NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Description of Company
and Basis of Presentation
We are a dedicated contract
development and manufacturing organization (“CDMO”) that provides a comprehensive range of services from process development
to Current Good Manufacturing Practices (“CGMP”) clinical and commercial manufacturing, focused on biopharmaceutical
drug substances derived from mammalian cell culture for biotechnology and pharmaceutical companies.
Effective January 5,
2018, we changed our name to Avid Bioservices, Inc. from Peregrine Pharmaceuticals, Inc. in connection with our transition to a
dedicated CDMO and the discontinuation of our research and development activities. For the fiscal 2019 and 2018 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 Consolidated Statements of Operations and Comprehensive Loss.
For additional information on the discontinuation of our research and development segment, refer to Note 11, Sale of Research
and Development Assets. Except where specifically noted or the context otherwise requires, references to “Avid,”
the “Company,” “we,” “us,” and “our,” in this Annual Report refer to Avid Bioservices,
Inc. and its subsidiaries.
Basis of Presentation
and Preparation
The accompanying consolidated
financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”)
and include the accounts of Avid Bioservices, Inc. and our subsidiaries. All intercompany accounts and transactions among the consolidated
entities have been eliminated in the consolidated financial statements. The preparation of our consolidated financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Management’s estimates are based on historical information available as of the
date of the consolidated financial statements and on various other assumptions that are believed to be reasonable under the circumstances.
Accounting estimates and judgements are inherently uncertain and actual results could differ materially from these estimates.
Segment Reporting
Our business operates
in one operating segment. Accordingly, we reported our financial results for one reportable segment. All of our identifiable
assets are in the United States.
Note 2 – Summary of Significant
Accounting Policies
Cash and Cash Equivalents
We consider all short-term investments
readily convertible to cash, without notice or penalty, with an initial maturity of 90 days or less to be cash equivalents.
Restricted Cash
Under the terms of three
separate operating leases related to our facilities (Note 4), we pledged, as collateral, letters of credit. During the fiscal year
ended April 30, 2020, an aggregate amount of $0.8 million of restricted cash that was pledged as collateral under two such letters
of credit was released back to us. Accordingly, at April 30, 2020 and 2019, restricted cash of $0.4 million and $1.2 million, respectively,
was pledged as collateral under letters of credit.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The following table provides a reconciliation
of cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets that sum to the total of the same
amounts shown in the Consolidated Statements of Cash Flows (in thousands):
|
|
As of April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
36,262
|
|
|
$
|
32,351
|
|
|
$
|
42,265
|
|
Restricted cash
|
|
|
350
|
|
|
|
1,150
|
|
|
|
1,150
|
|
Total cash, cash equivalents and restricted cash
|
|
$
|
36,612
|
|
|
$
|
33,501
|
|
|
$
|
43,415
|
|
Revenue Recognition
On May 1, 2018, we adopted Accounting Standards
Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and its subsequent updates (codified
as “ASC 606”), to all contracts that had not been completed as of May 1, 2018 using the modified retrospective method.
Accordingly, results for reporting periods after May 1, 2018 are presented in accordance with ASC 606, while prior period amounts
have not been adjusted and continue to be reported under the accounting standards that were in effect prior to our adoption of
ASC 606. The cumulative effect of adopting ASC 606 resulted in a one-time adjustment of $2.7 million to the opening balance of
accumulated deficit as of May 1, 2018 which is reflected in the Consolidated Statements of Stockholders’ Equity for the fiscal
year ended April 30, 2019.
Under ASC 606, we recognize revenue when
we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled
in exchange for those goods or services. To determine revenue recognition for contracts with customers, we perform the following
five steps: (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) we satisfy a performance obligation.
Revenue recognized from services provided
under our customer contracts are disaggregated into manufacturing and process development revenue streams.
Manufacturing revenue
Manufacturing revenue generally represents
revenue from the manufacturing of customer products recognized over time, utilizing an input method that compares the cost of cumulative
work-in-process to date to the most current estimates for the entire cost of the performance obligation. Under a manufacturing
contract, a quantity of manufacturing runs is ordered and the product is manufactured according to the customer’s specifications
and typically only one performance obligation is included. Each manufacturing run represents a distinct service that is sold separately
and has stand-alone value to the customer. The products are manufactured exclusively for a specific customer and have no alternative
use. The customer retains control of its product during the entire manufacturing process and can make changes to the process or
specifications at its request. Under these agreements, we are entitled to consideration for progress to date that includes an element
of profit margin.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Process development revenue
Process development revenue generally represents
revenue from services associated with the custom development of a manufacturing process and analytical methods for a customer’s
product. Process development revenue is recognized over time, utilizing an input method that compares the cost of cumulative work-in-process
to date to the most current estimates for the entire cost of the performance obligation. Under a process development contract,
the customer owns the product details and process, which has no alternative use. These process development projects are customized
to each customer to meet its specifications and typically only one performance obligation is included. Each process represents
a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of its
product as the product is being created or enhanced by our services and can make changes to its process or specifications upon
request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin.
The
following table summarizes our manufacturing and process development revenue for the fiscal years ended April 30, 2020, 2019 and
2018 (in thousands). Revenue for the fiscal year ended April 30, 2018 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:
|
|
Fiscal
Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Manufacturing
revenues
|
|
$
|
52,046
|
|
|
$
|
43,432
|
|
|
$
|
47,437
|
|
Process development
revenues
|
|
|
7,656
|
|
|
|
10,171
|
|
|
|
6,184
|
|
Total Revenues
|
|
$
|
59,702
|
|
|
$
|
53,603
|
|
|
$
|
53,621
|
|
The timing of revenue recognition, billings
and cash collections results in billed accounts receivable, 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 accounts receivable on the consolidated balance sheet when our rights
become unconditional. Contract liabilities represent customer deposits and deferred revenue billed and/or received in advance of
our fulfillment of performance obligations. Contract liabilities convert to revenue as we perform our obligations under the contract.
During the fiscal years ended April 30,
2020 and 2019, we recognized revenue of $13.6 million and $14.3 million, respectively, for which the contract liability was recorded
in a prior period.
The transaction price for services provided
under our customer contracts reflect our best estimates of the amount of consideration to which we are entitled in exchange for
providing goods and services to our customers. In determining the transaction price, we considered the different sources of variable
consideration including, but not limited to, discounts, credits, refunds, price concessions or other similar items. We have included
in the transaction price some or all of an amount of variable consideration, utilizing the most likely method, only to the extent
that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty
associated with the variable consideration is subsequently resolved. The actual amount of consideration ultimately received may
differ.
Management may be required to exercise
judgement in estimating revenue to be recognized. Judgement is required in identifying performance obligations, estimating the
transaction price, estimating the stand-alone selling prices of identified performance obligations, and estimating the progress
towards the satisfaction of performance obligations. If actual results in the future vary from our estimates, the estimates will
be adjusted, which will affect revenues in the period that such variances become known.
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. As of April 30, 2020, we do not have any unsatisfied performance obligations for contracts greater
than one year.
Prior to the adoption of ASC 606 on May
1, 2018, revenue was generally recognized when all of the following criteria were met: (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable,
and (iv) collectability is reasonably assured.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable generally represent
amounts billed for contract manufacturing and process development services provided under our customer contracts and are recorded
at the invoiced amount net of an allowance for doubtful accounts, if necessary. We apply judgment in assessing the ultimate realization
of our receivables and we estimate an allowance for doubtful accounts based on various factors, such as the aging of our receivables,
historical experience, and the financial condition of our customers. Based on our analysis of our accounts receivable balances
as of April 30, 2020 and 2019, we determined no allowance for doubtful accounts was necessary.
Concentrations of
Credit Risk and Customer Base
Financial instruments that potentially
subject us to a significant concentration of credit risk consist of cash and cash equivalents, accounts receivable and contract
assets. We maintain our cash balances primarily with one major commercial bank and our deposits held with the bank exceed the amount
of government insurance limits provided on our deposits. We are exposed to credit risk in the event of default by the major commercial
bank holding our cash balances to the extent of the cash amounts recorded on the accompanying Consolidated Balance Sheets exceed
the amount of government insurance limits provided on our deposits.
Our accounts receivable
from amounts billed for contract manufacturing and process development services are derived from a small customer base. Most contracts
require up-front payments and installment payments during the service period. We perform periodic evaluations of the financial
condition of our customers and generally do not require collateral, but we can terminate any contract if a material default occurs.
At April 30, 2020 and 2019, approximately 98% and 95%, respectively, of our accounts receivable were due from six customers. Our
contract assets are reclassified to accounts receivable when our rights to consideration become unconditional. At April 30, 2020
and 2019, approximately 96% and 87% of our contract assets were attributable to six customers and eight customers, respectively.
Our revenues are derived
from a small customer base. Historically, these customers have not entered into long-term contracts because their need for drug
supply depends on a variety of factors, including a product’s stage of development, the timing of regulatory filings and
approvals, the product needs of their collaborators, if applicable, their financial resources and the market demand with respect
to a commercial product.
The table below identifies
each of our customers that accounted for 10% or more of our total revenues during any of the fiscal years ended April 30, 2020,
2019 and 2018:
Customer
|
|
Geographc
Location
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Halozyme Therapeutics, Inc.
|
|
|
U.S.
|
|
|
|
28%
|
|
|
|
30%
|
|
|
|
55%
|
|
Gilead Sciences, Inc.
|
|
|
U.S.
|
|
|
|
24
|
|
|
|
–
|
|
|
|
–
|
|
Acumen Pharmaceuticals, Inc.
|
|
|
U.S.
|
|
|
|
11
|
|
|
|
*
|
|
|
|
–
|
|
IGM Biosciences, Inc.
|
|
|
U.S.
|
|
|
|
11
|
|
|
|
*
|
|
|
|
–
|
|
Coherus BioSciences, Inc.
|
|
|
U.S.
|
|
|
|
10
|
|
|
|
13
|
|
|
|
22
|
|
ADC Therapeutics America Inc.
|
|
|
U.S.
|
|
|
|
*
|
|
|
|
21
|
|
|
|
*
|
|
______________
*
Represents a percentage less than 10% of our total revenues.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
We attribute revenue to the individual
countries where the customer is headquartered. Revenues derived from U.S. based customers were 99%, 95% and 99% for the fiscal
years ended April 30, 2020, 2019 and 2018, respectively.
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 asset, which are generally as follows:
Description
|
|
Estimated Useful Life
|
Leasehold improvements
|
|
Shorter of estimated useful life or lease term
|
Laboratory and manufacturing equipment
|
|
5 – 10 years
|
Furniture, fixtures and office equipment
|
|
5 – 10 years
|
Computer equipment and software
|
|
3 – 5 years
|
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 April 30, 2020 and 2019. All of our property and equipment are located in the
U.S. Property and equipment consist of the following (in thousands):
|
|
April 30,
|
|
|
|
2020
|
|
|
2019
|
|
Leasehold improvements
|
|
$
|
21,130
|
|
|
$
|
20,574
|
|
Laboratory and manufacturing equipment
|
|
|
15,033
|
|
|
|
12,858
|
|
Computer equipment and software
|
|
|
5,334
|
|
|
|
4,644
|
|
Furniture, fixtures and office equipment
|
|
|
685
|
|
|
|
528
|
|
Construction-in-progress
|
|
|
2,564
|
|
|
|
1,590
|
|
Total property and equipment, gross
|
|
|
44,746
|
|
|
|
40,194
|
|
Less: accumulated depreciation and amortization
|
|
|
(17,641
|
)
|
|
|
(14,569
|
)
|
Total property and equipment, net
|
|
$
|
27,105
|
|
|
$
|
25,625
|
|
Depreciation and amortization
expense for the years ended April 30, 2020, 2019 and 2018 was $3.1 million, $2.7 million and $2.6 million, respectively.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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 that 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 if impairment indicators exist. For the fiscal years ended April 30, 2020
and 2019, there were no indicators of impairment of the value of our long-lived assets and no cumulative impairment losses recognized
as of April 30, 2020.
Fair Value of Financial
Instruments
The carrying amounts
in the accompanying Consolidated Balance Sheets for cash and cash equivalents, restricted cash, accounts receivable, accounts payable,
accrued liabilities and note payable approximate their fair values due to their short-term maturities.
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 April 30, 2020
and 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 inputs). In addition, there were no transfers between any Levels of the fair value hierarchy during the fiscal years ended
April 30, 2020 and 2019.
Restructuring Charges
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 and completed during the fiscal year ended April 30, 2018 (Note 10). One-time termination benefits were expensed
at the date we notified the employee, unless the employee was required to provide future service, in which case the benefits were
expensed ratably over the future service period.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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 April 30, 2020 and 2019, there were no outstanding stock-based awards with market or performance conditions.
Income Taxes
We utilize the liability method of accounting
for income taxes in accordance with Accounting Standards Codification (“ASC”) 740: Income Taxes (“ASC
740”). Under the liability method, deferred taxes are determined based on the 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 (Note 7). In addition, we recognize the impact of an uncertain tax
position only when it is more likely than not the tax position will be sustained upon examination by the tax authorities. We are
required to file federal and state income tax returns in various jurisdictions. The preparation of these returns requires us to
interpret the applicable tax laws in effect in such jurisdictions, which could affect the amount paid by us.
The income tax benefit recognized in the
accompanying Consolidated Statements of Operations and Comprehensive Loss for the year ended April 30, 2019 resulted from the “Intraperiod
Tax Allocation” rules under ASC 740, 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).
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.
Recently Adopted Accounting Standards
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU No. 2016-02 and its related amendments which introduced Leases (Topic 842)
(“ASC 842”), a new comprehensive lease accounting model that superseded the lease guidance under Leases (Topic 840).
The new accounting standard requires lessees to recognize right-of-use assets and corresponding lease liabilities for all leases
with lease terms of greater than 12 months. It also changed the definition of a lease and expanded the disclosure requirements
of lease arrangements. In July 2018, the FASB added a transition option for implementation that allowed companies to continue to
use the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative periods presented
in the year of adoption.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
On May 1, 2019, we adopted ASC 842
using the modified retrospective approach. Accordingly, prior period financial information and disclosures have not been
adjusted and continue to be reported in accordance with our historical accounting under the previous lease standard. In
addition, we elected the package of practical expedients available for existing contracts, which allowed us to carry forward
our historical assessments of lease identification, lease classification, and initial direct costs. As a result of adopting
ASC 842, we recognized right-of-use assets and lease liabilities of $23.3 million and $25.5 million, respectively, on May 1,
2019, which are primarily related to our facility operating leases (Note 4). The difference between the right-of-use assets
and lease liabilities is primarily attributed to the elimination of deferred rent. There was no adjustment to the opening
balance of accumulated deficit as a result of the adoption of ASC 842.
We determine if an arrangement is or contains
a lease at inception. Our operating leases with a term greater than one year are included in operating lease right-of-use assets,
operating lease liabilities and operating lease liabilities, less current portion in our Consolidated Balance Sheet at April 30,
2020. Right-of-use assets represent our right to use an underlying asset during the lease term and lease liabilities represent
our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized
at the lease commencement date, based on the present value of lease payments over the lease term. In determining the net present
value of lease payments, we use our incremental borrowing rate which represents an estimated rate of interest that we would have
to pay to borrow equivalent funds on a collateralized basis at the lease commencement date.
Our operating leases may include options
to extend the lease which are included in the lease term when it is reasonably certain that we will exercise a renewal option.
Operating lease expense is recognized on a straight-line basis over the expected lease term.
We elected the post-transition practical
expedient to not separate lease components from non-lease components for all existing leases. We also elected a policy to not apply
the recognition requirements of ASC 842 for short-term leases.
Recently Issued Accounting
Standards Not Yet Adopted
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU
2016-13”). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when
such losses are recorded. As a smaller reporting company, ASU 2016-13 and its subsequent updates are effective for fiscal years
beginning after December 15, 2022, which will be our fiscal year 2024 beginning May 1, 2023; however, early adoption is permitted.
We are currently evaluating the impact this standard will have on our consolidated financial statements.
In August 2018, the FASB issued ASU No.
2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements of fair value
measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level
2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop
significant unobservable inputs for Level 3 fair value measurements. 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. We do not
expect the adoption of this standard to have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU No.
2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies
the accounting for income taxes by removing certain exceptions and improving consistent application in certain areas of Topic 740.
ASU 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, which will
be our fiscal year 2022 beginning May 1, 2021. Early adoption is permitted. We are currently evaluating the timing and impact of
adopting ASU 2019-12 on our consolidated financial statements and related disclosures.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note 3 – Note Payable
On April 17, 2020, we
entered into a promissory note (the “Note”) with City National Bank, the lender, evidencing an unsecured loan pursuant
to the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) of the Coronavirus
Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) of approximately $4.4 million (the “PPP Loan”).
We applied for and received the PPP Loan pursuant to the then published PPP qualification and certification requirements.
On April 23, 2020, the
SBA, in consultation with the Department of Treasury, issued new guidance that created uncertainty regarding the qualification
requirements for a PPP Loan (the “New Guidance”). In light of the New Guidance, we determined it appropriate to pay
off the entire amount of the PPP Loan. Accordingly, on May 12, 2020, we paid off in full the principal and interest on the PPP
Loan, resulting in the termination of the Note. The PPP Loan was scheduled to mature on April 21, 2022 and had a fixed interest
rate of 1.00% per annum.
Note 4 – Leases
Operating Leases
We currently lease office, manufacturing,
laboratory and warehouse space in four buildings under three separate non-cancellable operating lease agreements. All of our leased
facilities are located in close proximity in Tustin, California, have original lease terms ranging from 7 to 12 years, contain
two multi-year renewal options, and scheduled rent increases of 3% on either an annual or biennial basis. With respect to multi-year
renewal options, a multi-year renewal option was included in determining the right-of-use asset and lease liability for two of
our leases, as we considered it reasonably certain that we would exercise such renewal options. In addition, two of our leases
provide for periods of free rent, lessor improvements and tenant improvement allowances, of which certain of these improvements
have been classified as leasehold improvements and are being amortized over the shorter of the estimated useful life of the improvements
or the remaining life of the lease. The operating lease right-of-use assets and liabilities on our Consolidated Balance Sheet for
the fiscal year ended April 30, 2020 primarily relate to these facility leases.
In September 2019, we terminated an operating
lease for one of our non-manufacturing facilities that was primarily utilized for warehouse space. In connection with the termination
of this lease, we removed the corresponding operating lease right-of-use asset and liability balances from our Consolidated Balance
Sheet and recognized a loss of $0.4 million, which is included in loss on lease termination in the Consolidated Statements of Operations
and Comprehensive Loss for the fiscal year ended April 30, 2020. Additionally, the lease termination released $0.3 million of restricted
cash that was pledged as collateral under a letter of credit required by the terminated lease.
Lease Costs
Certain of our facility leases require
us to pay property taxes, insurance and common area maintenance. While these payments are not included as part of our lease liabilities,
they are recognized as variable lease cost in the period they are incurred.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The components of lease cost for the fiscal
year ended April 30, 2020, were as follows (in thousands):
|
|
April 30, 2020
|
|
Operating lease cost
|
|
$
|
3,339
|
|
Variable lease cost
|
|
|
603
|
|
Short-term lease cost
|
|
|
171
|
|
Total lease cost
|
|
$
|
4,113
|
|
Operating lease expense under the prior lease standard was $2.9
million for each of the fiscal years ended April 30, 2019 and 2018.
Supplemental Information
Supplemental consolidated balance sheet and
other information related to our operating leases as of April 30, 2020 were as follows (in thousands, expect weighted average data):
|
|
April 30, 2020
|
|
Assets
|
|
|
|
|
Operating lease right-of-use assets
|
|
$
|
20,100
|
|
Liabilities
|
|
|
|
|
Operating lease liabilities
|
|
$
|
1,228
|
|
Operating lease liabilities, less current portion
|
|
|
21,244
|
|
Total operating lease liabilities
|
|
$
|
22,472
|
|
Weighted average remaining lease term
|
|
|
10.5 years
|
|
Weighted average discount rate
|
|
|
8.0%
|
|
Cash paid for amounts included in the measurement
of lease liabilities for the fiscal year ended April 30, 2020 was $3.1 million and is included in net cash used in operating activities
in our Consolidated Statements of Cash Flows.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Undiscounted Cash Flows
As of April 30, 2020, the maturities of
our operating lease liabilities, which includes those derived from lease renewal options that we considered it reasonably certain
that we would exercise, were as follows (in thousands):
Fiscal Year
|
|
|
Total
|
|
2021
|
|
|
$
|
2,972
|
|
2022
|
|
|
|
2,995
|
|
2023
|
|
|
|
3,010
|
|
2024
|
|
|
|
3,086
|
|
2025
|
|
|
|
3,171
|
|
Thereafter
|
|
|
|
18,767
|
|
Total lease payments
|
|
|
|
34,001
|
|
Less: imputed interest
|
|
|
|
(11,529
|
)
|
Total operating lease liabilities
|
|
|
$
|
22,472
|
|
Note 5 – Stockholders’ Equity
Termination of Rights
Agreement (Series D Preferred Stock)
On March 16, 2006, we
entered into a Rights Agreement with Rights Agent named therein, which agreement was subsequently amended and restated on March
16, 2016 (as amended, the “Rights Agreement”). The Rights Agreement was designed to strengthen the ability of our Board
of Directors to protect the interests of our stockholders against potential abusive or coercive takeover tactics and to enable
all stockholders to receive the full and fair value of their investment in the event that an unsolicited attempt is made to acquire
us. Under the Rights Agreement, our Board of Directors declared a dividend of one preferred share purchase right (the “Right”)
for each share of our common stock held by our stockholders of record as of the close of business on March 27, 2006, each of which
Right entitled the holder thereof to purchase a fraction of a share of our Series D Participating Preferred Stock, par value $0.001
per share, at the price specified in the Rights Agreement. The Rights were only exercisable if a person or group acquired 15% or
more of our outstanding common stock or announced a tender offer or exchange offer which, if consummated, would have resulted in
ownership by a person or group of 15% or more of our outstanding stock.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
On September 23, 2019,
the Rights Agreement was further amended to accelerate the scheduled expiration date of the Rights Agreement from the close of
business on March 16, 2021 to the close of business on September 23, 2019, and effectively terminate the Rights Agreement and the
Rights granted thereunder as of such expiration date. Our Board of Directors elected to terminate the Rights Agreement and the
Rights granted thereunder based on their recent evaluation of the effectiveness of, and the need for, a stockholder rights plan
and consideration of current corporate governance practices and proxy advisory guidelines. In connection with the termination of
the Rights Agreement, we filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities
Exchange Act on Form 25 with the SEC on September 23, 2019, in order to withdraw the Rights from registration under Section 12(b)
of the Securities Exchange Act of 1934, as amended, which deregistration was effective 90 days after the filing date.
Series E Preferred
Stock
On February 12, 2014, we filed with the
Secretary of State of the State of Delaware a Certificate of Designations of Rights and Preferences (the “Certificate of
Designations”) to designate the 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”).
The Certificate of Designations designated 2,000,000 shares of Series E Preferred Stock out of our 5,000,000 shares of authorized
but unissued shares of preferred stock. The Series E Preferred Stock is classified as permanent equity in accordance with FASB
ASC Topic 480, Distinguishing Liabilities from Equity. As of April 30, 2020 and 2019, there were 1,647,760 shares of our
Series E Preferred Stock issued and outstanding.
Each share of issued
and outstanding Series E Preferred Stock is convertible at any time, at the option of the holder, into a number of shares of our
common stock determined by dividing the liquidation preference of $25.00 per share Series E Preferred Stock by the then-current
conversion price per share, currently $21.00 per share, rounded down to the nearest whole number. As of April 30, 2020, if all
of our issued and outstanding shares of Series E Preferred Stock were converted at the conversion price of $21.00 per share, the
holders of our Series E Preferred Stock would receive an aggregate of 1,961,619 shares of our common stock. However, because the
conversion price of our Series E Preferred Stock is subject to adjustment from time to time in accordance with the applicable provisions
of our certificate of incorporation, we have reserved the maximum number of shares of our common stock that could be issued upon
the conversion of our Series E Preferred Stock upon a change of control event, assuming our shares of common stock are acquired
for consideration of $5.985 per share or less. In this scenario, each outstanding share of our Series E Preferred Stock would be
converted into 4.14 shares of our common stock, or 6,826,435 shares in the aggregate.
The Series E Preferred
Stock has no stated maturity date or mandatory redemption and is senior to all of our other securities. We may redeem the Series
E Preferred Stock for cash, in whole or in part, by paying the redemption price of $25.00 per share, plus any accrued and unpaid
dividends to the redemption date. Holders of the Series E Preferred Stock have no voting rights, except as defined in the Certificate
of Designations.
Holders of our Series
E Preferred Stock are entitled to receive cumulative dividends at the rate of 10.50% per annum based on the liquidation preference
of $25.00 per share, or $2.625 per annum per share, and are payable quarterly in cash, on or about the first day of each January,
April, July, and October. For each of the fiscal years ended April 30, 2020, 2019, and 2018, we paid aggregate cash dividends of
$4.3 million for issued and outstanding shares of our Series E Preferred Stock.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Sale
of Common Stock
During the fiscal years
ended April 30, 2020 and 2019, we had no offerings of our common stock.
During February 2018,
we completed an underwriting public offering pursuant to which we sold 10,294,445 shares of our common stock at the public offering
price of $2.25 per share. The aggregate gross proceeds we received from the public offering was $23.2 million, before deducting
underwriting discounts and commissions and other offering related expenses of $1.7 million.
During the fiscal year
ended April 30, 2018, we sold an aggregate of 1,051,259 shares of our common stock pursuant to an At Market Issuance Sales Agreement
(“AMI Sales Agreement”) for aggregate gross proceeds of $4.3 million. We paid a commission equal to 2.5% of the gross
proceeds from the sale of our common stock pursuant to the AMI Sales Agreement, or $0.1 million. As of April 30, 2018, we had raised
the full amount of gross proceeds available to us under the AMI Sales Agreement.
Warrants
As of April 30, 2020 and 2019, we had no
warrants issued and outstanding.
Shares of Common Stock Authorized and Reserved
for Future Issuance
As of April 30, 2020,
56,483,065 shares of our common stock were issued and outstanding. Our common stock outstanding as of April 30, 2020 excluded the
following shares of common stock reserved for future issuance (in thousands):
|
|
Shares
|
|
Stock Incentive Plans
|
|
|
6,941
|
|
Employee Stock Purchase Plan
|
|
|
1,149
|
|
Conversion of our outstanding Series E Preferred Stock
|
|
|
6,826
|
|
Total common stock reserved for future issuance
|
|
|
14,916
|
|
Note
6 – Benefit Plans
Stock
Incentive Plans
The Avid Bioservices,
Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”) is a stockholder-approved plan, which provides, among other things,
the ability for us to grant stock options, restricted stock units and other forms of stock-based awards. The 2018 Plan replaced
our 2009, 2010 and 2011 Stock Incentive Plans (the “Prior Plans”). However, any awards outstanding under the Prior
Plans as of the 2018 Plan’s 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.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
In addition, we currently
maintain three expired stock incentive plans referred to as the 2005, 2003 and 2002 Stock Incentive Plans (collectively, the “Expired
Plans”). No future grants of stock-based awards can be issued from the Expired Plans, however, all outstanding awards granted
under the Expired Plans will remain subject to the terms of the Expired Plans until they are exercised, canceled or expired.
The 2018 Plan, the Prior
Plans, and the Expired Plans are collectively referred to as the “Stock Plans”. As of April 30, 2020, we had an aggregate
of 6,941,049 shares of our common stock reserved for issuance under the Stock Plans, of which 3,203,034 shares were subject to
outstanding stock options and restricted stock units and 3,738,015 shares were available for future grants of stock-based awards.
Stock Options
Stock options granted
under our Stock Plans are granted at an exercise price not less than the fair market value of our common stock on the date of grant.
Stock option grants to employees generally vest 25% on each of the first, second, third and fourth anniversaries of the date of
grant, and stock option grants to non-employee directors generally vest over a period of one to three years from the date of grant.
Stock options generally have a contractual term of seven years; however, the maximum contractual term of any stock option granted
under the Stock Plans is ten years.
The estimated fair value
of stock options are measured at the grant date, using a fair value based method, such as a Black-Scholes option valuation model,
and is amortized as stock-based compensation expense on a straight-line basis over the requisite service period of the award, which
is generally the vesting period. The use of a valuation model requires us to make certain estimates and assumptions with respect
to selected model inputs. The expected volatility is based on the daily historical volatility of our common stock covering the
estimated expected term. The expected term of options granted reflects actual historical exercise activity and assumptions regarding
future exercise activity of unexercised, outstanding options. The risk-free interest rate is based on U.S. Treasury notes with
terms within the contractual life of the option at the time of grant. The expected dividend yield assumption is based on our expectation
of future dividend payouts. We have never declared or paid any cash dividends on our common stock and currently do not anticipate
paying such cash dividends.
The fair value of stock
options on the date of grant and the weighted-average assumptions used to estimate the fair value of the stock options using the
Black-Scholes option valuation model for fiscal years ended April 30, 2020, 2019 and 2018, were as follows:
|
|
Fiscal Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
|
1.86%
|
|
|
|
2.81%
|
|
|
|
2.21%
|
|
Expected life (in years)
|
|
|
5.06
|
|
|
|
5.57
|
|
|
|
6.19
|
|
Expected volatility
|
|
|
77.45%
|
|
|
|
76.56%
|
|
|
|
110.43%
|
|
Expected dividend yield
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes our stock option
transaction activity for the fiscal year ended April 30, 2020:
|
|
Stock Options
(in thousands)
|
|
|
Grant Date
Weighted
Average Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Aggregate
Intrinsic
Value (1)
(in thousands)
|
|
Outstanding at May 1, 2019
|
|
|
3,274
|
|
|
$
|
7.51
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
887
|
|
|
$
|
5.91
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(251
|
)
|
|
$
|
3.73
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(1,014
|
)
|
|
$
|
10.79
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2020
|
|
|
2,896
|
|
|
$
|
6.20
|
|
|
|
5.76
|
|
|
$
|
2,457
|
|
Vested and expected to vest
|
|
|
2,896
|
|
|
$
|
6.20
|
|
|
|
5.76
|
|
|
$
|
2,457
|
|
Exercisable at April 30, 2020
|
|
|
1,530
|
|
|
$
|
6.77
|
|
|
|
4.89
|
|
|
$
|
1,566
|
|
______________
|
(1)
|
Aggregate intrinsic value represents the difference between the exercise
price of an option and the closing market price of our common stock on April 30, 2020, which was $6.10 per share.
|
The weighted-average
grant date fair value of options granted during the fiscal years ended April 30, 2020, 2019 and 2018 was $3.74, $3.30 and $3.50
per share, respectively.
The aggregate intrinsic
value of stock options exercised during the fiscal years ended April 30, 2020, 2019 and 2018 was $0.7 million, $0.5 million and
$0.2 million, respectively. Cash received from stock options exercised during fiscal years ended April 30, 2020, 2019 and 2018
totaled $0.9 million, $1.3 million and $0.8 million, respectively.
We issue shares of common
stock that are reserved for issuance under the Stock Plans upon the exercise of stock options, and we do not expect to repurchase
shares of common stock from any source to satisfy our obligations under our compensation plans.
As of April 30, 2020,
the total estimated unrecognized compensation cost related to non-vested stock options was $4.1 million. This cost is
expected to be recognized over a weighted average vesting period of 2.66 years based on current assumptions.
Restricted Stock
A restricted stock unit
(“RSU”) represents the right to receive one share of our common stock upon the vesting of each unit. RSUs generally
vest over four years at the rate of one-fourth of the shares granted on each anniversary of the date of grant. The estimated fair
value of RSUs is based on the closing market value of our common stock on the date of grant, and is amortized as stock-based compensation
expense on a straight-line basis over the period of vesting.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes
our RSUs transaction activity for the fiscal year ended April 30, 2020:
|
|
|
Shares
(in thousands)
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Outstanding at May 1, 2019
|
|
|
|
200
|
|
|
$
|
4.32
|
|
Granted
|
|
|
|
194
|
|
|
|
5.91
|
|
Vested
|
|
|
|
(49
|
)
|
|
|
4.30
|
|
Forfeited
|
|
|
|
(38
|
)
|
|
|
5.07
|
|
Outstanding at April 30, 2020
|
|
|
|
307
|
|
|
$
|
5.23
|
|
The weighted-average
grant date fair value of RSUs granted during the fiscal years ended April 30, 2020 and 2019 was $5.91 and $4.28 per share, respectively.
No RSUs were granted during the fiscal year ended April 30, 2018.
The total fair value
of RSUs vested during the fiscal year ended April 30, 2020 was $0.3 million. No RSUs vested during the fiscal years ended April
30, 2019 and 2018.
As of April 30, 2020,
the total estimated unrecognized compensation cost related to non-vested RSUs was $1.3 million. This cost is expected to be recognized
over a weighted average vesting period of 2.82 years.
Employee
Stock Purchase Plan
The Avid Bioservices,
Inc. 2010 Employee Stock Purchase Plan (the “ESPP”) is a stockholder-approved plan under which employees can purchase
shares of our common stock, based on a percentage of their compensation, subject to certain limits. The purchase price per share
is equal to the lower of 85% of the fair market value of our common stock on the first trading day of the offering period or on
the last trading day of the six-month offering period. On October 9, 2019, our stockholders approved an amendment to the ESPP to
extend its term for an additional five years to October 21, 2025 and to change the commencement dates of the six-month offering
periods from May 1 and November 1 of each year to January 1 and July 1 of each year.
During the fiscal years
ended April 30, 2020, 2019 and 2018, a total of 47,526, 75,148 and 88,327 shares of our common stock were purchased, respectively,
under the ESPP at a weighted average purchase price per share of $3.94, $3.44 and $3.59, respectively. As of April 30, 2020, we
had 1,148,735 shares of our common stock reserved for issuance under the ESPP.
The fair value of the
shares purchased under the ESPP was determined using a Black-Scholes option valuation model (see explanation of valuation model
inputs above under “Stock Options”), and is recognized as expense on a straight-line basis over the requisite service
period (or six-month offering period).
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
The weighted average
grant date fair value of purchase rights under the ESPP during fiscal years ended April 30, 2020, 2019 and 2018 was $1.81, $1.49
and $1.65, respectively, based on the following weighted-average Black-Scholes option valuation model inputs:
|
|
Fiscal Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
|
2.08%
|
|
|
|
2.26%
|
|
|
|
1.10%
|
|
Expected life (in years)
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
0.50
|
|
Expected volatility
|
|
|
56.71%
|
|
|
|
71.10%
|
|
|
|
75.18%
|
|
Expected dividend yield
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
401(k) Plan
We maintain a 401(k) Plan pursuant to section
401(k) of the Internal Revenue Code that allows participating employees to defer a portion of their compensation on a tax deferred
basis up to the maximum amount permitted by the Internal Revenue Code. We match 50% of employee contributions of up to 6% of their
annual eligible compensation. The expense related to our matching contributions to the 401(k) Plan was $0.5 million, $0.4 million
and $0.6 million for the fiscal years ended April 30, 2020, 2019 and 2018, respectively.
Stock-based
Compensation Expense
Stock-based compensation
expense for the fiscal years ended April 30, 2020, 2019 and 2018 was comprised of the following (in thousands):
|
|
Fiscal Year Ended April 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Cost of revenues
|
|
$
|
922
|
|
|
$
|
474
|
|
|
$
|
378
|
|
Selling, general and administrative expense
|
|
|
1,577
|
|
|
|
1,121
|
|
|
|
820
|
|
Discontinued operations
|
|
|
–
|
|
|
|
–
|
|
|
|
340
|
|
Total
|
|
$
|
2,499
|
|
|
$
|
1,595
|
|
|
$
|
1,538
|
|
Due to our net loss position,
no tax benefits have been recognized in the Consolidated Statements of Cash Flows.
Note 7 – Income Taxes
We are primarily subject
to U.S. federal and California state jurisdictions. All tax years with tax attributes carrying forward remain open to examination
by U.S. federal and state authorities.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
In accordance with ASC
740, we are required to recognize the impact of an uncertain tax position in the consolidated financial statements when it is more
likely than not the position will be sustained upon examination by the tax authorities. An uncertain tax position will not be recognized
if it has less than a 50% likelihood of being sustained upon examination by the tax authorities. We had no unrecognized tax benefits
from uncertain tax positions as of April 30, 2020 and 2019. It is also our policy, in accordance with authoritative guidance, to
recognize interest and penalties related to income tax matters in interest and other expense in our Consolidated Statements of
Operations and Comprehensive Loss. We did not recognize interest or penalties related to income taxes for fiscal years ended April
30, 2020, 2019, and 2018, and we did not accrue for interest or penalties as of April 30, 2020 and 2019.
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.
At April 30, 2020, we
had net deferred tax assets of $118.1 million. Due to uncertainties surrounding our ability to generate future taxable income to
realize these tax assets, a full valuation has been established to offset our net deferred tax assets. Additionally, the future
utilization of our net operating loss carry forwards to offset future taxable income may be subject to an annual limitation, pursuant
to Internal Revenue Code Section 382, as a result of ownership changes that may have occurred previously or that could occur in
the future. A Section 382 analysis was completed as of the fiscal year ended April 30, 2019 and we subsequently reviewed ownership
activity through April 30, 2020, which it was determined that no significant change in ownership had occurred. However, ownership
changes occurring subsequent to April 30, 2020 may impact the utilization of net operating loss carry forwards and other tax attributes.
At April 30, 2020, we
had federal net operating loss carry forwards of approximately $427 million. The federal net operating loss carry forwards generated
prior to January 1, 2018 expire in fiscal years 2021 through 2038. The federal net operating loss generated after January 1, 2018
of $19.8 million can be carried forward indefinitely. Net operating losses generated after 2017 through 2020 may offset future
taxable income without limitation. Utilization of net operating losses generated subsequent to 2020 are limited to 80% of future
taxable income. We also have California state net operating loss carry forwards of approximately $277 million at April 30, 2020,
which begin to expire in fiscal year 2029.
The provision for income
taxes on our loss from continuing operations for the fiscal years ended April 30, 2020, 2019 and 2018 is comprised of the following
(in thousands):
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Federal income taxes at statutory rate
|
|
$
|
(2,197
|
)
|
|
$
|
(1,120
|
)
|
|
$
|
(6,112
|
)
|
State income taxes
|
|
|
–
|
|
|
|
(48
|
)
|
|
|
155
|
|
Expiration of deferred tax assets
|
|
|
2,588
|
|
|
|
2,507
|
|
|
|
1,840
|
|
Change in valuation allowance
|
|
|
(1,664
|
)
|
|
|
(2,480
|
)
|
|
|
(57,599
|
)
|
Stock-based compensation
|
|
|
1,138
|
|
|
|
1,309
|
|
|
|
1,584
|
|
Other, net
|
|
|
135
|
|
|
|
(452
|
)
|
|
|
6
|
|
Tax Cuts and Jobs Act
|
|
|
–
|
|
|
|
–
|
|
|
|
60,126
|
|
Income tax benefit
|
|
$
|
–
|
|
|
$
|
(284
|
)
|
|
$
|
–
|
|
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
for income tax purposes. Significant components of our deferred tax assets and deferred tax liabilities at April 30, 2020 and 2019
are as follows:
|
|
2020
|
|
|
2019
|
|
Net operating losses
|
|
$
|
114,105
|
|
|
$
|
113,612
|
|
Stock-based compensation
|
|
|
2,573
|
|
|
|
3,416
|
|
Deferred revenue
|
|
|
810
|
|
|
|
1,610
|
|
Deferred rent
|
|
|
–
|
|
|
|
555
|
|
Lease liabilities
|
|
|
6,324
|
|
|
|
–
|
|
Other
|
|
|
1,197
|
|
|
|
1,256
|
|
Total deferred tax assets
|
|
|
125,009
|
|
|
|
120,449
|
|
Less valuation allowance
|
|
|
(118,137
|
)
|
|
|
(119,516
|
)
|
Total deferred tax assets, net of valuation allowance
|
|
|
6,872
|
|
|
|
933
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(1,216
|
)
|
|
|
(933
|
)
|
Right-of-use assets
|
|
|
(5,656
|
)
|
|
|
–
|
|
Total deferred tax liabilities
|
|
|
(6,872
|
)
|
|
|
(933
|
)
|
Net deferred tax assets
|
|
$
|
–
|
|
|
$
|
–
|
|
On March 27, 2020, the CARES Act was signed
into law. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the
prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions,
temporary suspension of certain payment requirements for the employer portion of Social Security taxes, the creation of certain
refundable employee retention credits, and technical corrections from prior tax legislation for tax depreciation of certain qualified
improvement property. Due to our loss position, many of the provisions of the CARES Act do not impact us and the CARES Act does
not have a significant impact on our income tax provision for the fiscal year ended April 30, 2020.
Note 8 – 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. Diluted net loss per common share is computed by dividing our net loss attributable to common
stockholders by the sum of the weighted average number of shares of common stock outstanding during the period, plus the potential
dilutive effects of stock options, unvested RSUs, shares of common stock expected to be issued under our ESPP, warrants, and Series
E Preferred Stock outstanding during the period.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Net loss attributable
to common stockholders represents our net loss plus Series E Preferred Stock accumulated dividends. Series E Preferred Stock accumulated
dividends include dividends declared for the period (regardless of whether or not the dividends have been paid) and dividends accumulated
for the period (regardless of whether or not the dividends have been declared).
The potential dilutive
effect of stock options, unvested RSUs, shares of common stock expected to be issued under our ESPP, and warrants outstanding during
the period are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The
potential dilutive effect of our Series E Preferred Stock outstanding during the period is 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. Since the impact of potentially dilutive securities are anti-dilutive during periods
of net loss, there was no difference between basic and diluted loss per common share amounts for the fiscal years ended April 30,
2020, 2019 and 2018.
The calculation of weighted
average diluted shares outstanding excludes the dilutive effect of the following weighted average securities, as their effect is
anti-dilutive during periods of net loss (in thousands):
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
145
|
|
|
|
139
|
|
|
|
54
|
|
RSUs
|
|
|
76
|
|
|
|
34
|
|
|
|
–
|
|
ESPP
|
|
|
7
|
|
|
|
11
|
|
|
|
2
|
|
Total
|
|
|
228
|
|
|
|
184
|
|
|
|
56
|
|
The calculation of weighted average diluted
shares outstanding also excludes the following weighted average securities, 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 (in thousands):
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
2,650
|
|
|
|
2,712
|
|
|
|
3,637
|
|
RSUs
|
|
|
7
|
|
|
|
34
|
|
|
|
–
|
|
Warrants
|
|
|
–
|
|
|
|
13
|
|
|
|
39
|
|
Series E Preferred Stock
|
|
|
1,979
|
|
|
|
1,979
|
|
|
|
1,979
|
|
Total
|
|
|
4,636
|
|
|
|
4,738
|
|
|
|
5,655
|
|
Note 9 – Commitments and Contingencies
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 financial condition or results of operations.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
In March 2020, the World Health Organization declared the global
novel coronavirus disease (“COVID-19”) outbreak a pandemic and recommended containment and mitigation measures worldwide.
We are monitoring this closely, and although the COVID-19 pandemic has not had a significant impact on our operations to date,
the ultimate duration and severity of the outbreak and its impact on the economic environment and our business is highly uncertain.
Accordingly, we cannot provide any assurance that the COVID-19 pandemic will not have a material adverse impact on our operations
or future results. The extent to which the COVID-19 pandemic impacts our future business, strategic initiatives, results of operations
and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but
not limited to the duration, spread, severity and resurgence of the COVID-19 pandemic, the effects of the COVID-19 pandemic on
our customers, vendors, and employees and the remedial actions and stimulus measures adopted by local and federal governments,
and to what extent normal economic and operating conditions can resume.
Note 10 – Restructuring
Charges
In August 2017, we implemented
a restructuring plan intended to reduce operating costs and improve cost efficiencies, while we pursued strategic options for our
research and development assets and focused our efforts on growing our CDMO business. Under this restructuring plan, which we completed
in October 2017, we reduced our overall workforce by 57 employees. As a result, during the fiscal quarter ended October 31, 2017,
we incurred an aggregate of $1.6 million in restructuring costs consisting of termination benefits, including severance, and other
employee-related costs, of which $0.3 million is from discontinued operations and $1.3 million is from continuing operations. The
restructuring costs from discontinued operations are included in loss from discontinued operations, net of tax, in the accompanying
Consolidated Financial Statements for the fiscal year ended April 30, 2018 (Note 11). The restructuring costs from continuing operations
are included in operating expenses in the accompanying Consolidated Financial Statements for the fiscal year ended April 30, 2018.
All restructuring costs were paid in full during fiscal year 2018.
Note 11 –
Sale of Research and Development Assets
In February 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 $8.0 million from Oncologie, of which $3.0 million was received
in fiscal year 2018 and $5.0 million was received in fiscal year 2019. We are also eligible to receive up to an additional
$95.0 million 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 April 30, 2020, no development, regulatory or commercialization milestones have been achieved by Oncologie
under the February 2018 Purchase Agreement. 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.
In September 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 $1.0 million from Oncologie, which amount was paid in fiscal year 2019. We are
also eligible to receive up to an additional $21.0 million 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 April 30, 2020, no development, regulatory or commercialization milestones have been achieved by
Oncologie under the September 2018 Purchase Agreement. 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.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Discontinued Operations
As a result of the sale of our PS-targeting
and r84 technologies, 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 have been
excluded from continuing operations and presented as discontinued operations in the accompanying Consolidated Financial Statements
for all periods presented. During the fiscal years ended April 30, 2019 and 2018, we recorded a gain of $1.0 million and $8.0 million,
respectively, upon the completion of the September 2018 Purchase Agreement and the February 2018 Purchase Agreement, which amounts
are included in income (loss) from discontinued operations, net of tax, in the accompanying Consolidated Statements of Operations
and Comprehensive Loss for the fiscal years ended April 30, 2019 and 2018, respectively. 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, these results of operations 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.
There were no operating results from discontinued
operations for the fiscal year ended April 30, 2020.
The following table summarizes the results
of discontinued operations for the fiscal years ended April 30, 2019 and 2018 (in thousands):
|
|
Fiscal Year Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
License revenue
|
|
$
|
–
|
|
|
$
|
25
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
–
|
|
|
|
6,782
|
|
Selling, general and administrative
|
|
|
–
|
|
|
|
2,163
|
|
Restructuring charges
|
|
|
–
|
|
|
|
330
|
|
Total operating expenses
|
|
|
–
|
|
|
|
9,275
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
125
|
|
|
|
–
|
|
Gain on sale of research and development assets before income taxes
|
|
|
1,000
|
|
|
|
8,000
|
|
Income tax expense
|
|
|
284
|
|
|
|
–
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
841
|
|
|
$
|
(1,250
|
)
|
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note 12 – Selected Quarterly Financial
Data (Unaudited)
The following is a summary
of our unaudited quarterly results for each of the two most recent fiscal years (in thousands, except per share amounts):
|
|
Fiscal Year Ended April 30, 2020
|
|
|
|
|
First
Quarter
|
|
|
|
Second
Quarter
|
|
|
|
Third
Quarter
|
|
|
|
Fourth
Quarter
|
|
Revenues (a)
|
|
$
|
15,254
|
|
|
$
|
18,313
|
|
|
$
|
13,585
|
|
|
$
|
12,550
|
|
Gross profit (loss)
|
|
$
|
1,086
|
|
|
$
|
3,360
|
|
|
$
|
785
|
|
|
$
|
(1,299
|
)
|
Loss
from continuing operations, net of tax(b)
|
|
$
|
(3,164
|
)
|
|
$
|
(430
|
)
|
|
$
|
(2,104
|
)
|
|
$
|
(4,768
|
)
|
Net loss
|
|
$
|
(3,164
|
)
|
|
$
|
(430
|
)
|
|
$
|
(2,104
|
)
|
|
$
|
(4,768
|
)
|
Net loss attributable to common stockholders
|
|
$
|
(4,606
|
)
|
|
$
|
(1,872
|
)
|
|
$
|
(3,546
|
)
|
|
$
|
(6,210
|
)
|
Basic and diluted net loss per common share attributable to common stockholders (c)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
Fiscal Year Ended April 30, 2019
|
|
|
|
|
First
Quarter
|
|
|
|
Second
Quarter
|
|
|
|
Third
Quarter
|
|
|
|
Fourth
Quarter
|
|
Revenues
|
|
$
|
12,589
|
|
|
$
|
10,178
|
|
|
$
|
13,781
|
|
|
$
|
17,055
|
|
Gross profit
|
|
$
|
1,192
|
|
|
$
|
334
|
|
|
$
|
2,050
|
|
|
$
|
3,648
|
|
(Loss) income from continuing operations, net of tax
|
|
$
|
(1,961
|
)
|
|
$
|
(2,190
|
)
|
|
$
|
(1,139
|
)
|
|
$
|
234
|
|
Income from discontinued operations, net of tax (d)(e)
|
|
$
|
–
|
|
|
$
|
739
|
|
|
$
|
–
|
|
|
$
|
102
|
|
Net (loss) income
|
|
$
|
(1,961
|
)
|
|
$
|
(1,451
|
)
|
|
$
|
(1,139
|
)
|
|
$
|
336
|
|
Net loss attributable to common stockholders
|
|
$
|
(3,403
|
)
|
|
$
|
(2,893
|
)
|
|
$
|
(2,581
|
)
|
|
$
|
(1,106
|
)
|
Basic and diluted net (loss) income per common share attributable to common stockholders (c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
Discontinued operations
|
|
$
|
–
|
|
|
$
|
0.01
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Net loss per common share attributable to common stockholders
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
________________
|
(a)
|
Revenues for the fourth quarter of fiscal year ended April 30, 2020,
includes a $1.5 million reduction due to changes in estimates for variable consideration as compared to the third quarter of fiscal
year ended April 30, 2020.
|
|
(b)
|
Loss from continuing operations for the second quarter of fiscal year ended April 30, 2020 includes
a loss on lease termination of $0.4 million (Note 4)
|
|
(c)
|
Basic and diluted net income (loss) per common share attributable
to common stockholders calculations for each of the quarters are based on the basic and diluted weighted average common shares
outstanding for each period. As such, the sum of the quarters may not necessarily equal the basic and diluted net (loss) income
per common share amount for the fiscal year.
|
|
(d)
|
For the fiscal year ended April 30, 2019, the operating results of our former research and development segment
are reported as income from discontinued operations, net of tax (Note 1). There
were no operating results from discontinued operations for the fiscal year ended April 30, 2020.
|
|
(e)
|
Income from discontinued operations, net of tax, for the second quarter of fiscal year ended April
30, 2019 includes a gain on sale of research and development assets before tax of $1.0 million (Note 11).
|
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Note
13 – Subsequent Events
Repayment of PPP Loan
On May 12, 2020, we paid
off in full the principal and interest on the PPP Loan, resulting in the termination of the Note (Note 3).
Series E Preferred Stock Dividend
On June 3, 2020, our Board of Directors
declared a quarterly cash dividend of $0.65625 per share on our Series E Preferred Stock. The dividend payment is equivalent
to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference, accruing from April 1, 2020 through
June 30, 2020. The cash dividend of $1.1 million is payable on July 1, 2020 to holders of the Series E Preferred Stock of
record on June 15, 2020.