avid bioservices,
INC.
avid bioservices,
INC.
avid bioservices,
INC.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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 of biologics for the biotechnology and biopharmaceutical industries.
Basis of Presentation
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
(“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, 2022, as filed with the SEC on June 29, 2022. 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 subsidiary. 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.
Note 2 – Summary of Significant Accounting Policies
Information regarding our significant accounting
policies is contained in Note 2, “Summary of Significant Accounting Policies,” of the consolidated financial statements in
our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.
Revenue Recognition
Revenue recognized from services provided under
our customer contracts is disaggregated into manufacturing and process development revenue streams.
Manufacturing revenue
Manufacturing revenue generally represents revenue
from the manufacturing of customer products recognized over time utilizing an input method that compares the cost of cumulative work-in-process
to date to the most current estimates for the entire cost of the performance obligation. Under a manufacturing contract, a quantity of
manufacturing runs are ordered at a specified scale with prescribed dates, where the product is manufactured according to the customer’s
specifications and typically includes only one performance obligation. Each manufacturing run represents a distinct service that is sold
separately and has stand-alone value to the customer. The products are manufactured exclusively for a specific customer and have no alternative
use. The customer retains control of its product during the entire manufacturing process and can make changes to the process or specifications
at its request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin.
Process development revenue
Process development revenue generally represents
revenue from services associated with the custom development of a manufacturing process and analytical methods for a customer’s
product. Process development revenue is recognized over time utilizing an input method that compares the cost of cumulative work-in-process
to date to the most current estimates for the entire cost of the performance obligation. Under a process development contract, the customer
owns the product details and process, which has no alternative use. These process development projects are customized to each customer
to meet its specifications and typically includes only one performance obligation. 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 streams (in thousands):
Schedule of revenues | |
| | | |
| | |
| |
Three Months Ended July 31, | |
| |
2022 | | |
2021 | |
Manufacturing revenues | |
$ | 31,481 | | |
$ | 25,675 | |
Process development revenues | |
| 5,211 | | |
| 5,079 | |
Total revenues | |
$ | 36,692 | | |
$ | 30,754 | |
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 three months ended July 31, 2022 and
2021, we recognized revenue of $18.6 million and $17.5 million, respectively, for which the contract liability was recorded in a prior
period.
The transaction price for services provided under
our customer contracts reflects our best estimates of the amount of consideration to which we are entitled in exchange for providing goods
and services to our customers. For contracts with multiple performance obligations, we allocate transaction price to each performance
obligation identified in a contract on a relative standalone selling price basis. We generally determine relative standalone selling prices
based on the price observed in the customer contract for each distinct performance obligation. If observable standalone selling prices
are not available, we may estimate the applicable standalone selling price based on the pricing of other comparable services or on a price
that we believe the market is willing to pay for the applicable service.
In determining the transaction price, we also
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.
In addition, our customer contracts generally
include provisions entitling us to a cancellation or postponement fee when a customer cancels or postpones its commitments prior to our
initiation of services, therefore not utilizing their reserved capacity. The determination of such cancellation and postponement fees
are based on the terms stated in the related customer contract but are generally considered substantive for accounting purposes and create
an enforceable right and obligation due to us when the cancellation or postponement occurs. Accordingly, we recognize such fees, subject
to variable consideration, as revenue upon the cancellation or postponement date utilizing the most likely method.
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, estimating variable consideration, 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. There were no material adjustments in estimates
for variable consideration for the three months ended July 31, 2022 and 2021.
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 July 31, 2022, we do not have any unsatisfied performance obligations for contracts
greater than one year.
Costs incurred to obtain a contract are not material.
These costs are generally employee sales commissions, which are expensed as incurred and included in selling, general and administrative
expense in the unaudited condensed consolidated statements of operations and comprehensive income.
Restricted Cash
Under the terms of an operating lease related
to one of our facilities (Note 4), we are required to maintain a letter of credit as collateral. Accordingly, at July 31, 2022 and April
30, 2022, restricted cash of $0.4 million was pledged as collateral under the letter of credit.
The following table provides a reconciliation
of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total
of the same amounts shown in the unaudited condensed consolidated statements of cash flows (in thousands):
Schedule of cash | |
| | | |
| | | |
| | | |
| | |
| |
July 31, 2022 | | |
April
30, 2022 | | |
July 31, 2021 | | |
April
30, 2021 | |
Cash and cash equivalents | |
$ | 115,137 | | |
$ | 126,166 | | |
$ | 159,692 | | |
$ | 169,915 | |
Restricted cash | |
| 350 | | |
| 350 | | |
| 350 | | |
| 350 | |
Total cash, cash equivalents and restricted cash | |
$ | 115,487 | | |
$ | 126,516 | | |
$ | 160,042 | | |
$ | 170,265 | |
Accounts Receivable, Net
Accounts receivable is primarily comprised of
amounts owed to us for services provided under our customer contracts and are recorded at the invoiced amount net of an allowance for
doubtful accounts, if necessary. We apply judgement 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
balance as of July 31, 2022 and April 30, 2022, we determined an allowance for doubtful accounts for both periods of $18.4 million was
deemed necessary. For both periods, the amount is primarily due to a dispute with a customer over the payment of certain cancellation
fees due to us under the terms of the related customer contract. We believe we have a contractual right to this amount, but as this contractual
right is being disputed and therefore may be uncollectible, we have chosen to reserve the disputed amount.
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:
Schedule of estimated useful lives of property |
|
|
Description |
|
Estimated Useful Life |
Leasehold improvements |
|
Shorter of estimated useful life or lease term |
Laboratory and manufacturing equipment |
|
5 – 10 years |
Computer equipment and software |
|
3 – 5 years |
Furniture, fixtures and office equipment |
|
5 – 10 years |
Costs for property and equipment
net yet placed into service have been capitalized as construction-in-progress. These costs are primarily related to equipment and leasehold
improvements associated with our manufacturing facilities, and will be depreciated in accordance with the above guidelines once placed
into service. Interest costs incurred during construction of major capital projects are capitalized as construction-in-progress until
the underlying asset is ready for its intended use, at which point the interest costs are amortized as depreciation expense over the
life of the underlying asset. Interest capitalized as construction-in-progress was $0.2
million for the three months ended July 31, 2022 and $0.2
million for the fiscal year ended April 30, 2022. All of our property and equipment are located in the United States. Property
and equipment consist of the following (in thousands):
Schedule of property and equipment | |
| | | |
| | |
| |
July 31, 2022 | | |
April 30, 2022 | |
Leasehold improvements | |
$ | 47,180 | | |
$ | 37,345 | |
Laboratory and manufacturing equipment | |
| 30,071 | | |
| 30,089 | |
Computer equipment and software | |
| 5,031 | | |
| 5,326 | |
Furniture, fixtures and office equipment | |
| 843 | | |
| 843 | |
Construction-in-progress | |
| 57,460 | | |
| 43,809 | |
Total property and equipment, gross | |
| 140,585 | | |
| 117,412 | |
Less: accumulated depreciation and amortization | |
| (25,656 | ) | |
| (24,457 | ) |
Total property and equipment, net | |
$ | 114,929 | | |
$ | 92,955 | |
Depreciation and amortization
expense for the three months ended July 31, 2022 and 2021 was $1.6 million and $1.0 million, respectively.
Leases
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 (“ROU”)
assets, operating lease liabilities and operating lease liabilities, less current portion in our consolidated balance sheets. ROU 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 ROU 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.
Our finance lease with a term greater than one
year is included as an asset within property and equipment, net and a lease liability equal to the present value of the minimum lease
payments is included in other current liabilities and finance lease liabilities, less current portion in our consolidated balance sheets.
The present value of the finance lease payments is calculated using the implicit interest rate in the lease. Finance lease ROU assets
are amortized on a straight-line basis over the expected useful life of the asset and the carrying amount of the lease liability is adjusted
to reflect interest, which is recorded as interest expense.
Leases with an initial term
of 12 months or less are not recorded on our consolidated balance sheets and lease expense for these short-term leases is recognized on
a straight-line basis over the lease term. We have also elected the practical expedient to not separate lease components from non-lease
components.
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. If such events or changes in circumstances
arise, we compare the carrying amount of the long-lived assets to the estimated future undiscounted cash flows expected to be generated
by the long-lived assets. If the long-lived assets are determined to be impaired, any excess of the carrying value of the long-lived assets
over its estimated fair value is recognized as an impairment loss. For the three months ended July 31, 2022 and 2021, there were no indicators
of impairment of the value of our long-lived assets and no cumulative impairment losses were recognized as of July 31, 2022.
Stock-Based Compensation
We account for stock
options, restricted stock units, performance stock units and other stock-based awards granted under our equity compensation plans in
accordance with the authoritative guidance of ASC 718, Compensation – Stock 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 an expense on a straight-line basis over the requisite service periods.
The fair value of restricted stock units and performance stock units is measured at the grant date based on the closing market price
of our common stock on the date of grant. For restricted stock units, the fair value is recognized as an expense on a straight-line
basis over the requisite service periods. For performance stock units, which are subject to performance conditions, the fair value
is recognized as an expense on a straight-line basis over the requisite service periods when the achievement of such performance
condition is determined to be probable. If a performance condition is not determined to be probable or is not met, no stock-based
compensation expense is recognized, and any previously recognized expense is reversed. Forfeitures are recognized as a reduction of
stock-based compensation expense as they occur.
Debt Issuance Costs
Debt issuance costs related
to convertible senior notes are recorded as a deduction that is netted against the principal value of the debt and are amortized to interest
expense using the effective interest method over the contractual term of the debt (Note 3).
Comprehensive Income
Comprehensive income is the
change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income is
equal to our net income 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 July 31, 2022 and April
30, 2022, we did not have any Level 2 or Level 3 financial assets and our cash equivalents of $102.9 million and $116.3 million, respectively,
were invested in money market funds with one major commercial bank and carried at fair value based on quoted market prices for identical
securities (Level 1 input). We consider the fair value of our convertible senior notes to be a Level 2 financial liability due to limited
trading activity of the senior convertible notes (Note 3). We did not have any other Level 2 or Level 3 financial liabilities as of July
31, 2022 and April 30, 2022.
Accounting Standards Not
Yet Adopted
In June 2016, the Financial Accounting Standards
Board (“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. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit
Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which required entities to make a
one-time determination of whether an entity is eligible to be a smaller reporting company as of November 15, 2019 for the purpose of determining
the effective date of ASU 2016-13. We determined that we were eligible to be a smaller reporting company as of November 15, 2019, and
therefore, ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, which will be our fiscal year 2024 beginning May
1, 2023. Early adoption is permitted. We are currently evaluating the timing and impact the adoption of this standard will have on our
condensed consolidated financial statements.
Note 3 – Debt
Convertible Senior Notes
Due 2026
In March 2021, we issued $143.8 million in aggregate
principal amount of 1.25% exchangeable senior notes due 2026 (“Convertible Notes”) in a private offering to qualified institutional
buyers pursuant to Rule 144A under the Securities Act. The net proceeds we received from the issuance of Convertible Notes was $138.5
million, after deducting initial purchaser discounts and other debt issuance related expenses of $5.3 million.
The Convertible Notes are senior unsecured obligations
and accrue interest at a rate of 1.25% per annum, payable semi-annually in arrears on March 15 and September 15 of each year. The Convertible
Notes mature on March 15, 2026, unless earlier redeemed or repurchased by us or converted at the option of the holders. The Convertible
Notes are convertible into cash, shares of our common stock or a combination of cash and shares of our common stock, at our election in
the manner and subject to the terms and conditions provided in the indenture (the “Indenture”) governing the Convertible Notes.
The initial conversion rate for the Convertible
Notes is approximately 47.1403 shares of our common stock per $1,000 principal amount, which represents an initial conversion price of
approximately $21.21 per share of our common stock. The conversion rate is subject to adjustments upon the occurrence of certain events
in accordance with the terms of the Indenture. In addition, following certain corporate events that occur prior to the maturity date,
we will, in certain circumstances, increase the conversion rate for a holder who elects to convert their Convertible Notes in connection
with such a fundamental change, as defined in the Indenture.
Holders of the Convertible Notes may convert their
Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding September 15, 2025,
only under the following circumstances: (1) During any fiscal quarter commencing after the fiscal quarter ending July 31, 2021, if the
last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading
days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the
conversion price on each applicable trading day; (2) During the five business day period after any five consecutive trading day period
(the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the Convertible
Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock
and the exchange rate on each such trading day; (3) If we call any or all of the Convertible Notes for redemption, at any time prior to
the close of business on the second scheduled trading day immediately preceding the redemption date; and (4) Upon the occurrence of specified
corporate events as described in the Indenture.
On or after September 15, 2025 until the close
of business on the second scheduled trading day immediately preceding the maturity date, holders at their option may convert their Convertible
Notes at any time, regardless of the foregoing circumstances.
We may not redeem the Convertible Notes prior
to March 20, 2024. On or after March 20, 2024, the Convertible Notes are redeemable for cash, whole or in part, at our option, if the
last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days
(whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and
including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100%
of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If we undergo a fundamental change (as defined
in the Indenture), holders may require us to repurchase for cash all or any portion of their Convertible Notes at a fundamental change
repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to,
but excluding the redemption date.
The Indenture contains customary terms and covenants,
including that upon certain events of default occurring and continuing, the trustee or the holders of at least 25% in aggregate principal
amount of the outstanding Convertible Notes may declare the entire principal of all the Convertible Notes plus accrued and unpaid interest
to be immediately due and payable.
As of July 31, 2022, the conditions allowing holders
of the Convertible Notes to convert had not been met and, therefore, the Convertible Notes are classified as a long-term liability on
the unaudited condensed consolidated balance sheets at July 31, 2022 and April 30, 2022.
The net carrying amount of the Convertible Notes
is as follows (in thousands):
Schedule of net carrying amount of the debt component | |
| | |
| |
| |
July 31, 2022 | | |
April 30, 2022 | |
Principal | |
$ | 143,750 | | |
$ | 143,750 | |
Unamortized issuance costs | |
| (3,913 | ) | |
| (4,173 | ) |
Net carrying amount | |
$ | 139,837 | | |
$ | 139,577 | |
As of July 31, 2022, the estimated fair value
of the Convertible Notes was approximately $163.9 million. The fair value was determined based on the last actively traded price per $100
of the Convertible Notes for the period ended July 31, 2022 (Level 2).
The following table summarizes the interest expense
recognized related to the Convertible Notes for the three months ended July 31, 2022 and 2021 (in thousands).
Schedule of interest expense | |
| | | |
| | |
| |
Three Months Ended July 31, 2022 | | |
Three Months Ended July 31, 2021 | |
Contractual interest expense | |
$ | 224 | | |
$ | 449 | |
Amortization of issuance costs | |
| 260 | | |
| 254 | |
Total interest expense | |
$ | 484 | | |
$ | 703 | |
Capped Call Transactions
In connection with the issuance of the Convertible
Notes, we entered into privately negotiated capped call transactions (the “Capped Calls”) with certain financial institution
counterparties (the “Option Counterparties”). We used $12.8 million of the net proceeds from the issuance of the Convertible
Notes to pay the cost of the Capped Calls. The Capped Calls cover, subject to customary anti-dilution adjustments, the aggregate number
of shares of our common stock that initially underlie the Convertible Notes, and are generally expected to reduce the potential dilution
of our common stock upon any conversion of the Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap,
based on the cap price of the Capped Calls. The cap share price of the Capped Calls is approximately $28.02 per share, which represents
a premium of 75% over the last reported sale price of our common stock on March 9, 2021 and is subject to certain adjustments under the
terms of the Capped Calls. However, there would nevertheless be dilution upon conversion of the Convertible Notes to the extent that such
market price exceeds the capped share price as measured under the terms of the Capped Calls.
We evaluated the Capped Calls under ASC 815-10
and determined that they should be accounted for as a separate transaction from the Convertible Notes and that the Capped Calls met the
criteria for equity classification. Therefore, the cost of $12.8 million to purchase the Capped Calls was recorded as a reduction to additional
paid-in capital in the consolidated balance sheet at April 30, 2021. The Capped Calls will not be subsequently remeasured as long as the
conditions for equity classification continue to be met. As of July 31, 2022 and April 30, 2022, there were no conversions of our Convertible
Notes, and therefore, there was no activity with respect to the Capped Calls. We believe the conditions for equity classification continue
to be met as of July 31, 2022 and April 30, 2022.
Note 4 – Leases
We currently lease certain office, manufacturing,
laboratory and warehouse space located in Orange County, California under operating lease agreements. Our leased facilities have original
lease terms ranging from 7 to 12 years, contain multi-year renewal options, and scheduled rent increases of 3% on either an annual or
biennial basis. A multi-year renewal option was included in determining the right-of-use asset and lease liability for one of our leases
as we considered it reasonably certain that we would exercise such renewal option. In addition, three 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/or are being amortized over the shorter of the estimated useful life of the improvements or the remaining life of the
lease.
Certain of our operating facility leases require
us to pay property taxes, insurance and common area maintenance. While these payments are not included as part of our lease liabilities,
they are recognized as variable lease cost in the period they are incurred.
The components of operating lease cost for the
three months ended July 31, 2022 and 2021 were as follows (in thousands):
Schedule of lease costs | |
| | | |
| | |
| |
Three Months Ended July 31, | |
| |
2022 | | |
2021 | |
Operating lease cost | |
$ | 1,083 | | |
$ | 788 | |
Variable lease cost | |
| 389 | | |
| 198 | |
Short-term lease cost | |
| 130 | | |
| 102 | |
Total operating lease cost | |
$ | 1,602 | | |
$ | 1,088 | |
We also lease certain manufacturing equipment under a 5-year finance
lease that commenced in the second quarter of fiscal year 2022. Finance lease costs were immaterial for the three months ended July 31,
2022.
`
Supplemental consolidated balance sheet and other
information related to our operating and finance leases as of July 31, 2022 and April 30, 2022 were as follows (in thousands, expect
weighted average data):
Balance sheet classification of leases | |
| |
| | | |
| | |
Leases | |
Classification | |
July 31, 2022 | | |
April 30, 2022 | |
Assets | |
| |
| | | |
| | |
Operating | |
Operating lease right-of-use assets | |
$ | 36,093 | | |
$ | 36,806 | |
Finance | |
Property and equipment, net | |
| 2,680 | | |
| 2,728 | |
Total leased assets | |
| |
$ | 38,773 | | |
$ | 39,534 | |
| |
| |
| | | |
| | |
Liabilities | |
| |
| | | |
| | |
Current: | |
| |
| | | |
| | |
Operating | |
Current portion of operating lease liabilities | |
$ | 3,152 | | |
$ | 2,969 | |
Finance | |
Other current liabilities | |
| 511 | | |
| 505 | |
Non-current: | |
| |
| | | |
| | |
Operating | |
Operating lease liabilities, less current portion | |
| 37,077 | | |
| 37,886 | |
Finance | |
Finance lease liabilities, less current portion | |
| 1,963 | | |
| 2,093 | |
Total lease liabilities | |
| |
$ | 42,703 | | |
$ | 43,453 | |
Operating and finance leases | |
| | | |
| | |
Weighted average remaining lease term (years): | |
| | | |
| | |
Operating leases | |
| 12.2 | | |
| 12.4 | |
Finance lease | |
| 4.4 | | |
| 4.7 | |
Weighted average discount rate | |
| | | |
| | |
Operating leases | |
| 3.3% | | |
| 3.3% | |
Finance lease | |
| 5.3% | | |
| 5.3% | |
Cash paid for amounts included in the measurement
of operating lease liabilities was $1.0 million and $0.8 million for the three months ended July 31, 2022 and 2021, respectively, and
is included in net cash used in operating activities in our accompanying unaudited condensed consolidated statements of cash flows. Cash
paid for amounts included in the measurement of finance lease liabilities was immaterial for the three months ended July 31, 2022.
As of July 31, 2022, the maturities of our 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):
Schedule of maturities of operating lease liabilities | |
| | | |
| | | |
| | |
Fiscal Year Ending April 30, | |
Operating Leases | | |
Finance Lease | | |
Total | |
2023 (remaining period) | |
$ | 3,316 | | |
$ | 472 | | |
$ | 3,788 | |
2024 | |
| 4,140 | | |
| 629 | | |
| 4,769 | |
2025 | |
| 4,060 | | |
| 629 | | |
| 4,689 | |
2026 | |
| 4,167 | | |
| 629 | | |
| 4,796 | |
2027 | |
| 4,199 | | |
| 419 | | |
| 4,618 | |
Thereafter | |
| 28,708 | | |
| – | | |
| 28,708 | |
Total lease payments | |
$ | 48,590 | | |
$ | 2,778 | | |
$ | 51,368 | |
Less: imputed interest | |
| (8,361 | ) | |
| (304 | ) | |
| (8,665 | ) |
Total lease liabilities | |
$ | 40,229 | | |
$ | 2,474 | | |
$ | 42,703 | |
Note
5 – Equity Compensation Plans
Stock Incentive Plans
As of July 31, 2022, we had
an aggregate of 8,665,188 shares of our common stock reserved for issuance under our stock incentive plans, of which 4,277,289 shares
were subject to outstanding stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”)
and 4,387,899 shares were available for future grants of stock-based awards.
Stock Options
The following summarizes our
stock option transaction activity for the three months ended July 31, 2022:
Schedule of stock option activity | |
| | |
| |
| |
Stock Options | | |
Grant Date Weighted Average Exercise Price | |
| |
(in thousands) | | |
| |
Outstanding at May 1, 2022 | |
| 2,505 | | |
$ | 6.88 | |
Granted | |
| – | | |
$ | – | |
Exercised | |
| (95 | ) | |
$ | 6.83 | |
Canceled or expired | |
| (22 | ) | |
$ | 9.48 | |
Outstanding at July 31, 2022 | |
| 2,388 | | |
$ | 6.86 | |
Restricted Stock Units
The following summarizes our
RSUs transaction activity for the three months ended July 31, 2022:
Schedule of RSU activity | |
| | |
| |
| |
Shares | | |
Weighted Average Grant Date
Fair Value | |
| |
(in thousands) | | |
| |
Outstanding at May 1, 2022 | |
| 642 | | |
$ | 14.89 | |
Granted | |
| 602 | | |
$ | 18.00 | |
Vested | |
| (151 | ) | |
$ | 8.19 | |
Forfeited | |
| (10 | ) | |
$ | 15.73 | |
Outstanding at July 31, 2022 | |
| 1,083 | | |
$ | 17.54 | |
Performance Stock Units
During the three months ended
July 31, 2022, the Compensation Committee of the Board of Directors granted PSUs as part of the annual grant of equity incentive awards
to our executives. The PSUs are subject to annual vesting, as to one-third of the PSUs, over our three fiscal years ending April 30, 2023,
2024 and 2025 (each a “Performance Period”) based upon our attainment of certain predetermined financial metrics for each
such Performance Period. Each PSU that vests represents the right to receive one share of our common stock. Depending on the actual financial
metrics achieved relative to the target financial metrics for such Performance Periods, the number of PSUs issued could range from 0%
to 200% of the target amount. The number of granted shares included in the table below is based on a maximum 200% achievement of each
financial metric during each Performance Period (the “Maximum Performance Target”). If a financial metric is achieved at a
rate below the Maximum Performance Target, or is not achieved, the corresponding portion of the PSUs that do not vest will be forfeited.
The following summarizes our
PSUs transaction activity for the three months ended July 31, 2022:
Schedule of PSU activity | |
| | |
| |
| |
Shares | | |
Weighted Average Grant Date
Fair Value | |
| |
(in thousands) | | |
| |
Outstanding at May 1, 2022 | |
| 233 | | |
$ | 25.31 | |
Granted | |
| 573 | | |
$ | 18.09 | |
Vested | |
| – | | |
$ | – | |
Forfeited | |
| – | | |
$ | – | |
Outstanding at July 31, 2022 | |
| 806 | | |
$ | 20.18 | |
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 six-month offering period or on the last trading day
of the six-month offering period. During the three months ended July 31, 2022, a total of 27,711 shares of our common stock were purchased
under the ESPP at a purchase price $12.97 per share. As of July 31, 2022, we had 1,004,251 shares of our common stock reserved for issuance
under the ESPP.
Stock-Based Compensation
Stock-based compensation expense for the three
months ended July 31, 2022 and 2021 was comprised of the following (in thousands):
Share-based compensation expense | |
| | | |
| | |
| |
Three Months Ended July 31, | |
| |
2022 | | |
2021 | |
Cost of revenues | |
$ | 687 | | |
$ | 468 | |
Selling, general and administrative | |
| 1,210 | | |
| 831 | |
Total | |
$ | 1,897 | | |
$ | 1,299 | |
As of July 31, 2022, the total estimated unrecognized
compensation cost related to non-vested stock options and RSUs was $2.5 million and $17.9 million, respectively. These costs are expected
to be recognized over weighted average vesting periods of 1.5 and 3.2 years, respectively.
As of July 31, 2022, there was $12.2 million of
total estimated unrecognized compensation cost related to non-vested PSUs associated with the Performance Periods ending April 30, 2023, 2024 and 2025.
These costs are expected to be recognized over the weighted average vesting period of 1.6 years, however, we will assess the likelihood of achieving the predetermined
financial metrics associated with each Performance Period on a quarterly basis and the expense recognized, if any, will be adjusted accordingly.
Note 6 – Income Taxes
We are subject to taxation in the
United States and various states jurisdictions in which we conduct our business.
Our tax provision for interim periods is determined
using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. On a quarterly basis, we update
our estimate of the annual effective tax rate, and if the estimated annual tax rate changes, we make a cumulative adjustment in that quarter.
The tax expenses recorded for the first
quarter of fiscal year 2023 differs from the U.S. federal statutory tax rate of 21% due primarily to the tax impact of state
income taxes, stock-based compensation, non-deductible officers’ compensation and transportation fringe benefits.
For the three months ended July 31, 2022, we recorded
income tax expense of $0.7 million resulting in an effective tax rate of 31%.
We have no
material uncertain tax positions as of July 31, 2022. It is our policy to recognize interest and penalties related to income tax
matters in interest expense and other income (expense), net, respectively, in our unaudited condensed consolidated statements of
operations and comprehensive income. There was no
accrued interest or penalties associated with uncertain tax positions as of July 31, 2022.
Note 7 – Net Income Per Common Share
Basic net income per common
share is computed by dividing our net income by the weighted average number of shares of common stock outstanding during the period. Diluted
net income per common share is computed by dividing our net income 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 and PSUs, shares of common stock expected
to be issued under our ESPP, and Convertible Notes.
The potential dilutive effect
of stock options, unvested RSUs and PSUs, and shares of common stock expected to be issued under our ESPP 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
Convertible Notes are calculated using the if-converted method assuming the conversion of our Convertible Notes as of the earliest period
reported or at the date of issuance, if later, but are excluded if their effect is anti-dilutive. A reconciliation of the numerators
and the denominators of the basic and dilutive net income per common share computations are as follows (in thousands, except per share
amounts):
Reconciliation of earnings per share | |
| | | |
| | |
| |
Three Months Ended July 31, | |
| |
2022 | | |
2021 | |
Numerator | |
| | | |
| | |
Net income | |
$ | 1,564 | | |
$ | 6,304 | |
Denominator | |
| | | |
| | |
Weighted average basic common shares outstanding | |
| 61,905 | | |
| 61,137 | |
Effect of dilutive securities: | |
| | | |
| | |
Stock options | |
| 1,195 | | |
| 2,008 | |
RSUs and ESPP | |
| 233 | | |
| 426 | |
Weighted average dilutive common shares outstanding | |
| 63,333 | | |
| 63,571 | |
| |
| | | |
| | |
Net Income per share: | |
| | | |
| | |
Basic | |
$ | 0.03 | | |
$ | 0.10 | |
Diluted | |
$ | 0.02 | | |
$ | 0.10 | |
The following table presents
the potential dilutive securities excluded from the calculation of diluted net income per share for the periods presented as the effect
of their inclusion would have been anti-dilutive (in thousands):
Schedule of antidilutive shares | |
| | | |
| | |
| |
Three Months Ended July 31, | |
| |
2022 | | |
2021 | |
Stock options | |
| 55 | | |
| 29 | |
RSUs and PSUs | |
| 466 | | |
| 83 | |
Convertible Notes | |
| 6,776 | | |
| 6,776 | |
Total | |
| 7,297 | | |
| 6,888 | |
Note 8 – 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.
Humanigen Arbitration
On December 17, 2021, we filed a Demand for
Arbitration claiming more than $20.5 million in damages against Humanigen, Inc. (“Humanigen”) with the American
Arbitration Association (“AAA”) entitled, Avid Bioservices, Inc. v. Humanigen, Inc. (AAA Case No. 01-21-0018-0523).
The Demand contains three claims for: (1) breach of contract concerning the process development and manufacturing master services
agreement (“MSA”); (2) anticipatory breach of contract concerning the capacity expansion and contribution/commitment
letter (“Letter Agreement”); and (3) trade libel and commercial disparagement. We claim that per the terms of the MSA
Humanigen’s cancellation triggered an obligation to pay certain fees and reimburse us for certain costs with respect to the
contracted committed manufacturing runs, which amounts remain unpaid. On January 6, 2022, Humanigen filed an Answer to our Demand,
denying the allegations and asserting affirmative defenses. On July 1, 2022, Humanigen filed its counterclaims against us in the
form of a complaint in the Orange County Superior Court (Case No. 30-2022-01268184) alleging three claims for (1) breach of the MSA
seeking return or reimbursement of the amounts Humanigen paid us before cancelling the MSA, (2) declaratory relief that Humanigen
has no remaining obligations under the Letter Agreement, and (3) unfair business practices. On July 19, 2022, we filed a motion with
the state court to compel all claims by Humanigen against us to arbitration before the AAA. On August 29, 2022, Humanigen filed a
motion with the state court to stay the arbitration and consolidate all proceedings in state court, which motion we will oppose.
While we intend to vigorously pursue this arbitration against Humanigen,
we cannot offer any assurances that we will recover any damages from Humanigen.