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 October 31, 20182019
ORor
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 | |
(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 | ||
(714) 508-6100
(Registrant’s telephone number, including area code)
| Securities registered pursuant to Section 12(b) of the Act: |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.001 par value per share | CDMO | The NASDAQ Stock Market LLC |
| 10.50% Series E Convertible Preferred Stock, $0.001 par value per share | CDMOP | The 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 every Interactive Data File required to be submitted 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 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.
| Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o | Smaller reporting company |
| Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso No ý
As of December 3, 2018, there were 56,067,867November 30, 2019, the number of shares of registrant’s common stock $0.001 par value, outstanding.outstanding was 56,338,143.
AVID BIOSERVICES, INC.
Form 10-Q
For The Quarter Ended October 31, 2019
Page
No.
As used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, thethe terms “we,” “us,” “our,” “the Company,” and “Avid,”the “Company” refer to Avid Bioservices, Inc. and its consolidated subsidiaries.
PART I - I—FINANCIAL INFORMATION
| Item 1. | Condensed Consolidated Financial |
avid bioservices, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(inIn thousands, except share information)par value)
October 31, 2018 | April 30, 2018 | |||||||||||||||
| Unaudited | (Note 1) | October 31, 2019 | April 30, 2019 | |||||||||||||
| ASSETS | (unaudited) | |||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 32,694 | $ | 42,265 | $ | 33,960 | $ | 32,351 | ||||||||
| Trade and other receivables | 4,197 | 3,754 | ||||||||||||||
| Accounts receivable | 7,422 | 7,374 | ||||||||||||||
| Contract assets | 5,092 | – | 6,110 | 4,327 | ||||||||||||
| Inventories | 9,736 | 16,129 | ||||||||||||||
| Prepaid expenses | 774 | 679 | ||||||||||||||
| Assets of discontinued operations | – | 5,000 | ||||||||||||||
| Inventory | 7,809 | 6,557 | ||||||||||||||
| Prepaid expenses and other current assets | 926 | 709 | ||||||||||||||
| Total current assets | 52,493 | 67,827 | 56,227 | 51,318 | ||||||||||||
| Property and equipment, net | 26,279 | 26,479 | 26,990 | 25,625 | ||||||||||||
| Operating lease right-of-use assets | 21,381 | – | ||||||||||||||
| Restricted cash | 1,150 | 1,150 | 350 | 1,150 | ||||||||||||
| Other assets | 302 | 304 | 302 | 302 | ||||||||||||
| Total assets | $ | 80,224 | $ | 95,760 | $ | 105,250 | $ | 78,395 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 3,223 | $ | 1,909 | $ | 6,126 | $ | 4,352 | ||||||||
| Accrued payroll and related costs | 1,829 | 2,564 | 3,360 | 3,540 | ||||||||||||
| Contract liabilities | 17,307 | 27,935 | 22,199 | 14,651 | ||||||||||||
| Operating lease liabilities | 1,241 | – | ||||||||||||||
| Other current liabilities | 433 | 905 | 746 | 619 | ||||||||||||
| Liabilities of discontinued operations | 416 | 4,550 | ||||||||||||||
| Total current liabilities | 23,208 | 37,863 | 33,672 | 23,162 | ||||||||||||
| Operating lease liabilities, less current portion | 22,394 | – | ||||||||||||||
| Deferred rent, less current portion | 2,126 | 2,159 | – | 2,072 | ||||||||||||
| Capital lease, less current portion | 93 | – | ||||||||||||||
| Other long-term liabilities | – | 93 | ||||||||||||||
| Commitments and contingencies | ||||||||||||||||
| Stockholders’ equity: | ||||||||||||||||
| Preferred stock—$0.001 par value; 5,000,000 shares authorized; 1,647,760 shares issued and outstanding at October 31, 2018 and April 30, 2018, respectively | 2 | 2 | ||||||||||||||
| Common stock—$0.001 par value; 150,000,000 shares authorized; 56,063,488 and 55,689,222 shares issued and outstanding at October 31, 2018 and April 30, 2018, respectively | 56 | 55 | ||||||||||||||
| Preferred stock, $0.001 par value; 5,000 shares authorized; 1,648 shares issued and outstanding at October 31, 2019 and April 30, 2019, respectively | 2 | 2 | ||||||||||||||
| Common stock, $0.001 par value; 150,000 shares authorized; 56,338 and 56,136 shares issued and outstanding at October 31, 2019 and April 30, 2019, respectively | 56 | 56 | ||||||||||||||
| Additional paid-in capital | 614,541 | 614,810 | 613,325 | 613,615 | ||||||||||||
| Accumulated deficit | (559,802 | ) | (559,129 | ) | (564,199 | ) | (560,605 | ) | ||||||||
| Total stockholders’ equity | 54,797 | 55,738 | 49,184 | 53,068 | ||||||||||||
| Total liabilities and stockholders’ equity | $ | 80,224 | $ | 95,760 | $ | 105,250 | $ | 78,395 | ||||||||
See accompanying notes to condensed consolidated financial statements.
avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and comprehensive loss (UNAUDITED)
(in(Unaudited) (In thousands, except share and per share information)
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Revenues | $ | 18,313 | $ | 10,178 | $ | 33,567 | $ | 22,767 | ||||||||
| Cost of revenues | 14,953 | 9,844 | 29,121 | 21,241 | ||||||||||||
| Gross profit | 3,360 | 334 | 4,446 | 1,526 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 3,534 | 2,816 | 7,993 | 6,031 | ||||||||||||
| Loss on lease termination | 355 | – | 355 | – | ||||||||||||
| Total operating expenses | 3,889 | 2,816 | 8,348 | 6,031 | ||||||||||||
| Operating loss | (529 | ) | (2,482 | ) | (3,902 | ) | (4,505 | ) | ||||||||
| Interest and other income, net | 99 | 119 | 308 | 181 | ||||||||||||
| Loss from continuing operations before income taxes | (430 | ) | (2,363 | ) | (3,594 | ) | (4,324 | ) | ||||||||
| Income tax benefit | – | 173 | – | 173 | ||||||||||||
| Loss from continuing operations, net of tax | (430 | ) | (2,190 | ) | (3,594 | ) | (4,151 | ) | ||||||||
| Income from discontinued operations, net of tax | – | 739 | – | 739 | ||||||||||||
| Net loss | $ | (430 | ) | $ | (1,451 | ) | $ | (3,594 | ) | $ | (3,412 | ) | ||||
| Comprehensive loss | $ | (430 | ) | $ | (1,451 | ) | $ | (3,594 | ) | $ | (3,412 | ) | ||||
| Series E preferred stock accumulated dividends | (1,442 | ) | (1,442 | ) | (2,523 | ) | (2,523 | ) | ||||||||
| Net loss attributable to common stockholders | $ | (1,872 | ) | $ | (2,893 | ) | $ | (6,117 | ) | $ | (5,935 | ) | ||||
| Basic and diluted net (loss) income per common share attributable to common stockholders: | ||||||||||||||||
| Continuing operations | $ | (0.03 | ) | $ | (0.06 | ) | $ | (0.11 | ) | $ | (0.12 | ) | ||||
| Discontinued operations | – | 0.01 | – | 0.01 | ||||||||||||
| Net loss per share attributable to common stockholders | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.11 | ) | $ | (0.11 | ) | ||||
| Weighted average basic and diluted shares outstanding | 56,253 | 56,009 | 56,210 | 55,889 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
| Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Contract manufacturing revenue | $ | 10,178 | $ | 12,782 | $ | 22,767 | $ | 39,859 | ||||||||
| Cost of contract manufacturing | 9,844 | 16,242 | 21,241 | 36,690 | ||||||||||||
| Gross profit (loss) | 334 | (3,460 | ) | 1,526 | 3,169 | |||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 2,816 | 3,596 | 6,031 | 7,449 | ||||||||||||
| Restructuring charges | – | 1,258 | – | 1,258 | ||||||||||||
| Total operating expenses | 2,816 | 4,854 | 6,031 | 8,707 | ||||||||||||
| Operating loss | (2,482 | ) | (8,314 | ) | (4,505 | ) | (5,538 | ) | ||||||||
| Interest and other income, net | 119 | 13 | 181 | 37 | ||||||||||||
| Loss from continuing operations before income taxes | $ | (2,363 | ) | $ | (8,301 | ) | $ | (4,324 | ) | $ | (5,501 | ) | ||||
| Income tax benefit | 173 | – | 173 | – | ||||||||||||
| Loss from continuing operations | $ | (2,190 | ) | $ | (8,301 | ) | $ | (4,151 | ) | $ | (5,501 | ) | ||||
| Income (loss) from discontinued operations, net of tax | 739 | (4,323 | ) | 739 | (8,328 | ) | ||||||||||
| Net loss | $ | (1,451 | ) | $ | (12,624 | ) | $ | (3,412 | ) | $ | (13,829 | ) | ||||
| Comprehensive loss | $ | (1,451 | ) | $ | (12,624 | ) | $ | (3,412 | ) | $ | (13,829 | ) | ||||
| Series E preferred stock accumulated dividends | (1,442 | ) | (1,442 | ) | (2,523 | ) | (2,523 | ) | ||||||||
| Net loss attributable to common stockholders | $ | (2,893 | ) | $ | (14,066 | ) | $ | (5,935 | ) | $ | (16,352 | ) | ||||
| Basic and diluted weighted average common shares outstanding | 56,008,541 | 45,097,474 | 55,889,325 | 44,935,600 | ||||||||||||
| Basic and diluted net (loss) income per common share attributable to common stockholders: | ||||||||||||||||
| Continuing operations | $ | (0.06 | ) | $ | (0.21 | ) | $ | (0.12 | ) | $ | (0.18 | ) | ||||
| Discontinued operations | $ | 0.01 | $ | (0.10 | ) | $ | 0.01 | $ | (0.18 | ) | ||||||
| Net loss per share attributable to common stockholders | $ | (0.05 | ) | $ | (0.31 | ) | $ | (0.11 | ) | $ | (0.36 | ) | ||||
| 2 |
avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS of STOCKHOLDERs’ EQUITY
(Unaudited) (In thousands, except per share information)
| Three Months Ended October 31, 2019 | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at July 31, 2019 | 1,648 | $ | 2 | 56,238 | $ | 56 | $ | 613,395 | $ | (563,769 | ) | $ | 49,684 | |||||||||||||||
| Series E preferred stock dividends paid ($0.65625 per share) | – | – | – | – | (1,081 | ) | – | (1,081 | ) | |||||||||||||||||||
| Common stock issued under employee stock purchase plan | – | – | 47 | – | 187 | – | 187 | |||||||||||||||||||||
| Exercise of stock options | – | – | 53 | – | 173 | – | 173 | |||||||||||||||||||||
| Stock-based compensation expense | – | – | – | – | 651 | – | 651 | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (430 | ) | (430 | ) | |||||||||||||||||||
| Balance at October 31, 2019 | 1,648 | $ | 2 | 56,338 | $ | 56 | $ | 613,325 | $ | (564,199 | ) | $ | 49,184 | |||||||||||||||
| Three Months Ended October 31, 2018 | ||||||||||||||||||||||||||||
| Preferred Stock | Common Stock | Additional Paid-In | Accumulated | Total Stockholders’ | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||||||||
| Balance at July 31, 2018 | 1,648 | $ | 2 | 55,990 | $ | 55 | $ | 615,040 | $ | (558,351 | ) | $ | 56,746 | |||||||||||||||
| Series E preferred stock dividends paid ($0.65625 per share) | – | – | – | – | (1,081 | ) | – | (1,081 | ) | |||||||||||||||||||
| Common stock issued under employee stock purchase plan | – | – | 40 | – | 114 | – | 114 | |||||||||||||||||||||
| Exercise of stock options | – | – | 33 | 1 | 143 | – | 144 | |||||||||||||||||||||
| Stock-based compensation expense | – | – | – | – | 325 | – | 325 | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (1,451 | ) | (1,451 | ) | |||||||||||||||||||
| Balance at October 31, 2018 | 1,648 | $ | 2 | 56,063 | $ | 56 | $ | 614,541 | $ | (559,802 | ) | $ | 54,797 | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)of STOCKHOLDERs’ EQUITY (Continued)
(in thousands)
(Unaudited) (In thousands, except per share information)
Six Months Ended October 31, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (3,412 | ) | $ | (13,829 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,325 | 1,300 | ||||||
| Stock-based compensation | 622 | 794 | ||||||
| Gain on sale of research and development assets | (1,000 | ) | – | |||||
| Changes in operating assets and liabilities: | ||||||||
| Trade and other receivables | (443 | ) | 4,234 | |||||
| Contract assets | (2,204 | ) | – | |||||
| Inventories | (1,478 | ) | 16,581 | |||||
| Prepaid expenses | (95 | ) | (300 | ) | ||||
| Other non-current assets | 2 | 9 | ||||||
| Accounts payable | 880 | (1,426 | ) | |||||
| Accrued payroll and related expenses | (735 | ) | (1,787 | ) | ||||
| Contract liabilities | (2,715 | ) | (24,906 | ) | ||||
| Other accrued expenses and current liabilities | (741 | ) | 172 | |||||
| Assets and liabilities of discontinued operations | (4,134 | ) | (882 | ) | ||||
| Deferred rent, less current portion | (33 | ) | 572 | |||||
| Net cash used in operating activities | (14,161 | ) | (19,468 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (446 | ) | (1,809 | ) | ||||
| Proceeds from sale of research and development assets | 6,000 | – | ||||||
| Net cash provided by (used in) investing activities | 5,554 | (1,809 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Dividends paid on Series E preferred stock | (2,162 | ) | (2,162 | ) | ||||
| Net proceeds from issuance of common stock | – | 4,193 | ||||||
| Proceeds from issuance of common stock under Employee Stock Purchase Plan | 114 | 216 | ||||||
| Proceeds from exercise of stock options | 1,158 | 112 | ||||||
| Principal payments on capital lease obligation | (74 | ) | (154 | ) | ||||
| Net cash (used in) provided by financing activities | (964 | ) | 2,205 | |||||
| Net decrease in cash, cash equivalents and restricted cash | (9,571 | ) | (19,072 | ) | ||||
| Cash, cash equivalents and restricted cash at beginning of period | 43,415 | 47,949 | ||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 33,844 | $ | 28,877 | ||||
| SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Accounts payable for purchase of property and equipment | $ | 434 | $ | 139 | ||||
| Property and equipment acquired under capital lease | $ | 245 | $ | – | ||||
| Six Months Ended October 31, 2019 | ||||||||||||||||||||||||||||
| 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 ($1.3125 per share) | – | – | – | – | (2,162 | ) | – | (2,162 | ) | |||||||||||||||||||
| Common stock issued under employee stock purchase plan | – | – | 47 | – | 187 | – | 187 | |||||||||||||||||||||
| Exercise of stock options | – | – | 127 | – | 431 | – | 431 | |||||||||||||||||||||
| Vesting of restricted stock units | – | – | 28 | – | – | – | – | |||||||||||||||||||||
| Stock-based compensation expense | – | – | – | – | 1,254 | – | 1,254 | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (3,594 | ) | (3,594 | ) | |||||||||||||||||||
| Balance at October 31, 2019 | 1,648 | $ | 2 | 56,338 | $ | 56 | $ | 613,325 | $ | (564,199 | ) | $ | 49,184 | |||||||||||||||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets to the total of the same amounts shown above:
| October 31, 2018 | April 30, 2018 | October 31, 2017 | April 30, 2017 | |||||||||||||
| Cash and cash equivalents | $ | 32,694 | $ | 42,265 | $ | 27,727 | $ | 46,799 | ||||||||
| Restricted cash | 1,150 | 1,150 | 1,150 | 1,150 | ||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 33,844 | $ | 43,415 | $ | 28,877 | $ | 47,949 | ||||||||
| Six Months Ended October 31, 2018 | ||||||||||||||||||||||||||||
| 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 ($1.3125 per share) | – | – | – | – | (2,162 | ) | – | (2,162 | ) | |||||||||||||||||||
| 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 | – | – | 334 | 1 | 1,157 | – | 1,158 | |||||||||||||||||||||
| Stock-based compensation expense | – | – | – | – | 622 | – | 622 | |||||||||||||||||||||
| Net loss | – | – | – | – | – | (3,412 | ) | (3,412 | ) | |||||||||||||||||||
| Balance at October 31, 2018 | 1,648 | $ | 2 | 56,063 | $ | 56 | $ | 614,541 | $ | (559,802 | ) | $ | 54,797 | |||||||||||||||
See accompanying notes to condensed consolidated financial statements.
| 4 |
avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)
Six Months Ended October 31, | ||||||||
| 2019 | 2018 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (3,594 | ) | $ | (3,412 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | 1,467 | 1,325 | ||||||
| Stock-based compensation | 1,254 | 622 | ||||||
| Loss on lease termination | 355 | – | ||||||
| Loss on disposal of assets | 13 | – | ||||||
| Gain on sale of research and development assets | – | (1,000 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | (48 | ) | (443 | ) | ||||
| Contract assets | (1,783 | ) | (2,204 | ) | ||||
| Inventory | (1,252 | ) | (1,478 | ) | ||||
| Prepaid expenses and other assets | (217 | ) | (93 | ) | ||||
| Accounts payable | (86 | ) | 880 | |||||
| Accrued payroll and related expenses | (180 | ) | (735 | ) | ||||
| Contract liabilities | 7,548 | (2,715 | ) | |||||
| Other accrued expenses and current liabilities | (61 | ) | (774 | ) | ||||
| Assets and liabilities of discontinued operations | – | (4,134 | ) | |||||
| Net cash provided by (used in) operating activities | 3,416 | (14,161 | ) | |||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (985 | ) | (446 | ) | ||||
| Proceeds from sale of research and development assets | – | 6,000 | ||||||
| Net cash (used in) provided by investing activities | (985 | ) | 5,554 | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from exercise of stock options | 431 | 1,158 | ||||||
| Proceeds from issuance of common stock under employee stock purchase plan | 187 | 114 | ||||||
| Dividends paid on preferred stock | (2,162 | ) | (2,162 | ) | ||||
| Principal payments on finance lease | (78 | ) | (74 | ) | ||||
| Net cash used in financing activities | (1,622 | ) | (964 | ) | ||||
| Change in cash, cash equivalents and restricted cash | 809 | (9,571 | ) | |||||
| Cash, cash equivalents and restricted cash, beginning of period | 33,501 | 43,415 | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 34,310 | $ | 33,844 | ||||
| Supplemental disclosures of non-cash activities: | ||||||||
| Unpaid purchases of property and equipment | $ | 1,860 | $ | 434 | ||||
| Property and equipment acquired under finance lease | $ | – | $ | 245 | ||||
See accompanying notes to condensed consolidated financial statements.
| 5 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
Note 1 – Description of Company and per share information)Basis of Presentation
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.
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, and accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual 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, 2018.2019, as filed with the SEC on June 27, 2019. The condensed consolidated balance sheet at April 30, 20182019 has been derived from audited financial statements at that date. The unaudited financial information for the interim periods presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments. Results of operations for interim periods covered by this Quarterly Report on Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or any other interim period.
The unaudited condensed consolidated financial statements include the accounts of 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.
Certain prior period amounts within the accompanying unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect our financial position, net loss, cash flows as of and for the periods presented.
Discontinued Operations
For all periods presented, the operating results of our former research and development segment have been excluded from continuing operations and reported as income (loss) from discontinued operations, net of tax, in the accompanying unaudited condensed consolidated financial statements for all periods presented. In addition, the assetsof operations and liabilities related to our discontinued research and development segment are reported as assets and liabilities of discontinued operations in the accompanying unaudited condensed consolidated balance sheets at October 31, 2018 and April 30, 2018. For additional information on the discontinuation of our research and development segment, refer to Note 11, “Sale of Research and Development Assets”comprehensive loss (Note 7).
Segment ReportingNote 2 – Summary of Significant Accounting Policies
Historically,Information regarding 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 resultsignificant accounting policies is contained in Note 2, “Summary of Significant Accounting Policies”, of the aforementioned discontinued operation ofconsolidated financial statements in our research and development segment (Note 11),management has determined thatAnnual Report on Form 10-K for the Company now operates in only one operating segment. Accordingly, we reported our financial results for one reportable segment to reflect this new organizational structure.fiscal year ended April 30, 2019.
| 6 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Revenue Recognition
Restructuring
Restructuring charges consist of one-time termination benefits, including severance and other employee related costs related to a workforce reduction pursuant to a restructuring plan we implemented in August 2017 (fiscal year 2018). Under this restructuring plan, which we completed in October 2017, we incurred an aggregate of $1,588 in restructuring charges, of which $330 related to our discontinued research and development segment (Note 11) and $1,258 related to our contract manufacturing services segment.
Going Concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that we are unable to continue as a going concern.
At October 31, 2018, we had $32,694 in cash and cash equivalents. Our ability to fund our operations depends on the amount of cash on hand and our ability to generate sufficient revenue to cover our operations. We have expended substantial funds on our legacy research and development of pharmaceutical product candidates (discontinued operations) and our contract manufacturing business (continuing operations). As a result, we have experienced losses and negative cash flows from operations since our inception, and although we have discontinued our research and development segment, we expect negative cash flows from operations to continue until we can generate sufficient revenue to generate positive cash flow from operations.
In the event we are unable to obtain sufficient business to support our operations beyond the next twelve months, we may need to raise additional capital. Our ability to raise additional capital in the equity markets to fund our obligations in future periods depends 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.
Reclassifications
Certain prior year amounts related to deferred revenue and customer deposits have been reclassified to contract liabilities in our accompanying consolidated balance sheet for the fiscal year ended April 30, 2018 and in our accompanying consolidated statement of cash flows for the six months ended October 31, 2017 to conform to the current period presentation (Note 2). This reclassification had no effect on previously reported net loss.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Revenue is recognized from Contracts with Customersservices provided under our customer contracts, which we have disaggregated into manufacturing and process development revenue streams.
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 CustomersManufacturing revenue(“ASC 606”), which, along with subsequent amendments issued after May 2014, replaced substantially all then relevant U.S. GAAP revenue recognition guidance. ASC 606, as amended, is based on the principle that revenue is recognized to depict the contractual transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services utilizing a new five-step revenue recognition model, which steps include (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
On May 1, 2018, we adopted ASC 606, as amended, to all contracts not completed asManufacturing revenue generally represents revenue from the manufacturing of May 1, 2018 using the modified retrospective method. Results for the reporting period beginning after May 1, 2018 are presented in accordance with ASC 606, while prior period amounts continue to be reported under the accounting standards that were in effect for the prior period. The accounting policy for revenue recognition for periods prior to May 1, 2018 is described in Note 2 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.
The cumulative effect of adopting ASC 606 resulted in a one-time adjustment of $2,739 to the opening balance of accumulated deficit. The cumulative effect adjustment relates to the recognition of revenue and related costs for customer contracts that transfer goods or services over time. Under ASC 606, the timing of the recognition of contract manufacturing revenue and the related cost of contract manufacturing associated with goods or services provided to customers with no alternative use areproducts recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation. By contrast, in the prior period, contract manufacturing revenue and the related costs were recognized upon completion of the performance obligation in accordance with accounting standards that were in effect in the prior period. Under these customer contracts the customer retains control of the product as it is being created or enhanced by our services and/or we are entitled to compensation for progress to date that includes an element of profit margin.
The following table summarizes the cumulative effect of the adoption of ASC 606 on amounts previously reported in our consolidated balance sheet at April 30, 2018:
As Reported April 30, 2018 | ASC 606 Transition Adjustment |
Balance at May 1, 2018 | ||||||||||
| Contract assets | $ | – | $ | 2,888 | $ | 2,888 | ||||||
| Inventories | 16,129 | (7,871 | ) | 8,258 | ||||||||
| Contract liabilities | 27,935 | (7,913 | ) | 20,022 | ||||||||
| Other current liabilities | 905 | 191 | 1,096 | |||||||||
| Accumulated deficit | (559,129 | ) | 2,739 | (556,390 | ) | |||||||
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
The following tables summarize the effect of the adoption of ASC 606 on our unaudited condensed consolidated balance sheet at October 31, 2018 and our unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended October 31, 2018:
As Reported | Effect of Change Higher/(Lower) | Balance Without Adoption of ASC 606 | ||||||||||
| Contract assets | $ | 5,092 | $ | 5,092 | $ | – | ||||||
| Inventories | 9,736 | (16,244 | ) | 25,980 | ||||||||
| Contract liabilities | 17,307 | (17,506 | ) | 34,813 | ||||||||
| Three Months Ended October 31, 2018 | ||||||||||||
As Reported | Effect of Change Higher/(Lower) | Balance Without Adoption of ASC 606 | ||||||||||
| Contract manufacturing revenue | $ | 10,178 | $ | 1,215 | $ | 8,963 | ||||||
| Cost of contract manufacturing | 9,844 | (79 | ) | 9,923 | ||||||||
| Gross profit (loss) | 334 | 1,294 | (960 | ) | ||||||||
| Operating loss | (2,482 | ) | 1,294 | (3,776 | ) | |||||||
| Loss from continuing operations | (2,190 | ) | 1,294 | (3,484 | ) | |||||||
| Six Months Ended October 31, 2018 | ||||||||||||
As Reported |
Effect of Change Higher/(Lower) | Balance Without Adoption of ASC 606 | ||||||||||
| Contract manufacturing revenue | $ | 22,767 | $ | 11,831 | $ | 10,936 | ||||||
| Cost of contract manufacturing | 21,241 | 7,905 | 13,336 | |||||||||
| Gross profit (loss) | 1,526 | 3,926 | (2,400 | ) | ||||||||
| Operating loss | (4,505 | ) | 3,926 | (8,431 | ) | |||||||
| Loss from continuing operations | (4,151 | ) | 3,926 | (8,077 | ) | |||||||
Revenue Recognition
We derive revenue from contract manufacturing services provided under our customer contracts, which we have disaggregated into the following revenue streams:
Manufacturing revenue
The manufacturing revenue stream represents revenue from the manufacturing of customer product(s) derived from mammalian cell culture covering clinical through commercial manufacturing runs. Under a manufacturing contract, a quantity of manufacturing runs are ordered and the product is manufactured according to the customer’s specifications and typically only one performance obligation is included. Each manufacturing run represents a distinct service that is sold separately and has stand-alone value to the customer. The product(s)products are manufactured exclusively for a specific customer and have no alternative use. The customer retains control of their product during the entire manufacturing process and can make changes to the process or specifications at their request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin. Revenue
Process development revenue
Process development revenue generally represents revenue from services associated with this streamthe 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.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Process development revenue
The process development revenue stream represents revenue from non-manufacturing related services associated with the custom development of a customer’s product. Under a process development contract, the customer owns the product details and process, which has no alternative use. These process development projects are customized to each customer to meet their specifications and typically only one performance obligation is included. Each process represents a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of their product as the product is being created or enhanced by our services and can make changes to their process or specifications upon request. Revenue associated with this stream is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation.
The following table disaggregatessummarizes our contract manufacturing and process development revenue streams for the three and six months ended October 31, 2019 and 2018 and 2017 by revenue stream. Contract manufacturing revenue for the three and six months ended October 31, 2017 has not been adjusted in accordance with our modified retrospective adoption of ASC 606 and continues to be reported under the accounting standards that were in effect prior to our adoption of ASC 606 on May 1, 2018(in thousands):
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Manufacturing revenue | $ | 7,243 | $ | 11,437 | $ | 17,543 | $ | 36,236 | ||||||||
| Process development revenue | 2,935 | 1,345 | 5,224 | 3,623 | ||||||||||||
| Total contract manufacturing revenue | $ | 10,178 | $ | 12,782 | $ | 22,767 | $ | 39,859 | ||||||||
Contract balances
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Manufacturing revenue | $ | 15,989 | $ | 7,243 | $ | 28,897 | $ | 17,543 | ||||||||
| Process development revenue | 2,324 | 2,935 | 4,670 | 5,224 | ||||||||||||
| Total revenues | $ | 18,313 | $ | 10,178 | $ | 33,567 | $ | 22,767 | ||||||||
The timing of revenue recognition, billings and cash collections results in billed trade receivables, contract assets (unbilled receivables), and contract liabilities (customer deposits and deferred revenue). Contract assets are recorded when our right to consideration is conditioned on something other than the passage of time. Contract assets are reclassified to trade receivablesaccounts 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 will convert to contract manufacturing revenue as we perform our obligations under the contract.
We During the three and six months ended October 31, 2019, we recognized contract manufacturing revenue of $3,063$6.4 million and $10,025,$12.6 million, respectively, duringfor which the contract liability was recorded in a prior period. During the three and six months ended October 31, 2018, we recognized revenue of $3.1 million and $10.0 million, respectively, for which the contract liability was recorded in thea prior year.period.
Practical expedients and contract costs
| 7 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
We apply the practical expedient available under ASC 606 that permits us not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. In addition, we currently do not have any unsatisfied performance obligations for contracts greater than one year.year as of October 31, 2019.
Costs incurredLeases
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 obtain or fulfillbe 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 contract are not material. These costs are generally employee sales commissions,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 expensed when incurredprimarily related to our facility operating leases (Note 3). The difference between the right-of-use assets and included in selling, general and administrative expense inlease liabilities is primarily attributed to the accompanying condensed consolidated statementselimination of operations and comprehensive loss.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Cash and Cash Equivalentsdeferred rent. There was no adjustment to the opening balance of accumulated deficit as a result of the adoption of ASC 842.
We considerdetermine 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 October 31, 2019. 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 investments readily convertible to cash with an initial maturity of three months or less to be cash equivalents.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 duringcredit. During the termsquarter ended October 31, 2019, $0.8 million of restricted cash that was pledged as collateral under two of such leases. Atletters of credit was released back to us. As of October 31, 20182019 and April 30, 2018,2019, restricted cash of $1,150$0.4 million and $1.2 million, respectively, was pledged as collateral under these lettersletter(s) of credit.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows (in thousands):
October 31, 2019 | April 30, 2019 | October 31, 2018 | April 30, 2018 | |||||||||||||
| Cash and cash equivalents | $ | 33,960 | $ | 32,351 | $ | 32,694 | $ | 42,265 | ||||||||
| Restricted cash | 350 | 1,150 | 1,150 | 1,150 | ||||||||||||
| Total cash, cash equivalents and restricted cash shown in the condensed consolidated statements of cash flows | $ | 34,310 | $ | 33,501 | $ | 33,844 | $ | 43,415 | ||||||||
| 8 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 October 31, 2019 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):
| October 31, 2019 | April 30, 2019 | |||||||
| Leasehold improvements | $ | 21,132 | $ | 20,574 | ||||
| Laboratory and manufacturing equipment | 13,137 | 12,858 | ||||||
| Computer equipment and software | 4,719 | 4,644 | ||||||
| Furniture, fixtures and office equipment | 685 | 528 | ||||||
| Construction-in-progress | 3,334 | 1,590 | ||||||
| Total property and equipment, gross | $ | 43,007 | $ | 40,194 | ||||
| Less: accumulated depreciation and amortization | (16,017 | ) | (14,569 | ) | ||||
| Total property and equipment, net | $ | 26,990 | $ | 25,625 | ||||
Depreciation and amortization expense for the three and six months ended October 31, 2019 was $0.7 million and $1.5 million, respectively. Depreciation and amortization expense for the three and six months ended October 31, 2018 was $0.7 million and $1.3 million, respectively.
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. For the six months ended October 31, 20182019 and 2017,2018, there were no indicators of impairment of the value of our long-lived assets.
| 9 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 October 31, 2019, 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 October 31, 20182019 and April 30, 2018,2019, 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 six months ended October 31, 20182019 and 2017.
Stock-based Compensation
We account for stock options, restricted stock rights 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. In addition, the fair value of restricted stock rights 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 October 31, 2018, there were no outstanding stock-based awards with market or performance conditions.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
2018.
Income Taxes
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized. As a result of our cumulative losses, management has concluded that a full valuation allowance against our net deferred tax assets is appropriate.
The income tax benefit recognized in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss during the three and six months ended October 31, 2018 resulted from the “Intraperiod Tax Allocation” rules under ASC 740:Income Taxes, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in our case, discontinued operations. Accordingly, a tax benefit was recorded in continuing operations with an offsetting tax expense recorded in discontinued operations (Note 11)7).
| 10 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Recent Accounting Standards Not Yet Adopted
In December 2017,June 2016, the Tax Cuts and Jobs Act (the “Tax Act”Financial Accounting Standards Board (“FASB”) was enacted. The Tax Act includes a numberissued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of changesCredit Losses on Financial Instruments. This standard update requires that certain financial assets be measured at amortized cost net of an allowance for estimated credit losses such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to existing U.S. tax laws that impact us, most notably a reductionoccur over the life of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years, effective January 1, 2018. We performed a reviewassets. The estimate of credit losses must be based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the Tax Act for the fiscal year ended April 30, 2018, and based on the information available at that time, recorded certain provisional amounts related to the revaluation of our deferred tax assets and liabilities, which were fully offset by a valuation allowance.
In December 2017, the SEC issued interpretive guidance under Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. As discussed above, for the fiscal year ended April 30, 2018, we recognized provisional tax impacts related to the revaluation of deferred tax assets and liabilities, which amounts were fully offset by a valuation allowance. The ultimate impact may differ from these provisional amounts, due to among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Act. The accounting for these provisions is expected to be complete when our 2017 U.S. corporate income tax return is filed in the first quarter of calendar year 2019.
Adoption of Other Recent Accounting Pronouncements
In November 2016, the FASB issuedamounts. ASU 2016-18, Statement of Cash Flows (Topic 230):Restricted Cash, which clarifies the presentation requirements of restricted cash within the statement of cash flows. ASU 2016-18 will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-182016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We adopted ASU 2016-18 on May 1, 2018 and the cash and cash equivalents at the beginning-of-period and end-of-period total amounts in our condensed consolidated statements of cash flows have been adjusted to include $1,150 of restricted cash for each of the periods presented.
2019. In May 2017,November 2019, the FASB issued ASU 2017-09, Compensation - Stock Compensation2019-10, Financial Instruments—Credit Losses (Topic 718)326),Derivatives and Hedging (Topic 815) and Leases (Topic 842):ScopeEffective Dates, which defers the effective date of Modification Accounting,which provides guidance about which changesASU 2016-13 to the terms or conditions of a stock-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periodsfiscal years beginning after December 15, 2017. We adopted2022 for all entities except SEC reporting companies that are not smaller reporting companies. As a smaller reporting company, ASU 2017-09 on2016-13 will now be effective for our fiscal year 2024 beginning May 1, 2018. The2023; however, early adoption is permitted. We are currently evaluating the timing and impact of adopting ASU 2016-13 on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820):Disclosure Framework—Changes to the Disclosure 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 this ASU did not2018-13 to have a material impact on our condensed consolidated financial statements and related disclosures.
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 used 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 October 31, 2019 condensed consolidated balance sheets 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 over the next 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 amount is included in loss on lease termination in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended October 31, 2019. 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.
| 11 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Our operating lease expense for the three and six months ended October 31, 2019 was $0.9 million and $1.8 million, respectively, and is 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. Cash paid for amounts included in the measurement of lease liabilities for the six months ended October 31, 2019 was $1.6 million and is included in net cash used in operating activities in our accompanying unaudited condensed consolidated statements of cash flows.
As of October 31, 2019, the maturities of our operating lease liabilities were as follows (in thousands):
| Fiscal Year Ending April 30, | Total | ||||
| 2020 (remaining period) | $ | 1,539 | |||
| 2021 | 3,135 | ||||
| 2022 | 3,159 | ||||
| 2023 | 3,174 | ||||
| 2024 | 3,249 | ||||
| Thereafter | 22,020 | ||||
| Total lease payments | $ | 36,276 | |||
| Less: imputed interest | (12,641 | ) | |||
| Total operating lease liabilities | $ | 23,635 | |||
The balance sheet classification of our operating lease liabilities was as follows (in thousands):
| October 31, 2019 | ||||
| Operating lease liabilities | $ | 1,241 | ||
| Operating lease liabilities, less current portion | 22,394 | |||
| Total operating lease liabilities | $ | 23,635 | ||
As of October 31, 2019, the weighted average remaining lease term and weighted average discount rate of our operating leases was 10.8 years and 8.1%, respectively.
| 12 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(
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 thousands, exceptthe 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 andpurchase 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, information)
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.
New Accounting Standards Not Yet Adopted
In February 2016,On September 23, 2019, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lesseesRights Agreement was further amended to recognize right-of-use assetsaccelerate 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 lease liabilitieseffectively 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 its balance sheet for all leases with lease terms greater than 12 monthstheir recent evaluation of the effectiveness of, and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidancethe need for, a lessee, a lessorstockholder rights plan and saleconsideration of current corporate governance practices and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a userproxy advisory guidelines. In connection with the termination of the financial statementsRights 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 assesswithdraw the amount, timing and uncertaintyRights from registration under Section 12(b) of cash flows arising from leases. ASU 2016-02the Securities Exchange Act of 1934, as amended, which deregistration 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.
Trade receivables represent amounts billed for contract manufacturing services and are recorded at the invoiced amount net of an allowance for doubtful accounts, if necessary. Other receivables are reported at amounts expected to be collected net of an allowance for doubtful accounts, if necessary. Trade and other receivables consist ofeffective 90 days after the following:filing date.
October 31, 2018 | April 30, 2018 | |||||||
| Trade receivables | $ | 4,183 | $ | 3,539 | ||||
| Other receivables | 14 | 215 | ||||||
| Total trade and other receivables | $ | 4,197 | $ | 3,754 | ||||
Series E Preferred Stock Dividends
We continually monitor our allowance for doubtful accounts for all receivables. We apply judgment in assessing the ultimate realization
Holders of our receivables and we estimate an allowance for doubtful accounts based on various factors, such as, the aging of accounts receivable balances, historical experience, and the financial condition of our customers. Based on our analysis of our receivables as of October 31, 2018 and April 30, 2018, we determined no allowance for doubtful accounts was necessary.
Inventories10.50% Series E Convertible Preferred Stock $0.001 par value per share (“Series E Preferred Stock”), are recordedentitled to receive cumulative dividends at the lowerrate of cost or market (net realizable value) and include raw materials and work-in-process (comprised of raw materials, direct labor and overhead costs associated with in-process manufacturing services) associated with contract manufacturing services. Overhead costs allocated to work-in-process inventory are10.50% per annum based on the normal capacityliquidation preference of our production facilities$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 do not include costs from abnormally low production or idle capacity, which are expensed directly to cost of contract manufacturing inOctober. The following table summarizes the period incurred. DuringSeries E Preferred Stock quarterly dividend activity during the three and six months ended October 31, 2018 and 2017, we expensed $2,923 and $4,652, respectively, and $4,938 and $5,838, respectively, in idle capacity costs directly to cost of contract manufacturing in the accompanying condensed consolidated financial statements. Subsequent to the adoption of ASC 606, manufacturing costs associated with work-in-process are recorded to cost of contract manufacturing in the accompanying condensed consolidated financial statements as incurred. Cost is determined by the first-in, first-out method. Inventories consist of the following:2019:
October 31, 2018 | April 30, 2018 | |||||||
| Raw materials | $ | 9,648 | $ | 8,165 | ||||
| Work-in-process | 88 | 7,964 | ||||||
| Total inventories | $ | 9,736 | $ | 16,129 | ||||
| Declaration Date | Record Date | Payment Date | Cash Dividends Paid | Dividend Per Share | ||||||||
| (in thousands) | ||||||||||||
| 6/5/2019 | 6/17/2019 | 7/1/2019 | $ | 1,081 | $ | 0.65625 | ||||||
| 9/4/2019 | 9/16/2019 | 10/1/2019 | 1,081 | 0.65625 | ||||||||
| Total | $ | 2,162 | $ | 1.31250 | ||||||||
| 13 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Property and equipment is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related asset, generally ranging from three to ten years. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the estimated useful life of the asset or the remaining lease term. Construction-in-progress, which represents direct costs related to the construction of various equipment and leasehold improvements associated with our manufacturing facilities, are not depreciated until the asset is completed and placed into service. No interest was incurred or capitalized as construction-in-progress as of October 31, 2018 and April 30, 2018. All of our property and equipment are located in the U.S.
Property and equipment, net, consists of the following:
October 31, 2018 | April 30, 2018 | |||||||
| Leasehold improvements | $ | 20,738 | $ | 20,686 | ||||
| Laboratory equipment | 12,380 | 10,258 | ||||||
| Furniture, fixtures, office equipment and software | 5,159 | 4,597 | ||||||
| Construction-in-progress | 1,644 | 3,310 | ||||||
| Total property and equipment | 39,921 | 38,851 | ||||||
| Less accumulated depreciation and amortization | (13,642 | ) | (12,372 | ) | ||||
| Total property and equipment, net | $ | 26,279 | $ | 26,479 | ||||
Depreciation and amortization expense for the three and six months ended October 31, 2018 was $683 and $1,325, respectively. Depreciation and amortization expense for the three and six months ended October 31, 2017 was $658 and $1,300, respectively.
In June 2018, we financed certain software under a capital lease agreement that bears interest at a rate of approximately 4.19% per annum. The gross value of software purchased under the capital lease of $245 and the related accumulated amortization of $34 are included in property and equipment, net in the accompanying unaudited condensed consolidated balance sheet at October 31, 2018.
Minimum future lease payments under the capital lease as of October 31, 2018 are as follows:
| Fiscal Year ending April 30,: | ||||
| 2019 (remainder of fiscal year) | $ | – | ||
| 2020 | 85 | |||
| 2021 | 97 | |||
| Total minimum lease payments | 182 | |||
| Amount representing interest | (11 | ) | ||
| Net present value minimum lease payments | 171 | |||
| Less current portion included in other current liabilities | (78 | ) | ||
| Long-term portion included in capital lease obligation, less current portion | $ | 93 | ||
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, exceptEach share and per share information)
Series E Preferred Stock Dividend
The following table summarizes the 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”) quarterly dividend activity during the six months ended October 31, 2018:
Declaration Date | Record Date | Payment Date | Dividends Paid | Dividend Per Share | ||||||||
| 6/6/2018 | 6/18/2018 | 7/2/2018 | $ | 1,081,000 | $ | 0.65625 | ||||||
| 9/5/2018 | 9/17/2018 | 10/1/2018 | $ | 1,081,000 | $ | 0.65625 | ||||||
Shares of Common Stock Authorized and Reserved for Future Issuance
On October 4, 2018, our stockholders approved an amendment to our Certificate of Incorporation to decrease our authorized number of shares of common stock from 500,000,000 shares to 150,000,000 shares (the “Certificate of Amendment”). The Certificate of Amendment became effective upon filing with the Secretary of State of the State of Delaware on October 4, 2018.
As of October 31, 2018, 56,063,488 shares of our common stock were issued and outstanding. In addition, our common stock outstanding as of October 31, 2018 excluded the following shares of our common stock reserved for future issuance:
_____________
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Stock Incentive Plans
On October 4, 2018, our stockholders approved the Avid Bioservices, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”) which provides, among other things, the ability for us to grant stock options, restricted stock, stock appreciation rights, restricted stock units and other forms of share-based awards.
The number of shares of our common stock authorized for issuance underdetermined by dividing the 2018 Planliquidation 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 October 31, 2019, 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 sumapplicable provisions of (A) 2,350,000 and (B)our certificate of incorporation, we have reserved the aggregatemaximum number of shares of our common stock availablethat 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 grant of awards under our 2009, 2010, and 2011 aggregate.
Note 5–Equity Compensation Plans
Stock Incentive Plans (the “Prior Plans”) as of October 4, 2018 (the “Effective Date” of the 2018 Plan). The 2018 Plan replaced the Prior Plans, and no new awards will be granted under the Prior Plans as of the Effective Date. However, any awards outstanding under the Prior Plans on the Effective Date will remain subject to and be paid under the applicable Prior Plan, and any shares subject to outstanding awards under the Prior Plans that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the 2018 Plan.
As of October 31, 2018,2019, we had an aggregate of 7,313,4247,106,600 shares of our common stock reserved for issuance under our stock incentive plans, of which 3,146,7133,906,628 shares were subject to outstanding stock options and restricted stock rightsunits (“RSUs”) and 4,166,7113,199,972 shares were available for future grants of stock-based awards.
Stock Options
The following summarizes our stock option transaction activity for the six months ended October 31, 2018:2019:
| Stock Options | Shares | Weighted Average Exercisable Price | ||||||||||||||
| Outstanding, May 1, 2018 | 3,597,738 | $ | 8.74 | |||||||||||||
| Stock Options | Grant Date Weighted Average Exercise Price | |||||||||||||||
| (in thousands) | ||||||||||||||||
| Outstanding at May 1, 2019 | 3,274 | $ | 7.51 | |||||||||||||
| Granted | 439,647 | $ | 5.05 | 683 | $ | 5.74 | ||||||||||
| Exercised | (334,556 | ) | $ | 3.47 | (127 | ) | $ | 3.42 | ||||||||
| Canceled or expired | (679,366 | ) | $ | 11.26 | (278 | ) | $ | 4.35 | ||||||||
| Outstanding, October 31, 2018 | 3,023,463 | $ | 8.22 | |||||||||||||
| Outstanding at October 31, 2019 | 3,552 | $ | 7.57 | |||||||||||||
Restricted Stock Rights
On June 15, 2018, the Compensation Committee of the Board of Directors granted an aggregate of 128,050 restricted stock right (“RSR”) awards to substantially all of our employees, excluding executive officers, which entitles the employee the right to be issued a share of our common stock upon vesting of the RSR. The RSR’s were granted under our 2011 Stock Incentive Plan and vest annually in equal installments over a four-year period. The RSR’s have an aggregate grant date fair value of $464, based on the closing market price of our common stock on the date of grant, which is amortized as stock-based compensation expense on a straight-line basis over the period of vesting.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Restricted Stock Units
The following summarizes our restricted stock rightRSUs transaction activity for the six months ended October 31, 2018:2019:
| Restricted Stock Rights | Shares | Weighted Average Grant Date Fair Value | ||||||||||||||
| Outstanding, May 1, 2018 | – | $ | – | |||||||||||||
| Shares | Weighted Average Grant Date Fair Value | |||||||||||||||
| (in thousands) | ||||||||||||||||
| Outstanding at May 1, 2019 | 200 | $ | 4.32 | |||||||||||||
| Granted | 128,050 | 3.62 | 194 | $ | 5.91 | |||||||||||
| Vested | – | – | (28 | ) | $ | 3.62 | ||||||||||
| Forfeited | (4,800 | ) | 3.62 | (11 | ) | $ | 4.48 | |||||||||
| Outstanding, October 31, 2018 | 123,250 | $ | 3.62 | |||||||||||||
| Outstanding at October 31, 2019 | 355 | $ | 5.24 | |||||||||||||
Employee Stock Purchase Plan
We have reservedThe Avid Bioservices, Inc. 2010 Employee Stock Purchase Plan (the “ESPP”) is a total of 2,142,857stockholder-approved plan under which eligible employees are allowed to purchase shares of our common stock to be purchased under our Employee Stock Purchase Plan (“ESPP”), of which 1,231,699 shares remained available to purchase at October 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 participantsthrough payroll deductions at a price equal to 85% of the lesser of 85%lower of the fair market value of our common stock atas of the (i) beginningfirst trading day of a six-monththe offering period or (ii) endon the last trading day of the six-month offering period. TheEmployee 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 providesto extend its term for two six-monthan 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; the first offering period begins on the first trading day on or afteryear, to January 1 and July 1 of each May 1; the second offering period begins on the first trading day on or after each November 1. year.
During the six months ended October 31, 2018, 39,7102019, 47,526 shares of our common stock were purchased under the ESPP at a purchase price of $2.87$3.94 per share. As of October 31, 2019, we had 1,148,735 shares of our common stock reserved for issuance under the ESPP.
Stock-Based Compensation
Total stock-basedStock-based compensation expense related to stock-based awards issued under our equity compensation plans is included infor the accompanying unaudited condensed consolidated statementsthree and six months ended October 31, 2019 and 2018 was comprised of operations and comprehensive loss as follows:the following (in thousands):
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Cost of contract manufacturing | $ | 85 | $ | 138 | $ | 170 | $ | 138 | ||||||||
| Selling, general and administrative | 240 | 125 | 452 | 330 | ||||||||||||
| Discontinued operations | – | 46 | – | 326 | ||||||||||||
| Total | $ | 325 | $ | 309 | $ | 622 | $ | 794 | ||||||||
| Share-based compensation from: | ||||||||||||||||
| Stock options | $ | 275 | $ | 287 | $ | 529 | $ | 696 | ||||||||
| Restricted stock rights | 27 | – | 42 | – | ||||||||||||
| ESPP | 23 | 22 | 51 | 98 | ||||||||||||
| Total | $ | 325 | $ | 309 | $ | 622 | $ | 794 | ||||||||
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Cost of revenues | $ | 245 | $ | 85 | $ | 431 | $ | 170 | ||||||||
| Selling, general and administrative | 406 | 240 | 823 | 452 | ||||||||||||
| Total stock-based compensation | $ | 651 | $ | 325 | $ | 1,254 | $ | 622 | ||||||||
As of October 31, 2018,2019, the total estimated unrecognized compensation cost related to non-vested employee stock options and non-vested restricted stock rightsRSUs was $3,118$4.6 million and $404,$1.6 million, respectively. These costs are expected to be recognized over a weighted average vesting periods of 2.932.90 years and 3.623.31 years, respectively.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, unvested RSRs,RSUs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Diluted net loss per common share is computed by dividing our net loss attributable to common stockholders by the sum of the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effects of stock options, unvested RSRs,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 RSRs,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 was calculated using the if-converted method assuming the conversion of Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but are excluded if their effect is anti-dilutive. However, because the impact of stock options, unvested RSRs,RSUs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per common share amounts for the three and six months ended October 31, 20182019 and 2017.2018.
The calculation of weighted average diluted shares outstanding for the three and six months ended October 31, 2018 and 2017 excludes the dilutive effect of the following weighted average outstanding stock options, unvested RSRsRSUs and shares of common stock expected to be issued under our ESPP as their impact is anti-dilutive during periods of net loss:loss (in thousands):
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Stock Options | 234,763 | 31,877 | 185,996 | 69,065 | ||||||||||||
| RSRs | 55,963 | – | 30,645 | – | ||||||||||||
| ESPP | 16,401 | – | 9,090 | 133 | ||||||||||||
| Total | 307,127 | 31,877 | 225,731 | 69,198 | ||||||||||||
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Stock options | 197 | 235 | 133 | 186 | ||||||||||||
| RSUs | 66 | 56 | 63 | 31 | ||||||||||||
| ESPP | 12 | 16 | 6 | 9 | ||||||||||||
| Total | 275 | 307 | 202 | 226 | ||||||||||||
The calculation of weighted average diluted shares outstanding for the three and six months ended October 31, 2018 and 2017 also excludes the following weighted average outstanding stock options, unvested RSUs, warrants, and Series E Preferred Stock (assuming the if-converted method), as their exercise prices or conversion price were greater than the average market price of our common stock during the respective periods, resulting in an anti-dilutive effect:effect (in thousands):
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Stock Options | 2,238,986 | 3,600,478 | 2,599,877 | 3,608,917 | ||||||||||||
| ESPP | – | 43,332 | – | – | ||||||||||||
| Warrants | 12,306 | 39,040 | 25,673 | 39,040 | ||||||||||||
| Series E Preferred Stock | 1,978,783 | 1,978,783 | 1,978,783 | 1,978,783 | ||||||||||||
| Total | 4,230,075 | 5,661,633 | 4,604,333 | 5,626,740 | ||||||||||||
During the three and six months ended October 31, 2018, warrants to purchase 39,040 shares of our common stock expired unexercised. As of October 31, 2018, we had no warrants issued and outstanding.
February 2018 Asset Assignment and Purchase Agreement
On February 12, 2018, we entered into an Asset Assignment and Purchase Agreement (the “February 2018 Purchase Agreement”) with Oncologie, Inc. (“Oncologie”) pursuant to which we sold to Oncologie the majority of our research and development assets, which included the assignment of certain exclusive licenses related to our former phosphatidylserine (PS)-targeting program, as well as certain other licenses and assets useful and/or necessary for the potential commercialization of bavituximab.
Pursuant to the February 2018 Purchase Agreement, we received an aggregate of $8,000 from Oncologie, paid over three installments, of which $3,000 was received in March 2018 (first installment), $3,000 was received in June 2018 (second installment) and $2,000 was received in September 2018 (third installment). We are also eligible to receive up to an additional $95,000 in the event that Oncologie 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 Oncologie commercializes and sells products utilizing bavituximab or the other transferred assets. As of October 31, 2018, no development, regulatory and commercialization milestones as defined in the February 2018 Purchase Agreement have been achieved by Oncologie. Oncologie is responsible for all future research, development and commercialization of bavituximab, including all related intellectual property costs and all other future liabilities and obligations arising out of the ownership of the transferred assets (i.e., we remain obligated for all liabilities associated with the research and development assets associated with the February 2018 Purchase Agreement incurred or arising prior to February 13, 2018). In addition, during May 2018, we entered into a separate services agreement with Oncologie to provide contract development and manufacturing services, at our commercial rates, in support of the research and development assets sold under the February 2018 Purchase Agreement.
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Stock options | 2,866 | 2,239 | 2,855 | 2,600 | ||||||||||||
| RSUs | – | – | 108 | – | ||||||||||||
| Warrants | – | 12 | – | 25 | ||||||||||||
| Series E Preferred Stock | 1,979 | 1,979 | 1,979 | 1,979 | ||||||||||||
| Total | 4,845 | 4,230 | 4,942 | 4,604 | ||||||||||||
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
Note 7 – 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 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), 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 following table is a reconciliation of the pre-tax income from discontinued operations to the income from discontinued operations, net of tax, as presented in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended October 31, 2018. There were no operating results from discontinued operations for the three and six months ended October 31, 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 | ||
_____________
(1)The gain on sale of research and development assets before income taxes was recorded in connection with the $1.0 million we received from Oncologie, Inc. (“Oncologie”) under the September2018 Asset Assignment and Purchase Agreement
On September 13, 2018, we entered into a separate Asset Assignment and Purchase Agreement (the “September 2018 Purchase Agreement”) with Oncologie pursuant to which we sold to Oncologie our r84 technology, which included the assignment of certain licenses, patents and other assets useful and/or necessary for the potential commercialization of the r84 technology.
Pursuant to the September 2018 Purchase Agreement, we received $1,000 from Oncologie, which amount was paid to us in October 2018. We are also eligible to receive up to an additional $21,000 in the event that Oncologie achieves certain development, regulatory and commercialization milestones with respect to r84. In addition, we are eligible to receive royalties on net sales ranging from the low to mid-single digits in the event that Oncologie commercializes and sells products utilizing the r84 technology. As of October 31, 2018, no development, regulatory and commercialization milestones as defined in the September 2018 Purchase Agreement have been achieved by Oncologie. Oncologie is responsible for all future research, development and commercialization of r84, including all related intellectual property costs and all other future liabilities and obligations arising out of the ownership of the transferred assets (i.e., we remain obligated for all liabilities associated with the research and development assets associated with the September 2018 Purchase Agreement incurred or arising prior to September 13, 2018).Note 8 – Subsequent Events
Discontinued Operations
As a result of the sale of our PS-targeting program and our r84 technology, 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 from our former research and development segment and the related assets and liabilities have been presented as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 1). The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the former research and development segment. The allocations do not include amounts related to general corporate administrative expenses or interest expense. Therefore, the results of operations from the former research and development segment do not necessarily reflect what the results of operations would have been had the former research and development segment operated as a stand-alone segment.
The following table summarizes the results of discontinued operations for the three and six months ended October 31, 2018 and 2017:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | – | $ | 3,650 | $ | – | $ | 7,216 | ||||||||
| Selling, general and administrative | – | 343 | – | 782 | ||||||||||||
| Restructuring charges | – | 330 | – | 330 | ||||||||||||
| Total operating expenses | $ | – | $ | 4,323 | $ | – | $ | 8,328 | ||||||||
| Gain on sale of research and development assets before income taxes | $ | 1,000 | – | $ | 1,000 | – | ||||||||||
| Income tax expense | (261 | ) | – | (261 | ) | – | ||||||||||
| Income (loss) from discontinued operations, net of tax | $ | 739 | $ | (4,323 | ) | $ | 739 | $ | (8,328 | ) | ||||||
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
The following table summarizes the assets and liabilities of discontinued operations as of October 31, 2018 and April 30, 2018:
| October 31, 2018 | April 30, 2018 | |||||||
| Assets: | ||||||||
| Other receivables | $ | – | $ | 5,000 | ||||
| Total assets of discontinued operations | $ | – | $ | 5,000 | ||||
| Liabilities: | ||||||||
| Accounts payable | $ | – | $ | 32 | ||||
| Accrued clinical trial and related fees | 117 | 3,613 | ||||||
| Accrued payroll and related costs | 174 | 614 | ||||||
| Other liabilities | 125 | 291 | ||||||
| Total liabilities of discontinued operations | $ | 416 | $ | 4,550 | ||||
The carrying value of the assets and liabilities deemed a component of discontinued operations were not classified as “held for sale” in the accompanying unaudited condensed consolidated balance sheet at October 31, 2018 and the accompanying condensed consolidated balance sheet at April 30, 2018, as Oncologie did not purchase or assume any of the reported assets or liabilities under the aforementioned February 2018 Purchase Agreement and September 2018 Purchase Agreement.
On December 5, 2018,4, 2019, 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 October 1, 20182019 through December 31, 2018.2019. The cash dividend is payable on January 2, 20192020 to holders of the Series E Preferred Stock of record on December 17, 2018.16, 2019.
| Item 2. | Management’s Discussion and Analysis of Financial Condition And Results of |
The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Avid Bioservices, Inc. included in Part I Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.2019.
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“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”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate”, “believe”, “can”, “continue”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “project”, “seek”, “should”, “target”, “will”,“anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. These forward-looking statements are subject to numerous risks and uncertainties, including the risks and uncertainties described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018,2019, those identified in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q, and in other filings we may make with the Securities and Exchange Commission from 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 impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-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
We are a dedicated contract development and manufacturing organization (“CDMO”)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 submissions and support. We also provide a variety of process development services, including cell line development and optimization, cell culture and feed optimization, analytical methods development and product characterization.
We have experience in performing process development and manufacturing of biologics since 1993 in our Franklin biomanufacturing facility (“Franklin Facility”), located at our headquarters in Tustin, California. In March 2016, we expanded our manufacturing capacity through the commissioning of our Myford biomanufacturing facility (“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.Strategic Objectives
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, which we completed at the beginning of calendar 2018. During our transition, weWe have established and beganare currently executing on the following near-term strategic objectives:
| · | Expand existing customer relationships and diversify our customer base by securing additional customers to support our future potential revenue growth; |
| · | Continue to invest in manufacturing facilities and infrastructure to maximize our facility utilization and support our customers’ development and clinical and commercial manufacturing requirements; and |
| · | Broaden our sales force by hiring sales representatives to execute our business development |
Second Quarter Highlights
The following summarizes select highlights from our second quarter ended October 31, 2019:
| · | Announced the completion of the expansion of our process development capabilities and laboratory space within our CDMO campus in Orange County, California, which included the expansion of our total available process development laboratory space, upgrades to the infrastructure and equipment within our existing process development laboratories, and the implementation of new state-of-the-art technologies and equipment designed to facilitate efficient, high-throughput development of innovative upstream and downstream manufacturing processes; |
| · | Appointed Richard (Rich) Richieri as our chief operations officer. Mr. Richieri is a senior executive with more than 25 years of biopharmaceutical industry manufacturing operations experience. In this role, Mr. Richieri will oversee our process development, clinical and commercial manufacturing, technical support and facilities functions and focus on streamlining operations, building internal efficiencies and strategic planning for future growth; and |
| · | Expanded the scope of work with multiple existing customers to increase the number of manufacturing batches and/or scale of production. |
We are also currently in the processfinal design stage for the construction of expanding and optimizing our process development capabilities and laboratory space, which includes expanding our total available process development laboratory space to more than 6,000 square feet, upgrading the infrastructure and equipmenta new pharmaceutical-grade water system within our existing process development laboratories,Myford facility. The installation of this system will supply water to multiple manufacturing systems, which we believe is a critical step in creating the manufacturing efficiencies required to increase output and implementing new state-of-the-art technologiesstrengthen our margins. We expect both the installation and equipment designedvalidation of this system to facilitate efficient, high-throughput development of innovative upstreamtake place in fiscal 2021.
Performance and downstream manufacturing processes. We are strategically conducting this work in phases to avoid disruption to current customer programs.Financial Measures
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are contract manufacturing revenue,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 understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes.
Contract Manufacturing RevenueRevenues
Contract manufacturing revenue isRevenues 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 customer product(s)products derived from mammalian cell culture covering clinical through commercial manufacturing runs. The process development revenue stream generally represents revenue from non-manufacturing related services associated with the custom development of a manufacturing process and analytical methods for a customer’s product.
Gross Profit
Gross profit is equal to contract manufacturing revenuerevenues less cost of contract manufacturing.revenues. Cost of contract manufacturingrevenues reflects the direct cost of labor, overhead and material costs. Direct labor costs include personnel costs within the manufacturing, process development, quality assurance, quality control, validation, supply chain and facilities functions. Overhead costs include the rent, common area maintenance, utilities, property taxes, security, materials and supplies, software, small equipment and deprecation costs of all manufacturing and laboratory locations.
We regularly analyze the components of gross profit as well as gross profit as a percentage of contract manufacturing revenue. Specifically we look at the gross profit margins of our manufacturing revenue and process development revenues, and the effects of idle capacity, if any, on these revenue streams.
| 19 |
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses are composed of corporate-level expenses including personnel and support costs of corporate functions such as executive management, legal, accounting, business development, legal, human resources, information technology, and other centralized services. SG&A expenses include corporate legal fees, audit and accounting fees, investor relation expenses, non-employee director fees, facility related expenses, and other expenses relating to our general management, administration, and business development activities. SG&A expenses are generally not directly proportional to revenues, but we expect such expenses to increase over time to support the needs of our growing company.
Results of Operations(in thousands)
On May 1, 2018, we adopted ASU 2014-09, Revenue from Contracts (Topic 606):Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method applied to all contracts not completed as of May 1, 2018. Under the modified retrospective method, results for reporting periods beginning after May 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under the accounting standards in effect for the prior period. Refer to Note 2, “Summary of Significant Accounting Policies” for details regarding the adoption of ASC 606.
The following table compares the unaudited condensed consolidated statements of operations from our continuing operations for the three and six months ended October 31, 2019 and 2018 and 2017, which are further discussed below.(in thousands):
Three Months Ended October 31, | Six Months Ended October 31, | Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||||||||||||||||||||||||||||||||
| 2018 | 2017 | $ Change | 2018 | 2017 | $ Change | 2019 | 2018 | $ Change | 2019 | 2018 | $ Change | |||||||||||||||||||||||||||||||||||||
| Contract manufacturing revenue | $ | 10,178 | $ | 12,782 | $ | (2,604 | ) | $ | 22,767 | $ | 39,859 | $ | (17,092 | ) | ||||||||||||||||||||||||||||||||||
| Cost of contract manufacturing | 9,844 | 16,242 | (6,398 | ) | 21,241 | 36,690 | (15,449 | ) | ||||||||||||||||||||||||||||||||||||||||
| Gross profit (loss) | 334 | (3,460 | ) | 3,794 | 1,526 | 3,169 | (1,643 | ) | ||||||||||||||||||||||||||||||||||||||||
| Revenues | $ | 18,313 | $ | 10,178 | $ | 8,135 | $ | 33,567 | $ | 22,767 | $ | 10,800 | ||||||||||||||||||||||||||||||||||||
| Cost of revenues | 14,953 | 9,844 | 5,109 | 29,121 | 21,241 | 7,880 | ||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 3,360 | 334 | 3,026 | 4,446 | 1,526 | 2,920 | ||||||||||||||||||||||||||||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 2,816 | 3,596 | (780 | ) | 6,031 | 7,449 | (1,418 | ) | 3,534 | 2,816 | 718 | 7,993 | 6,031 | 1,962 | ||||||||||||||||||||||||||||||||||
| Restructuring charges | – | 1,258 | (1,258 | ) | – | 1,258 | (1,258 | ) | ||||||||||||||||||||||||||||||||||||||||
| Loss on lease termination | 355 | – | 355 | 355 | – | 355 | ||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | 2,816 | 4,854 | (2,038 | ) | 6,031 | 8,707 | (2,676 | ) | 3,889 | 2,816 | 1,073 | 8,348 | 6,031 | 2,317 | ||||||||||||||||||||||||||||||||||
| Operating loss | (2,482 | ) | (8,314 | ) | 5,832 | (4,505 | ) | (5,538 | ) | 1,033 | (529 | ) | (2,482 | ) | 1,953 | (3,902 | ) | (4,505 | ) | 603 | ||||||||||||||||||||||||||||
| Interest and other income, net | 119 | 13 | 106 | 181 | 37 | 144 | 99 | 119 | (20 | ) | 308 | 181 | 127 | |||||||||||||||||||||||||||||||||||
| Loss from continuing operations before income taxes | $ | (2,363 | ) | $ | (8,301 | ) | $ | 5,938 | $ | (4,324 | ) | $ | (5,501 | ) | $ | 1,177 | (430 | ) | (2,363 | ) | 1,933 | (3,594 | ) | (4,324 | ) | 730 | ||||||||||||||||||||||
| Income tax benefit | 173 | – | 173 | 173 | – | 173 | – | 173 | (173 | ) | – | 173 | (173 | ) | ||||||||||||||||||||||||||||||||||
| Loss from continuing operations | $ | (2,190 | ) | $ | (8,301 | ) | $ | 6,111 | $ | (4,151 | ) | $ | (5,501 | ) | $ | 1,350 | ||||||||||||||||||||||||||||||||
| Loss from continuing operations, net of tax | $ | (430 | ) | $ | (2,190 | ) | $ | 1,760 | $ | (3,594 | ) | $ | (4,151 | ) | $ | 557 | ||||||||||||||||||||||||||||||||
Three Months Ended October 31, 20182019 Compared to the Three Months Ended October 31, 20172018
Contract Manufacturing RevenueRevenues
Contract manufacturing revenueRevenues for the three months ended October 31, 2018 was $10,1782019 were $18.3 million compared to $12,782 for the same period in the prior year, a decrease of $2,604 or 20%. The decline in revenue can primarily be attributed to fewer manufacturing runs completed in the current period compared to the prior period as a result of a decrease in the current manufacturing demand from our two largest customers. Revenue for the quarter was also impacted by our planned sequential shutdown of our Franklin and Myford manufacturing facilities, which halted manufacturing at each facility for several weeks in order to conduct both routine and non-routine maintenance and upgrades. The quarterly revenue decline was offset by a $1,215 favorable impact from the adoption of ASC 606. Refer to Note 2 “Summary of Significant Accounting Policies” in the accompanying notes to the unaudited condensed consolidated financial statements for details regarding the adoption of ASC 606.
Gross Profit
Gross profit for the three months ended October 31, 2018 was $334 compared to a loss of $3,460$10.2 million for the same period in the prior year, an increase of $3,794,$8.1 million or 80%. The increase in revenues can primarily be attributed to an increase in the number of in-process and completed manufacturing runs in the current-year period, primarily for our largest customer. The increase in revenues was attributed to the following components of our revenue streams:
| $ millions | ||||
| Net increase in manufacturing revenue | $ | 8.7 | ||
| Net decrease in process development revenue | (0.6 | ) | ||
| Total increase in revenues | $ | 8.1 | ||
| 20 |
Gross Profit
Gross profit for the three months ended October 31, 2019 was $3.4 million compared to $0.3 million for the same period in the prior year, an increase of approximately $3.0 million, where gross margins for such periods were 3%18% and a negative 27%3%, respectively. The $3,794$3.0 million increase in gross profit for the current-year period was primarily dueattributed to an improvement from manufacturingincreased revenues, which was partially offset by costs associated with the hiring of personnel to accommodate growth in production demand and process development project profit of $1,790 combined with a $2,004 decreaseincreases in idle capacity costs.other compensation expenses.
Selling, General and Administrative Expenses
SG&A decreased $780, or 22%, duringexpenses were $3.5 million for the three months ended October 31, 20182019 compared to $2.8 million for the same period in the prior year, period. The decrease in SG&A was primarily due to decreases in facility-related expensesan increase of $484 and legal, accounting and other professional fees of $334.approximately $0.7 million or 25%. As a percentage of revenue, SG&A expenses remained consistent at 28% for both the current year and prior year periods.
Restructuring Charges
During the three months ended October 31, 2017,2019 and 2018 were 19% and 28%, respectively. The increase in SG&A expenses was attributed to the following components:
| $ millions | ||||
| Increase in payroll and benefit costs | $ | 0.4 | ||
| Increase in stock-based compensation expense | 0.2 | |||
| Net increase in all other SG&A expenses | 0.1 | |||
| Total increase in SG&A expenses | $ | 0.7 | ||
Loss on Lease Termination
In September 2019, we incurred restructuring chargesentered into a lease amendment to terminate an operating lease for one of $1,588 directly related to a restructuring plan we implemented in August 2017, pursuant to which we reduced our overall workforcenon-manufacturing facilities that was primarily utilized for warehouse space. The lease termination was primarily driven by 57 employees in orderour efforts 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 8 of the Notes to the Consolidated Financial Statements includedby leveraging available warehouse space in our Annual Report on Form 10-K forother facilities, which in aggregate will save us approximately $1.3 over the fiscal year ended April 30, 2018). The costs incurrednext 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 approximately $0.4 million. Additionally, the lease termination released $0.3 million of restricted cash that was pledged as collateral under this restructuring plan, which was completed in October 2017, consisteda letter of one-time termination benefits, including severance, and other employee related costs. Ofcredit required by the total restructuring charges incurred, $1,258 was related to our contract manufacturing services segment and $330 was related to our discontinued research and development segment. The restructuring charges associated with our discontinued research and development segment are included in income (loss) from discontinued operations in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended October 31, 2017. We did not incur any restructuring charges during the three and six months ended October 31, 2018.terminated lease.
Operating Loss
Operating loss was $2,482,$0.5 million, or a negative 24%3% of revenue, for the three months ended October 31, 20182019 compared to an operating loss of $8,314,$2.5 million, or a negative 65%24% of revenue, for the same period in the prior year. Of this $5,832 This $2.0 million improvement in year-over-year operating loss, approximately $3,794 was attributable to a $3.0 million increase in gross profit, margin improvement,which was partially offset by an increase in SG&A decreaseexpenses of $780approximately $0.7 million and a loss of approximately $0.4 million recognized in connection with the absencetermination of restructuring charges in 2018 that resulted in a decrease of $1,258.an operating lease.
Income Tax Benefit
In September 2018, we recognized a $1,000$1.0 million gain in discontinued operations, before taxes, for the sale of our r84 technology (as described in Note 117 to the accompanying unaudited condensed consolidated financial statements). In accordance with the “Intraperiod Tax Allocation” rules under ASC 740:Income Taxes, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in our case, discontinued operations for the three months ended October 31, 2018, we recorded a tax benefit in continuing operations of $173$0.2 million with an offsetting tax expense of $261 recorded$0.3 million in discontinued operations. The remaining deferred tax benefit of $88 will be$0.1 million was allocated proportionally to continuing operations throughout the remainder of the fiscal year.year 2019.
| 21 |
Six Months Ended October 31, 20182019 Compared to the Six Months Ended October 31, 20172018
Contract Manufacturing Revenue
Contract manufacturing revenueRevenues for the six months ended October 31, 2018 was $22,7672019 were $33.6 million compared to $39,859$22.8 million for the same period in the prior year, a decreasean increase of $17,092$10.8 million or 43%47%. IncludedThe increase in the $39,859 prior year revenue was $9,924 of revenue associated with several manufacturing runs that were completed in fiscal year 2017, but recognized in the first quarter of fiscal year 2018 due to a client-requested delay in shipment. The comparable period decline in revenuerevenues can primarily be attributed to feweran increase in the number of manufacturing runs in-process and/or completed in the currentcurrent-year period compared to the priorprior-year period as a result of a decrease in the currentgrowing manufacturing demand from our two largest customers. Revenue fora more diversified customer base. The increase in revenues was attributed to the current period was also impacted by our planned sequential shutdownfollowing components of our Franklin and Myford manufacturing facilities, which halted manufacturing at each facility for several weeks in order to conduct both routine and non-routine maintenance and upgrades. Finally, the current year decline in revenue as compared to the prior year period was offset by an $11,831 favorable impact from the adoption of ASC 606. Refer to Note 2 “Summary of Significant Accounting Policies” in the accompanying notes to the unaudited condensed consolidated financial statements for details regarding the adoption of ASC 606.streams:
| $ millions | ||||
| Net increase in manufacturing revenue | $ | 11.4 | ||
| Net decrease in process development revenue | (0.6 | ) | ||
| Total increase in revenues | $ | 10.8 | ||
Gross Profit
Gross profit for the six months ended October 31, 20182019 was $1,526$4.4 million compared to $3,169$1.5 million for the same period in the prior year, a decreasean increase of $1,643,approximately $2.9 million, where gross margins for such periods were 7%13% and 8%7%, respectively. The $1,643 decrease$2.9 million increase in gross profit for the current-year period was comprised of a $2,818 decrease in manufacturing and process development project profit,primarily attributed to increased revenues, which was partially offset by a favorable reductioncosts associated with the hiring of personnel to idle capacity costs of $1,175.accommodate growth in production demand, and increases in other compensation expenses and equipment repairs.
Selling, General and Administrative Expenses
SG&A expense decreased $1,418, or 19%, duringexpenses were $8.0 million for the six months ended October 31, 20182019 compared to $6.0 million for the same period in the prior year, period. The decrease in SG&A was attributed to the current year period decreases in payroll and related costsan increase of $767, facility-related expenses of $1,232 and legal, accounting and other professional fees of $926. These current year period decrease in SG&A was offset by the July 2017 settlement of a derivative and class action lawsuit, pursuant to which our former non-employee directors agreed to payapproximately $2.0 million or cause to be paid $1,500 to us (as described in Note 3 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018), which non-recurring amount was applied against non-employee director fees during the fiscal quarter ended July 31, 2017.33%. As a percentage of revenue, SG&A expenses for the six months ended October 31, 2019 and 2018 were 24% and 2017 were 26% and 19%, respectively. The increase in SG&A expenses was attributed to the following components:
| $ millions | ||||
| Increase in payroll and benefit costs | $ | 0.8 | ||
| Increase in separation related expenses | 0.6 | |||
| Increase in stock-based compensation expense | 0.4 | |||
| Net increase in all other SG&A expenses | 0.2 | |||
| Total increase in SG&A expenses | $ | 2.0 | ||
Loss on Lease Termination
Restructuring Charges
DuringIn 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 the six months ended October 31, 2017,next four years. In connection with the termination of this lease, we incurred restructuring chargesremoved the corresponding operating lease right-of-use asset and liability balances from our balance sheet and recognized a loss of $1,588 related toapproximately $0.4 million.Additionally, the lease termination released $0.3 million of restricted cash that was pledged as collateral under a restructuring plan we implemented in August 2017, as further described above. We did not incur any restructuring charges duringletter of credit required by the six months ended October 31, 2018.terminated lease.
Operating Loss
Operating loss was $4,505,$3.9 million, or a negative 20%12% of revenue, for the six months ended October 31, 20182019 compared to an operating loss of $5,538,$4.5 million, or a negative 14%20% of revenue, for the same period in the prior year. Of this $1,033This $0.6 million improvement in year-over-year operating loss approximately $1,643 was attributable to a $2.9 million increase in gross profit, decreasewhich was partially offset by a favorablean increase in SG&A expense reductionexpenses of $1,418approximately $2.0 million and a loss of approximately $0.4 million recognized in connection with the absencetermination of restructuring charges in 2018 that resulted in a decrease of $1,258.an operating lease.
| 22 |
Income Tax Benefit
In September 2018, we recognized a $1,000$1.0 million gain in discontinued operations, before taxes, for the sale of our r84 technology (as described in Note 117 to the accompanying unaudited condensed consolidated financial statements). In accordance with the “Intraperiod Tax Allocation” rules under ASC 740:Income Taxes, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in our case, discontinued operations for the six months ended October 31, 2018, we recorded a tax benefit in continuing operations of $173$0.2 million with an offsetting tax expense of $261 recorded$0.3 million in discontinued operations. The remaining deferred tax benefit of $88 will be$0.1 million was allocated proportionally to continuing operations throughout the remainder of the fiscal year.year 2019.
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 1110 to the accompanying unaudited condensed consolidated financial statements)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 (loss) from discontinued operations, net of tax, in the accompanying unaudited condensed consolidated financial statements for all periods presented. The gain of $1,000$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 andof operations and comprehensive loss for the three and six months ended October 31, 2018. There were no operating results from discontinued operations during the three and six months ended October 31, 2019.
Liquidity and Capital Resources
At October 31, 2019, we had $34.0 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 October 31, 2019, we performed an analysis and concluded that our cash and cash equivalents as of October 31, 2019 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 six months ended October 31, 2019 and 2018 are as follows (in thousands):
| Six Months Ended October 31, | ||||||||
| 2019 | 2018 | |||||||
| Net cash provided by (used in) operating activities | $ | 3,416 | $ | (14,161 | ) | |||
| Net cash (used in) provided by investing activities | (985 | ) | 5,554 | |||||
| Net cash used in financing activities | (1,622 | ) | (964 | ) | ||||
| 23 |
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 six months ended October 31, 2019 was primarily attributable to a net loss of $3.6 million, offset by adjustments to exclude noncash charges for depreciation and amortization and stock-based compensation in an aggregate amount of $2.7 million, and include cash flows from the net change in operating assets and liabilities of $4.3 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 six months ended October 31, 2018 was primarily attributable to a net loss of $3.4 million, as negatively adjusted to exclude a $1.0 million gain on the sale of certain research and development assets and $4.1 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 $1.9 million and net cash outflows from the net change in certain other operating assets and liabilities of $7.6 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 six months ended October 31, 2019 consisted of property and equipment acquisitions of $1.0 million primarily related to our manufacturing and development operations including costs associated with the expansion of our process development laboratory space, which was completed and placed in service during October 2019.
Net cash provided by investing activities for the six months ended October 31, 2018 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 $0.4 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 six months ended October 31, 2019 was $1.6 million. This included $2.2 million in dividends paid on our preferred stock and $0.1 million of principal finance lease payments, offset by $0.4 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 six months ended October 31, 2018 was $1.0 million. This included $2.2 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.
| 24 |
Contractual Obligations
Except as set forth below, during the six months ended October 31, 2019, 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 six months ended October 31, 2018,2019, 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, 2018, except for our critical accounting policies and estimates on revenue recognition as a result of our adoption of ASC 606, as described in2019.
Recent Accounting Pronouncements
Refer to 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.
Backlog
Liquidity and Capital Resources
We have expended substantial funds on our legacy research and developmentOur backlog represents, as of pharmaceutical product candidates (discontinued operations) and our contract manufacturing business (continuing operations).a point in time, future revenue from work not yet completed under signed contracts. As a result, we have historically experienced losses and negative cash flows from operations since our inception.
During fiscal year 2018, we refocused our corporate strategy, whereby we transitioned our business to operate solely as a dedicated CDMO and discontinued our research and development segment (as described in Note 1 to the accompanying consolidated financial statements). Now that we have commenced our first full fiscal year as a dedicated CDMO, our ability to continue as a going concern depends on the amount of cash on hand and our ability to generate positive cash flows from operations, primarily through securing new customers and diversifying our customer base, and thereby reducing our reliance on a small customer base, increasing revenues, improving gross margins and managing our operating expenses.
At October 31, 2018 we had $32,694 in cash and cash equivalents. In addition, as of October 31, 2018,2019, our current backlog was approximately $36$52 million, (as further discussed in the “Backlog” section below).as compared to approximately $46 million as of April 30, 2019. While we anticipate the majority of our backlog will be recognized as revenue duringover the remainder of fiscal year 2019,next twelve (12) months, our backlog is subject to a number of risks and uncertainties, including the risk that a customer may experience delays in its program(s) or otherwise, which could result in the postponement of anticipated manufacturing services; the risk that a customer timely cancels its commitments prior to our 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; and the risk that we may not successfully execute on all customer projects, any of which could have a negative impact on our liquidity, reported backlog and future revenue. As a result of these risks and uncertainties, our cash on hand as of October 31, 2018, together with our projected cash receipts under our current backlog, may not be sufficient to fund our operations beyond one year after the date our financial statements are issued.
In the event we are unable to secure sufficient business to support our operations, we may need to raise additional capital in the future. Additional funding may include the financing or leasing of capital equipment or raising capital in the equity markets. Our ability to raise additional capital in the equity markets to fund our obligations in future periods depends on a number of factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties, including but not limited to, negative economic conditions, adverse market conditions, and adverse financial results. If we are unable to either raise sufficient capital in the equity markets or generate additional revenue, we may need to further restructure, or cease, our operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.
As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that our accompanying unaudited condensed consolidated financial statements are issued.
Significant components of the changes in cash flows from operating, investing, and financing activities for the six months ended October 31, 2018 compared to the same prior year period are as follows (in thousands):
Cash Used In Operating Activities. Net cash used in operating activities represents our net loss, as reported, adjustments to reconcile net loss to net cash used in operating activities and net changes in the timing of cash flows as reflected by the changes in operating assets and liabilities, as described in the below table:
| Six Months Ended October 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss, as reported | $ | (3,412 | ) | $ | (13,829 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,325 | 1.300 | ||||||
| Stock-based compensation | 622 | 794 | ||||||
| Gain on sale of research and development ass | (1,000 | ) | – | |||||
| Net cash used in operating activities before changes in operating assets and liabilities | $ | (2,465 | ) | $ | (11,735 | ) | ||
| Net change in operating assets and liabilities from: | ||||||||
| Continuing operations | $ | (7,562 | ) | $ | (6,851 | ) | ||
| Discontinued operations | (4,134 | ) | (882 | ) | ||||
| Net cash used in operating activities | $ | (14,161 | ) | $ | (19,468 | ) | ||
Net cash used in operating activities decreased $5,307 to $14,161 for the six months ended October 31, 2018 compared to net cash used in operating activities of $19,468 for the six months ended October 31, 2017. This decrease in net cash used in operating activities was due to a decrease of $9,270 in net loss reported for the current six-month period after adjustments for non-cash expenses and gain on sale of research and development assets, as described in the above table, offset by a net change in operating assets and liabilities of $711 and $3,252 from continuing and discontinued operations, respectively. The net change in operating assets and liabilities from continuing operations was primarily due to decreases in inventories and contract liabilities (customer deposits and deferred revenue) associated with the application of ASC 606, which we adopted on May 1, 2018. The net change in operating assets and liabilities from discontinued operations was primarily due to decreases in accrued payroll and related costs and accrued clinical trial and related fees.
Net Cash Provided By (Used In) Investing Activities. Net cash provided by (used in) investing activities for the six months ended October 31, 2018 and 2017 was $5,554 and ($1,809), respectively.
Net cash provided by investing activities for the six months ended October 31, 2018 consisted of proceeds of $6,000 related to the sale of certain research and development assets associated with our discontinued research and development segment (as described in Note 11 to the accompanying condensed consolidated financial statements), offset by the purchase of property and equipment of $446.
Net cash used in investing activities for the six months ended October 31, 2017 was directly related to the purchase of property and equipment.
Net Cash (Used In) Provided By Financing Activities. Net cash (used in) provided by financing activities for the six months ended October 31, 2018 and 2017 was ($964) and $2,205, respectively.
Net cash used in financing activities during the six months ended October 31, 2018 consisted of $2,162 in dividends paid on our issued and outstanding Series E Preferred Stock and $74 in principal payments on a capital lease obligation, which amounts were offset by $1,158 in net proceeds from stock option exercises and $114 in net proceeds from the purchase of shares of our common stock under our Employee Stock Purchase Plan.
Net cash provided by financing activities during the six months ended October 31, 2017 consisted of $4,193 in net proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement (as of July 31, 2017 we had raised the full amount of gross proceeds available to us under this At Market Issuance Sales Agreement), $216 in net proceeds from the purchase of shares of our common stock under our Employee Stock Purchase Plan, and $112 in net proceeds from stock option exercises, which amounts were offset by dividends paid on our issued and outstanding Series E Preferred Stock of $2,162 and principal payments on a capital lease obligation of $154.
Backlog
Our backlog represents, as of a point in time, future contract manufacturing revenue from work not yet completed under signed contracts. As of October 31, 2018, our backlog was approximately $36 million (ASC 606) as compared to approximately $33 million (ASC 605) as of October 31, 2017. While we anticipate the majority of our backlog will be recognized as revenue during the remainder of fiscal year 2019, our backlog is subject to a number of risks and uncertainties, including the risk that a customer may experience delays in its program(s) or otherwise, which could result in the postponement of anticipated manufacturing services; the risk that a customer timely cancels its commitments prior to our 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; and, the risk that we may not successfully execute on all customer projects, any of which could have a negative impact on our liquidity, reported backlog and future revenue.
| Item 3. | Quantitative and Qualitative Disclosures About Market |
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 risksix months ended October 31, 2019, 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 October 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.
| Item 4. | Controls And |
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 October 31, 2018,2019, 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 October 31, 2018.2019.
Changes in Internal Control over Financial Reporting
There were no significant changes in our internal control over financial reporting, during the quarter ended October 31, 2018,2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
| Item 1. | Legal |
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, 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 and events pertaining to a particular case. We currently are not a party to any legal proceedings, the adverse outcome of which, in 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 |
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,IA, “Risk Factors,” ofFactors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.
None.
None.2019. There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K.
Not applicable
None.
| Item 6. |
| (a) | Exhibits: |
| 4.1 |
| 4.2 | Amendment to the Avid Bioservices, Inc. 2010 Employee Stock Purchase Plan (Incorporated by reference to Exhibit A to Registrant’s Definitive Proxy Statement as filed with the SEC on August 21, 2019). |
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) |
| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) |
| 101.INS | XBRL Taxonomy Extension Instance Document. * |
| 101.SCH | XBRL Taxonomy Extension Schema Document. * |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. * |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. * |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. * |
| 101.PRE | XBRL Presentation Extension Linkbase Document. * |
* Filed herewith.
| * | Filed herewith. |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AVID BIOSERVICES, INC. | |
| Date:December | By:/s/ |
| Interim President and Chief Executive Officer | |
| Date:December | By:/s/ Daniel R. Hart |
| Daniel R. Hart | |
| 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) |