an Asset Assignment and Purchase Agreement (the “Purchase Agreement”) with a third-party oncology therapeutics company (the “Buyer”) pursuant to which we sold to the Buyer the majority of our research and development assets, which included the assignment of certain exclusive licenses related to our former PS-targeting program, as well as certain other licenses and assets useful and/or necessary for the potential commercialization of bavituximab. 

Pursuant to the Purchase Agreement, we expect to receive an aggregate of $8 million from the Buyer, payable in 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 March 14, 2018. We are also eligible to receive up to an additional $95 million in the event that the Buyer 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 Buyer commercializes and sells products utilizing bavituximab or the other transferred assets. The Buyer 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 Purchase Agreement incurred or arising prior to February 13, 2018). In addition, as part of the transaction, we and the Buyer agreed 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 Buyer in support of bavituximab.

Discontinued Operations

As a result of (i) the sale of our PS-targeting program, (ii)and r84 technologies in February 2018 and September 2018, respectively (as described in Note 10 of the heldNotes to the consolidated financial statements included in our Annual Report on Form 10-K for sale classification of our R84 technology, (iii)the fiscal year ended April 30, 2019), 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 from discontinued operations, net of tax, 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 presented below include certain allocations that management believes fairly reflect the utilization of services to the 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 research and development segment do not necessarily reflect what the results of operations would have been had the research and development segment operated as a stand-alone segment.presented.

 

 

 

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avid bioservices, inc.INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

(UNAUDITED)

 

The following table summarizes theThere were no operating results offrom discontinued operations for the three and nine months ended January 31, 2018 and 2017:

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2018  2017  2018  2017 
Operating expenses:                
Research and development $374,000  $5,912,000  $7,590,000  $21,347,000 
Selling, general and administrative  1,315,000   293,000   2,097,000   1,256,000 
Restructuring charges  –   –   330,000   – 
                 
Total operating expenses  1,689,000   6,205,000   10,017,000   22,603,000 
                 
Other expense  387,000   –   387,000   – 
Loss from discontinued operations $2,076,000  $6,205,000  $10,404,000  $22,603,000 

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 use2020. The following table is 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

The carrying valuereconciliation of the assets and liabilities deemed a componentpre-tax income from discontinued operations to the income from discontinued operations, net of the discontinued research and development segment were not classifiedtax, as “assets held for sale”presented in the accompanying unaudited condensed consolidated balance sheets at January 31, 2018statements of operations and April 30, 2017 since there were no related assets reported as of the respective balance sheet dates and the Buyer did not assume any liabilities under the 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 acomprehensive 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.

16

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR 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 2017.2019 (in thousands):

 

Gain on sale of research and development assets before income taxes(1) $1,000 
Income tax expense  (261)
Income from discontinued operations, net of tax $739 

13.       SUBSEQUENT EVENTS_____________

Sale(1) The gain on 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,before income taxes was recorded in connection with the $1.0 million we received from Oncologie, Inc. (“Oncologie”) under the September 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 issuanceAsset Assignment 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 UnderwritingPurchase 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 sharesto Oncologie our r84 technology, which included the assignment 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 commissionscertain licenses, patents and other offering related expenses. We intend to use the net proceeds from the offeringassets useful and/or necessary for the expansionpotential commercialization of our contract manufacturing business and for general corporate purposes.the r84 technology.

 

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.Note 8 – Subsequent Events

 

Series E Preferred Stock Dividend

On March 7, 2018,4, 2020, our Board of Directors declared a quarterly cash dividend of $0.65625 per share on our outstanding 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 January 1, 20182020 through March 31, 2018.2020. The cash dividend is payable on April 2, 20181, 2020 to holders of the Series E Preferred Stock of record on March 19, 2018.16, 2020.

 

 

 

 

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Item 2.Management’s Discussion and Analysis of Financial Condition And Results of Operations.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, 2019.

Cautionary Statement Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains 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”, “believe”, “will”, “anticipate”, “estimate”, “expect” “project”,but not limited to, “anticipate,” “believe,” “can,” “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, 2017,2019, 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 contract development and manufacturing organization (“CDMO”) committed to improving the lives of patients by manufacturing and delivering high quality pharmaceutical products. We providededicated CDMO that provides a comprehensive range of services from process development to current Good Manufacturing Practices (“cGMP”)CGMP commercial manufacturing focused on biopharmaceutical products derived from mammalian cell culture. With over 25 years of experience producing monoclonal antibodies and recombinant proteins in batch, fed-batch and perfusion modes, our services include cGMPCGMP 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.

Strategic Objectives

 

We have experience in performing process developmentestablished and manufacturing of biologics since 1993 in our Franklin biomanufacturing facility, or Franklin Facility, located at our headquarters in Tustin, California. In March 2016, we expanded our manufacturing capacity through the launch of our Myford biomanufacturing facility, or Myford 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 impactare currently executing 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.

18


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 part of our transition efforts, we have completed the following initiatives:strategic objectives:

 

·In August 2017, we instituted a number of strategic actions, including the reduction ofExpand existing customer relationships and diversify our research and development workforce, designedcustomer base by securing additional customers to reduce costs and better position ourselves to achieve overall profitability;support our future potential revenue growth;
·In September 2017, we named Roger J. Lias, Ph.D., who has more than 20 years of management experience in the biologics CDMO industry, as the president of our contract manufacturing subsidiary. Dr. Lias was thereafter appointed our President and Chief Executive Officer in December 2017 as we transitioned to a dedicated CDMO;
·In October and November 2017, we appointed a total of six new independent members to our board of directors, each of whom has relevant CDMO industry experience;
·In November 2017, we named Tracy Kinjerski as our Vice President of Business Operations, who will focus on executing new business development initiatives with the objective of growing our commercial customer base;
·On January 5, 2018, we formally changed our corporate name to Avid Bioservices, Inc. and adopted the new ticker symbol “CDMO” on The NASDAQ Capital Market to align with the new end-market focus and strategic positioning of our business;
·By January 31, 2018, we classified our R84 technology as held for sale and we abandoned our remaining research and development assets (including our intent to return the exosome technology back to the original licensor); and
·On February 12, 2018, we sold our PS-targeting program pursuant to an Asset Assignment and Purchase Agreement (as described in Note 10 to the accompanying unaudited condensed consolidated financial statements).

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’ development and clinical and commercial development and manufacturing requirements; and
·Broaden our sales force by hiring sales representatives to execute our business development initiatives in key markets; and
·Expand and diversify our customer base by securing additional customers to support our future potential revenue growth beyond fiscal year 2018.markets.

 

 

 

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Results of OperationsThird Quarter Highlights

 

The following table compares the unaudited condensed consolidated statements of operationssummarizes select highlights from our continuing operations for the three and nine monthsthird quarter ended January 31, 2018 and 2017.2020:

 

  

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)
·Appointed Timothy Compton as our Chief Commercial Officer. Mr. Compton is an accomplished professional with more than 20 years of commercial operations and sales team management experience. In this role, Mr. Compton will focus on driving the continued growth of our CDMO business, including the ongoing expansion of our commercial and clinical client base;
·Added one new customer and expanded the scope of work with multiple existing customers to increase the number of manufacturing batches; and
·Advanced the planning and design stages to both enhance our Myford facility, and support its future expansion. These near-term facility improvements include, installing a pharmaceutical grade water system, and upgrading key IT systems and general infrastructure. We expect the installation and validation of the pharmaceutical grade water system to take place in late calendar year 2020 and certain IT system enhancements and general infrastructure upgrades to complete by the end of fiscal 2021.

 

Contract Manufacturing RevenuePerformance and Financial Measures

 

Three Months:In assessing the performance of our business, we consider a variety of performance and financial measures. The decreasekey indicators of the financial condition and operating performance of our business are revenues, gross profit, selling, general and administrative expenses and operating income.

We intend for this discussion to provide the reader with information that will assist in contractunderstanding 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.

Revenues

Revenues are derived from services provided under our customer contracts and are disaggregated into manufacturing and process development revenue streams. The manufacturing revenue stream generally represents revenue from the manufacturing 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 ofcustomer products derived from mammalian cell culture covering clinical through commercial 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 demandruns. The process development revenue stream generally represents revenue from our second largest customer.

Nine Months: The increase in contract manufacturing revenue 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 to revenueservices 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 readymanufacturing process and analytical methods 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 withinrevenues less cost of contractrevenues. Cost of revenues reflects the direct cost of labor, overhead and material costs. Direct labor costs include personnel costs within the manufacturing, are idle capacityprocess 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 $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 higherall manufacturing costs associated with lower facility utilization in addition to the variability of manufacturing costs from product to product.and laboratory locations.

 

 

 

 20 

 

 

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 cost of contract manufacturing are 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.

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, accounting, business development, legal, human resources, information technology, project management, 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, project management, and business development activities. SG&A expenses are generally not directly proportional to revenues, but we expect such expenses to increase over time to support the needs of our growing company.

 

Three Months: Results of Operations

The increase in SG&A expenses of $459,000 (11%) duringfollowing table compares the three months ended January 31, 2018 compared to the same prior year period was primarily due to a 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).

Nine Months: The decrease in SG&A expensesstatements 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 whichoperations from 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.

Restructuring Charges

Restructuring charges of $1,588,000 incurred during the quarter ended October, 31, 2017 were 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 9 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 are included in loss from discontinuedcontinuing operations in the accompanying unaudited condensed consolidated financial statements for the nine months ended January 31, 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. We did not incur any restructuring charges during the three and nine months ended January 31, 2017.2020 and 2019 (in thousands):

 

Discontinued Operations

As a result of (i) the sale of our PS-targeting program (as described in Note 10 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 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.

  

Three Months Ended

January 31,

  

Nine Months Ended

January 31,

 
  2020  2019  $ Change  2020  2019  $ Change 
Revenues $13,585  $13,781  $(196) $47,152  $36,548  $10,604 
Cost of revenues  12,800   11,731   1,069   41,921   32,972   8,949 
Gross profit  785   2,050   (1,265)  5,231   3,576   1,655 
                         
Operating expenses:                        
Selling, general and administrative  2,996   3,242   (246)  10,989   9,273   1,716 
Loss on lease termination  –   –   –   355   –   355 
Total operating expenses  2,996   3,242   (246)  11,344   9,273   2,071 
Operating loss  (2,211)  (1,192)  (1,019)  (6,113)  (5,697)  (416)
Interest and other income, net  107   9   98   415   190   225 
Loss from continuing operations before income taxes  (2,104)  (1,183)  (921)  (5,698)  (5,507)  (191)
Income tax benefit  –   44   (44)  –   217   (217)
Loss from continuing operations, net of tax $(2,104) $(1,139) $(965) $(5,698) $(5,290) $(408)

 

 

 

 21 

 

Three Months Ended January 31, 2020 Compared to Three Months Ended January 31, 2019

Revenues

Revenues for the three months ended January 31, 2020 were $13.6 million compared to $13.8 million for the same period in the prior year, a decrease of $0.2 million, or 1%. The decrease in revenues can primarily be attributed to a decrease in process development revenue, which was largely offset by an increase in the number of in-process and completed manufacturing runs in the current-year period. The following table provides the net change in revenues by our revenue streams:

  $ millions 
Net increase in manufacturing revenue $0.8 
Net decrease in process development revenue  (1.0)
Total decrease in revenues $(0.2)

Additionally, growth in manufacturing revenue during the current-year period was impacted by a production interruption related to a problem with a specific piece of equipment, which resulted in the termination of certain in-process manufacturing runs and the postponement of other manufacturing runs scheduled to commence during the current-year period. We are currently in the process of implementing what we believe to be the necessary corrections for the specific piece of equipment that resulted in the production interruption, however, we expect that this interruption will continue to have a negative impact on our revenues and gross profit for the remainder of fiscal 2020.

Gross Profit

Gross profit for the three months ended January 31, 2020 was $0.8 million compared to $2.1 million for the same period in the prior year, a decrease of approximately $1.3 million, where gross margins for such periods were 6% and 15%, respectively. The $1.3 million decrease in gross profit for the current-year period was primarily attributed to the costs associated with the production interruption described above, increased depreciation expense from the acquisition of new equipment, and a net decrease in revenues.

Selling, General and Administrative Expenses

SG&A expenses were $3.0 million for the three months ended January 31, 2020 compared to $3.2 million for the same period in the prior year, a decrease of approximately $0.2 million, or 8%. As a percentage of revenue, SG&A expenses for the three months ended January 31, 2020 and 2019 were 22% and 24%, respectively. The decrease in SG&A expenses was attributed to the following components:

  $ millions 
Decrease in accrued bonus expenses $(0.7)
Increase in separation related expenses  0.2 
Net increase in all other SG&A expenses  0.3 
Total decrease in SG&A expenses $(0.2)

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Operating Loss

Operating loss was $2.2 million, or a negative 16% of revenue, for the three months ended January 31, 2020 compared to an operating loss of $1.2 million, or a negative 9% of revenue, for the same period in the prior year. Of this $1.0 million change in year-over-year operating loss, approximately $1.3 million was attributable to a gross profit decrease, which was partially offset by a decrease in SG&A expenses of approximately $0.2 million.

Nine Months Ended January 31, 2020 Compared to Nine Months Ended January 31, 2019

Revenues

Revenues for the nine months ended January 31, 2020 were $47.2 million compared to $36.5 million for the same period in the prior year, an increase of approximately $10.6 million, or 29%. The increase in revenues can primarily be attributed to an increase in the number of manufacturing runs in-process and/or completed in the current-year period compared to the prior-year period as a result of growing manufacturing demand from a more diversified customer base, which increase was offset by a decrease in process development revenue. The increase in revenues was attributed to the following components of our revenue streams:

  $ millions 
Net increase in manufacturing revenue $12.1 
Net decrease in process development revenue  (1.5)
Total increase in revenues $10.6 

Additionally, growth in manufacturing revenue during the current-year period was impacted by a production interruption related to a problem with a specific piece of equipment, which resulted in the termination of certain in-process manufacturing runs and the postponement of other manufacturing runs scheduled to commence during the current-year period. We are currently in the process of implementing what we believe to be the necessary corrections for the specific piece of equipment that resulted in the production interruption, however, we expect that this interruption will continue to have a negative impact on our revenues and gross profit for the remainder of fiscal 2020.

Gross Profit

Gross profit for the nine months ended January 31, 2020 was $5.2 million compared to $3.6 million for the same period in the prior year, an increase of approximately $1.7 million, where gross margins for such periods were 11% and 10%, respectively. The $1.7 million increase in gross profit for the current-year period was primarily attributed to increased revenues, which was partially offset by costs associated with payroll and related costs, higher facility and equipment related costs primarily associated with the production interruption described above, increased depreciation expense from the acquisition of new equipment, and general equipment repairs and maintenance costs.

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Selling, General and Administrative Expenses

SG&A expenses were $11.0 million for the nine months ended January 31, 2020 compared to $9.3 million for the same period in the prior year, an increase of approximately $1.7 million, or 19%. As a percentage of revenue, SG&A expenses for the nine months ended January 31, 2020 and 2019 were 23% and 25%, respectively. The increase in SG&A expenses was attributed to the following components:

  $ millions 
Increase in separation related expenses $0.8 
Increase in payroll and benefit costs  0.5 
Increase in stock-based compensation expense  0.4 
Decrease in accrued bonus expenses  (0.3)
Net increase in all other SG&A expenses  0.3 
Total increase in SG&A expenses $1.7 

Loss on Lease Termination

In September 2019, we entered into a lease amendment to terminate an operating lease for one of our non-manufacturing facilities that was primarily utilized for warehouse space. The lease termination was primarily driven by our efforts to reduce costs by leveraging available warehouse space in our other facilities, which in aggregate will save us approximately $1.3 million over a period of four years. In connection with the termination of this lease, we removed the corresponding operating lease right-of-use asset and liability balances from our balance sheet and recognized a loss of $0.4 million. Additionally, the lease termination released $0.3 million of restricted cash that was pledged as collateral under a letter of credit required by the terminated lease.

Operating Loss

Operating loss was $6.1 million, or a negative 13% of revenue, for the nine months ended January 31, 2020 compared to an operating loss of $5.7 million, or a negative 16% of revenue, for the same period in the prior year. Of this $0.4 million change in year-over-year operating loss, approximately $1.7 million was attributable to an increase in SG&A expenses and $0.4 million was attributable to a loss recognized in connection with the termination of an operating lease, which were partially offset by an increase in gross profit of approximately $1.7 million.

Income Tax Benefit

In September 2018, we recognized a $1.0 million gain in discontinued operations, before taxes, for the sale of our r84 technology (as described in Note 7 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 nine months ended January 31, 2019, we recorded a tax benefit in continuing operations of $0.2 million with an offsetting tax expense of $0.3 million in discontinued operations. The remaining deferred tax benefit of $0.1 million was allocated proportionally to continuing operations throughout the remainder of fiscal year 2019.

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Discontinued Operations

As a result of the sale of our PS-targeting and r84 technologies in February 2018 and September 2018, respectively (as described in Note 10 to the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019), the abandonment of our remaining research and development assets, and the strategic shift in our corporate direction to focus solely on our CDMO business, the operating results of our former research and development segment have been excluded from continuing operations and reported as income from discontinued operations, net of tax, in the accompanying unaudited condensed consolidated financial statements for all periods presented. The gain of $1.0 million 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 of operations and comprehensive loss for the nine months ended January 31, 2019. There were no operating results from discontinued operations during the three and nine months ended January 31, 2020.

Liquidity and Capital Resources

At January 31, 2020, we had $30.7 million in cash and cash equivalents. Our ability to fund our operations is dependent on the amount of cash on hand and our ability to generate positive cash flow to sustain our current operations. If we are unable to generate sufficient revenue to generate positive cash flow from operations, we will experience negative cash flows from operations. We plan to fund our operations using our existing cash and cash equivalents and cash generated from services provided under our customer contracts. As of January 31, 2020, we performed an analysis and concluded that our cash and cash equivalents as of January 31, 2020 together with cash expected to be generated from services provided under our customer contracts will be sufficient to support our operations for at least one year from the issuance date of this Quarterly Report.

In the event we are unable to secure sufficient additional manufacturing services projects to support our current operations, we may need to raise additional capital through a combination of equity offerings and debt financings in order to fund our future operations. There can be no assurance that, in the event we require additional financing, such financing will be available on acceptable terms or at all. Our ability to raise additional capital in the equity markets 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, our financial results and economic and market conditions. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as making capital expenditures or incurring additional debt. If we are unable to fund our continuing operations through these sources, we may need to further restructure, or cease, our operations.

Cash Flow Analysis

Significant components of the changes in cash flows from operating, investing and financing activities for the nine months ended January 31, 2020 and 2019 are as follows (in thousands):

  Nine Months Ended January 31, 
  2020  2019 
Net cash provided by (used in) operating activities $2,780  $(17,243)
Net cash (used in) provided by investing activities  (3,025)  4,752 
Net cash used in financing activities  (2,219)  (2,016)

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Net Cash Provided By (Used In) Operating Activities

Net cash provided by (used in) operating activities represents our net loss, as adjusted to reconcile our net loss to net cash provided by (used in) operating activities and net changes in the timing of cash flows as reflected by the changes in operating assets and liabilities.

Net cash provided by operating activities for the nine months ended January 31, 2020 was primarily attributable to a net loss of $5.7 million, offset by adjustments to exclude noncash charges for depreciation and amortization, stock-based compensation and loss on lease termination in an aggregate amount of $4.5 million, and include cash flows from the net change in operating assets and liabilities of $4.0 million. The net change in operating assets and liabilities was primarily due to the timing of cash receipts and expenditures associated with working capital.

Net cash used in operating activities for the nine months ended January 31, 2019 was primarily attributable to a net loss of $4.6 million, as negatively adjusted to exclude a $1.0 million gain on the sale of certain research and development assets and $4.4 million related to the change in assets and liabilities of discontinued operations, and partially offset by positive adjustments to exclude noncash charges for depreciation and amortization and stock-based compensation of $3.1 million, in aggregate, and net cash outflows from the net change in certain other operating assets and liabilities of $10.5 million. The net change in operating assets and liabilities was primarily due to the timing of cash receipts and expenditures associated with working capital.

Net Cash (Used In) Provided By Investing Activities

Our investing activities consist of capital expenditures for our manufacturing and development operations and with respect to the prior year period, proceeds from the sale of certain research and development assets associated with our discontinued research and development segment (as described in Note 10 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019).

Net cash used in investing activities during the nine months ended January 31, 2020 consisted of property and equipment acquisitions of $3.0 million primarily related to our manufacturing and development operations.

Net cash provided by investing activities for the nine months ended January 31, 2019 consisted of proceeds of $6.0 million related to the sale of certain research and development assets associated with our discontinued research and development segment, offset by property and equipment acquisitions of $1.2 million.

Net Cash Used In Financing Activities

Our financing activities primarily consist of cash dividends paid on our preferred stock and proceeds from the exercise of stock options and the issuance of common stock under our ESPP.

Net cash used in financing activities for the nine months ended January 31, 2020 was $2.2 million. This included $3.2 million in dividends paid on our preferred stock and $0.1 million of principal finance lease payments, offset by $0.9 million of proceeds from the exercise of stock options and $0.2 million of proceeds from the issuance of common stock under our ESPP.

Net cash used in financing activities for the nine months ended January 31, 2019 was $2.0 million. This included $3.2 million in dividends paid on our preferred stock and $0.1 million of principal lease payments, offset by $1.2 million of proceeds from the exercise of stock options and $0.1 million of proceeds from the issuance of common stock under our ESPP.

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Contractual Obligations

Except as set forth below, during the nine months ended January 31, 2020, there were no material changes in our contractual obligations and commitments, as described in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2019.

In September 2019, we entered into an amendment of one of our facility operating lease agreements (as described in Note 3 to the accompanying unaudited condensed consolidated financial statements), pursuant to which the term of the lease was shortened from August 2023 to September 2019, which effectively terminated the lease and thereby reduced our future minimum lease payments under all non-cancelable operating leases by approximately $1.0 million.

 

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 nine months ended January 31, 2018,2020, 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 related2019.

Recent Accounting Pronouncements

Refer to discontinued operations as described in Note 2, “SummarySummary of Significant Accounting Policies”Policies, in the accompanying notes to theour unaudited condensed consolidated financial statements.statements for a discussion of recent accounting pronouncements, including ASC 842, the new standard related to accounting for leases, which we adopted on May 1, 2019.

 

Liquidity and Capital Resources

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.Backlog

 

Our ability to fund our operations is dependent on the amountbacklog represents, as of cash on hand and our ability to generate sufficienta point in time, future revenue to cover our operations. Atfrom work not yet completed under signed contracts. As of January 31, 2018,2020, our backlog was approximately $58 million, as compared to approximately $46 million as of April 30, 2019. While we had $17,938,000 in cash and cash equivalents and in February 2018, we raised $23,163,000 in gross proceeds fromanticipate the salemajority 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 receivewill be recognized as revenue over the next six (6)twelve (12) months, fromour backlog is subject to a number of risks and uncertainties, including 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 eventrisk 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; the risk that a customer may experience delays in its program(s) or otherwise, which wouldcould result in the postponement of anticipated manufacturing services; and, the risk that we may not successfully execute on all customer projects, any of which could 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 “Backlog” section below) 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.

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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 nine months ended January 31, 2018 compared to the same prior year period are as follows:

Net Cash Used In Operating Activities. Net cash used in operating activities represents our (i) net loss, as reported, (ii) less non-cash operating expenses, and (iii) net changes in the timing of cash flows as reflected by the changes in operating assets and liabilities, as described in the below table:

  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)

Net cash used in operating activities increased $485,000 to $28,101,000 for the nine months ended January 31, 2018 compared to net cash used in operating activities of $27,616,000 for the nine months ended January 31, 2017. This increase in net cash used in operating activities was due to an increase of $2,835,000 in our net loss reported for the current nine-month period after deducting non-cash operating expenses as described in the above table, offset by a net change in operating assets and liabilities of $2,350,000 primarily due to the timing of cash receipts and expenditures associated with deferred revenue, customer deposits, inventories, trade and other receivables, accounts payable, and accrued clinical trial and related fees.

Net Cash Used In Investing Activities. Net cash used in investing activities for the nine months ended January 31, 2018 and 2017, was $2,144,000 and $2,439,000, respectively, which amounts primarily consisted of property and equipment acquisitions related to our manufacturing operations.

Net Cash Provided By Financing Activities. Net cash provided by financing activities for the nine months ended January 31, 2018 and 2017, was $1,384,000 and $10,171,000, respectively.

Net cash provided by financing activities during the nine months ended January 31, 2018 consisted of (i) $4,193,000 in net proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement, (ii) $217,000 in net proceeds from the purchase of shares of our common stock under our Employee Stock Purchase Plan (“ESPP”), and (iii) $398,000 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 and principal payments on a capital lease 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.

Backlog

Our backlog represents, as of a point in time, future contract manufacturing revenue from work not yet completed under signed contracts. As of January 31, 2018, our backlog was approximately $39 million, the majority of which, we expect to recognize over the next twelve (12) months, compared to approximately $70 million as of January 31, 2017. 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 our future revenue.

 

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Item 3.Quantitative and Qualitative Disclosures About Market Risk.Risk

 

Our cash and cash equivalents are primarily invested in money market funds with one major commercial bank withDuring 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 risknine months ended January 31, 2020, there were no material changes in the eventmarket risks described in the “Quantitative and Qualitative Disclosures About Market Risk” section of default byour Annual Report on Form 10-K for 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 January 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.fiscal year ended April 30, 2019.

 

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Item 4.Controls And Procedures.Procedures

Evaluation of Disclosure 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 Interim 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 Officerprincipal executive officer and Chief Financial Officer,principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of January 31, 2018,2020, the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officerprincipal executive officer and Chief Financial Officerprincipal financial officer concluded that our disclosure controls and procedures were effective as of January 31, 2018.2020.

Changes in Internal Control over Financial Reporting

 

There were no significant changes in our internal control over financial reporting, during the quarter ended January 31, 2018,2020, 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.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.Factors

 

There have been no material changesWe operate in a rapidly changing environment that involves a number of risks that could materially and adversely affect our business, results of operations, financial condition or cash flows. For a detailed discussion of the risks that affect our business, please refer to the risk factors included in Part I, Item 1A ofIA, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017,2019. There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K, except for the following risk factors:as follows:

 

If we cannot secure additional business, we may have to raise additional capital or further restructure, or cease,Outbreaks of communicable infections, such as the global coronavirus, could cause disruptions in our operations.business.

 

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.

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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 theThe 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 allglobal outbreak of the amounts paid to us in advance under those canceled commitments, which wouldcoronavirus could have a negative impact on our liquidity,revenues and operating results. This outbreak could result in disruptions and damage to our reported backlog and revenue guidance. As such, we expect our current backlog (as further discussed inbusiness, caused by both the above “Backlog” section)negative impact 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 thatobtain raw materials, supplies and component parts necessary to operate 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.

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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 initiativesCDMO business 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 maynegative 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.  

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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 foroperate 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 asfacilities should the introduction by otherscoronavirus spread more broadly within Southern California thereby creating an increased risk of new offerings and technologies that provide alternativesexposure to our offerings. In the event we are unable to offer or enhancemanufacturing workforce which cannot operate 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.  

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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.

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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.facilities remotely. While we continue to evaluatedevelop plans to help mitigate the effectnegative impact of the TCJAcoronavirus to our business, the efforts will not completely prevent our business from being adversely affected, and the longer the outbreak impacts supply and demand and the more broadly the outbreak spreads the more negative the impact it will have on our business, includingrevenues and operating results, and the more limited our projection of minimal cash taxesability will be to try and our net operating losses, the impact of such tax reform on holders of our common stock is uncertain and may be adverse.   make up for delayed or lost revenues.

 

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.

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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: 

·our loss of a significant customer;
·uncertainties about our ability to continue to fund our operations beyond the next twelve months;
·significant changes in our financial results or that of our competitors, including our ability to continue as a going concern;
·our ability to meet revenue projections;
·the offering and sale of shares of our common stock, either sold at market prices or at a discount under an equity transaction;
·significant changes in our capital structure;
·published reports by securities analysts;
·announcements of partnering transactions, licensing agreements, joint ventures, strategic alliances, and any other transaction that involves the development, sale or use of our technologies or competitive technologies;
·regulatory developments, including possible delays, and product safety concerns;
·outcomes of significant litigation, disputes and other legal or regulatory proceedings;
·general stock trends in the biotechnology and pharmaceutical industry sectors;
·public concerns as to the safety and effectiveness of the products we manufacture;
·economic trends and other external factors, including but not limited to, interest rate fluctuations, economic recession, inflation, foreign market trends, national crisis, and disasters; and
·healthcare reimbursement reform and cost-containment measures implemented by government agencies.

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.

None

Item 3.Defaults Upon Senior Securities.

None

Item 4.MINE SAFETY DISCLOSURES.

Not applicable

Item 5.Other Information.

None



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Item 6.Exhibits.Exhibits

 

(a)Exhibits:

 

3.1Certificate of Incorporation of Avid Bioservices, Inc., a Delaware corporation, as amended through January 5, 2018. *
4.1Form of Indenture (Incorporated by reference to Exhibit 4.4 to the Registrant’s Registration Statement on Form S-3 filed with the SEC on January 12, 2018). **
10.1Settlement Agreement, dated November 27, 2017, by and among Avid Bioservices, Inc., Ronin Trading, LLC, Ronin Capital, LLC, SWIM Partners LP, SW Investment Management LLC, John S. Stafford, III, Stephen White and Roger Farley (Incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on November 28, 2017). **
10.2Severance Agreement and Mutual General Release between Steven W. King and Avid Bioservices, Inc. dated December 22, 2017. *
31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/ and 15d-14(a) of the Securities Exchange Act of 1934, as amended. **

31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/ and 15d-14(a) of the Securities Exchange Act of 1934, as amended. * *

32Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b)18 U.S.C. 1350, as adopted pursuant to Section 906 of the Securities ExchangeSarbanes-Oxley Act of 1934, as amended, and 18 U.S.C. Section 1350.2002. * *

101.INSXBRL Taxonomy Extension Instance Document. *

101.SCHXBRL Taxonomy Extension Schema Document. *

101.CALXBRL Taxonomy Extension Calculation Linkbase Document. *

101.DEFXBRL Taxonomy Extension Definition Linkbase Document. *

101.LABXBRL Taxonomy Extension Label Linkbase Document. *

101.PREXBRL Presentation Extension Linkbase Document. *

__________ __________________

** Filed herewith.
**Previously filed.

 

 

 

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SIGNATURES

 

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:March 12, 201810, 2020By:/s/ Roger J. Lias, Ph.D.Richard B. Hancock
 Richard B. Hancock
 Roger J. Lias, Ph.D.
Interim President and Chief Executive Officer
  
  
  
Date:March 12, 201810, 2020By:/s/ Paul J. LytleDaniel R. Hart
 Daniel R. Hart
 

Paul J. Lytle
Chief Financial Officer

(signed both as an officer duly authorized to sign on behalf of the Registrant and principal financial officer and chief accounting officer)

 

 

 

 

 

 

 

 

 

 

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