See accompanying notes to consolidated financial
statements.
See accompanying notes to consolidated financial
statements.
See accompanying notes to consolidated
financial statements.
See accompanying notes to consolidated financial
statements.
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 development and CGMP manufacturing
of biologics for the biotechnology and biopharmaceutical industries.
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 subsidiary.
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 subsidiary. 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 our 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, our contract manufacturing and development services segment. Accordingly, we reported our financial results
for one reportable segment. All 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 an operating
lease related to one of our facilities (Note 4), we are required to maintain a letter of credit as collateral. Accordingly, at April 30,
2022 and 2021, restricted cash of $0.350.4 million was pledged as collateral under the letter 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):
Schedule of Restricted Cash | |
| | | |
| | | |
| | |
| |
As of April 30, | |
| |
2022 | | |
2021 | | |
2020 | |
Cash and cash equivalents | |
$ | 126,166 | | |
$ | 169,915 | | |
$ | 36,262 | |
Restricted cash | |
| 350 | | |
| 350 | | |
| 350 | |
Total cash, cash equivalents and restricted cash | |
$ | 126,516 | | |
$ | 170,265 | | |
$ | 36,612 | |
Revenue Recognition
We recognize revenue in accordance with the authoritative
guidance of ASC 606, Revenue from Contracts with Customers. 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 to 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 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.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table summarizes our manufacturing and process development revenue streams (in thousands):
Disaggregation of revenue | |
| | | |
| | | |
| | |
| |
Fiscal Year Ended April 30, | |
| |
2022 | | |
2021 | | |
2020 | |
Manufacturing revenues | |
$ | 99,282 | | |
$ | 83,678 | | |
$ | 52,046 | |
Process development revenues | |
| 20,315 | | |
| 12,190 | | |
| 7,656 | |
Total revenues | |
$ | 119,597 | | |
$ | 95,868 | | |
$ | 59,702 | |
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, 2022
and 2021, we recognized revenue of $34.0
million and $27.3
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.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
During the fiscal year ended April 30, 2022, changes
in estimates for variable consideration resulted in a decrease in revenues of $14.7 million. These changes in estimates for variable consideration
can primarily be attributed to a dispute with a customer over the payment of certain cancellation fees due to us under the terms of the
related customer contract which resulted in a decrease in revenues of $11.7 million for the fiscal year ended April 30, 2022. We believe
we have a contractual right to the disputed amount, but as this contractual right is being disputed and therefore may be uncollectible,
we have not recorded revenue associated with the disputed amount.
During the fiscal years ended April 30, 2021 and
2020, changes in estimates for variable consideration resulted in an increase in revenues of $1.1 million and a decrease in revenues of
$1.5 million, respectively.
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, 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
consolidated statements of operations and comprehensive income (loss).
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 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
balance as of April 30, 2022, we determined an allowance for doubtful accounts of $18.4 million was deemed necessary, which 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.
Based on our analysis of our accounts receivable
balance as of April 30, 2021, we determined no allowance for doubtful accounts was necessary.
Concentrations of Credit
Risk and Customer Base
Financial instruments that potentially subject
us to concentrations of credit risk consist of cash and cash equivalents, accounts receivable, net and contract assets. As of April 30,
2022 and 2021, we maintain our cash balances primarily with one and two major commercial banks, respectively, and our deposits held with
the banks 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 banks 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 services provided under customer contracts are derived from a limited number of customers. Most customer 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,
2022 and 2021, approximately 84% and 98%, respectively, of our accounts receivable, net were due from six customers. Our contract assets
are reclassified to accounts receivable when our rights to consideration become unconditional. At April 30, 2022 and 2021, approximately
88% and 97%, respectively, of our contract assets were attributable to six customers.
Our revenues are derived from
a limited number of customers. 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.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2022, 2021
and 2020:
Concentration of revenues | |
| |
| | | |
| | | |
| | |
Customer | |
Geographic Location | |
2022 | | |
2021 | | |
2020 | |
| |
| |
| | |
| | |
| |
Halozyme Therapeutics, Inc.(1) | |
U.S. | |
| 41 | % | |
| 51 | % | |
| 28 | % |
IGM Biosciences, Inc. | |
U.S. | |
| 11 | | |
| * | | |
| 11 | |
Gilead Sciences, Inc. | |
U.S. | |
| * | | |
| 16 | | |
| 24 | |
Acumen Pharmaceuticals, Inc. | |
U.S. | |
| * | | |
| * | | |
| 11 | |
Coherus BioSciences, Inc. | |
U.S. | |
| * | | |
| * | | |
| 10 | |
______________
| (1) | Revenues are derived from the manufacture of multiple therapeutics
that our customer uses in various products and product candidates. |
| * | Represents a percentage less than 10% of our total revenues. |
We attribute revenue to the individual countries
where the customer is headquartered. Revenues derived from U.S. based customers were approximately 100% for fiscal years ended April 30,
2022 and 2021 and approximately 99% for the fiscal year ended April 30, 2020.
Leases
We account for our leases in accordance with the
authoritative guidance of ASC 842, 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 are 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.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 fiscal year ended April 30, 2022. No interest was capitalized for the fiscal year ended April 30, 2021. 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 | |
| | | |
| | |
| |
April 30, | |
| |
2022 | | |
2021 | |
Leasehold improvements | |
$ | 37,345 | | |
$ | 23,000 | |
Laboratory and manufacturing equipment | |
| 30,089 | | |
| 20,793 | |
Computer equipment and software | |
| 5,326 | | |
| 5,541 | |
Furniture, fixtures and office equipment | |
| 843 | | |
| 843 | |
Construction-in-progress | |
| 43,809 | | |
| 8,372 | |
Total property and equipment, gross | |
| 117,412 | | |
| 58,549 | |
Less: accumulated depreciation and amortization | |
| (24,457 | ) | |
| (21,094 | ) |
Total property and equipment, net | |
$ | 92,955 | | |
$ | 37,455 | |
Depreciation and
amortization expense for the fiscal years ended April 30, 2022, 2021 and 2020 was 4,480$4.5
million, 3,453$3.5
million and 3,091$3.1
million, respectively.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Capitalized Software Implementation
Costs
We capitalize certain
implementation costs incurred under cloud computing hosting arrangements. Costs incurred during the application development stage
related to the implementation of the hosting arrangement are capitalized and included within other assets on the accompanying
consolidated balance sheets. Amortization of capitalized implementation costs is recognized on a straight-line basis over the term
of the associated hosting arrangement when it is ready for its intended use. Costs related to preliminary project activities and
post-implementation activities are expensed as incurred. As of April 30, 2022 and 2021, we had capitalized software implementation
costs of $3.5
million and $0.9
million, respectively.
Impairment
Long-lived assets are reviewed for impairment
in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events or
changes in circumstances 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 fiscal years ended April 30, 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 April 30, 2022.
Fair Value of Financial Instruments
The carrying amounts in the
accompanying consolidated balance sheets for cash and cash equivalents, restricted cash, accounts receivable, net, accounts payable and
accrued liabilities 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, 2022 and 2021,
we did not have any Level 2 or Level 3 financial assets and our cash equivalents of $116.3 million and $158.8 million, respectively, were
invested in money market funds with one and two major commercial banks, respectively, and carried at fair value based on quoted market
prices for identical securities (Level 1 inputs). 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. Refer to Note 3, Debt, of the notes to the consolidated financial
statements for further details. We did not have any other Level 2 or Level 3 financial liabilities as of April 30, 2022 and 2021.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 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 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 Discount and Issuance Costs
Debt discount and issuance costs related to convertible
senior notes are recorded as deductions that net against the principal value of the debt and are amortized to interest expense over the
contractual term of the debt using the effective interest method (Note 3). Upon the adoption of ASU 2020-06 on May 1, 2021, the unamortized
debt discount balance was derecognized as of the adoption date (Note 2).
Advertising Costs
Advertising costs are expensed as incurred and included in selling,
general and administrative expenses in the consolidated statements of operations and comprehensive income (loss). For the fiscal years
ended April 30, 2022, 2021 and 2020, advertising costs were $0.6 million, $0.3 million, and $0.2 million, respectively.
Income Taxes
We utilize the liability method of
accounting for income taxes in accordance with 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. We provide a valuation allowance when it is more likely than not that our deferred tax assets will not be realized. On a
periodic basis, we reassess the valuation allowance on our deferred tax assets, weighing positive and negative evidence to assess
the recoverability of the deferred tax assets. In the fourth quarter of fiscal 2022, we reassessed the valuation allowance noting
the shift of positive evidence outweighing negative evidence, including significant revenue growth, continued profitability, and
expectations regarding future profitability. After assessing both the positive evidence and negative evidence, we determined it was
more likely than not that our deferred tax assets would be realized and therefore released our valuation allowance related to
federal and state deferred tax assets as of April 30, 2022, resulting in a benefit from income taxes of $115.0
million.
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.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Comprehensive Income (Loss)
Comprehensive income (loss) is the change in equity
during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) is equal to our
net income (loss) for all periods presented.
Recently Adopted Accounting Standards
In December 2019, the Financial Accounting Standards
Board (“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. We adopted ASU 2019-12 on May 1, 2021, and the adoption of this standard did not have a material impact on our consolidated
financial statements.
In August 2020, the FASB issued ASU No. 2020-06,
Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic
815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The
amendments in this ASU will eliminate the beneficial conversion and cash conversion accounting models for convertible instruments, as
well as, amend the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because
of specific settlement provisions. The ASU will also modify how particular convertible instruments and certain contracts that may be settled
in cash or shares impact the diluted earnings per share calculation. ASU 2020-06 is effective for public companies for fiscal years, and
interim periods within those years, beginning after December 15, 2021, which will be our fiscal year 2023 beginning May 1, 2022. Early
adoption is permitted.
We elected to early adopt ASU 2020-06 on May 1,
2021, using a modified retrospective transition method. Under this transition method, prior period financial information and disclosures
are not adjusted and continue to be reported under the accounting standards that were in effect prior to our adoption of ASU 2020-06.
The adoption of ASU 2020-06
resulted in the re-combination of the debt and equity components of our convertible senior notes (Note 3) into a single debt instrument,
which resulted in a $42.4 million decrease in additional paid-in capital from the derecognition of the bifurcated equity component, a
$41.6 million increase in convertible senior notes from the derecognition of the discount associated with the bifurcated equity component,
or debt discount, and $0.8 million decrease to the opening balance of accumulated deficit, representing the cumulative non-cash interest
expense recognized related to the amortization of the debt discount associated with the bifurcated equity component of our convertible
senior notes. The adoption of this standard also reduces the non-cash interest expense recognized in future periods due to the derecognition
of the debt discount associated with the bifurcated equity component of our convertible senior notes. When calculating net income per
share of common stock attributable to common stockholders, we use the if-converted method as required under ASU 2020-06 to determine the
dilutive effect of our convertible senior notes.
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.
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 consolidated financial statements.
AVID BIOSERVICES, INC.
NOTES
TO 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, beginning
on September 15, 2021. 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.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 April 30, 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 consolidated balance sheets at April 30, 2022 and 2021.
In accounting for the issuance of the Convertible
Notes, prior to the adoption of ASU 2020-06, we separated the Convertible Notes into debt and equity components. The carrying amount of
the debt component on the date of the issuance was $99.7 million and was determined based on a binomial lattice model, which yielded an
effective discount rate of 8.78% and was derived with the assistance of a third-party valuation. The equity component was allocated a
value of $44.1 million, representing the difference between the par value of the Convertible Notes and the fair value of the debt component.
The equity component was not remeasured as long as it continued to meet the conditions for equity classification, and the equity component
was recorded as additional paid-in capital within stockholders’ equity on the consolidated balance sheet at April 30, 2021. The
difference between the principal amount of the Convertible Notes and the debt component, or the debt discount, was amortized to interest
expense using the effective interest method over the contractual term of the Convertible Notes.
In accounting for the issuance costs related to
the Convertible Notes, prior to the adoption of ASU 2020-06, we allocated the total amount incurred to the debt and equity components
of the Convertible Notes based on their relative values. Issuance costs attributable to the debt component were $3.7 million and are being
amortized to interest expense using the effective interest method over the contractual term of the Convertible Notes. Issuance costs attributable
to the equity component were $1.6 million and were netted with the equity component in additional paid-in capital within stockholders’
equity on the consolidated balance sheet at April 30, 2021.
On May 1, 2021, we elected to early adopt ASU
2020-06 using the modified retrospective transition method. Under such transition method, prior period financial information and disclosures
are not adjusted and continue to be reported under the accounting standards that were in effect prior to our adoption of ASU 2020-06.
The adoption of ASU 2020-06 resulted in the re-combination
of the debt and equity components of the Convertible Notes into a single debt instrument, which resulted in a $42.4 million decrease in
additional paid-in capital from the derecognition of the bifurcated equity component, a $41.6 million increase in convertible senior notes,
net from the derecognition of the discount associated with the bifurcated equity component, or debt discount, and $0.8 million decrease
to the May 1, 2021 opening balance of accumulated deficit, representing the cumulative non-cash interest expense recognized related to
the amortization of the debt discount associated with the bifurcated equity component of the Convertible Notes. Additionally, we derecognized
the allocation of the issuance costs to the equity component and all issuance costs related to the Convertible Notes are being amortized
to interest expense using the effective interest method over the contractual term of the Convertible Notes which is included in the cumulative
adjustment to the opening balance of accumulated deficit.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The net carrying amount of the Convertible Notes
is as follows (in thousands):
Schedule of net carrying amount of the debt component | |
| | | |
| | |
| |
April 30, 2022 | | |
April 30, 2021 | |
Principal | |
$ | 143,750 | | |
$ | 143,750 | |
Unamortized debt discount (1) | |
| – | | |
| (43,189 | ) |
Unamortized issuance costs | |
| (4,173 | ) | |
| (3,612 | ) |
Net carrying amount | |
$ | 139,577 | | |
$ | 96,949 | |
The net carrying amount of the equity component
of the Convertible Notes is as follows (in thousands):
Schedule of net carrying amount of the equity component | |
| | | |
| | |
| |
April 30, 2022 | | |
April 30, 2021 | |
Equity component (debt discount) | |
$ | – | | |
$ | 44,051 | |
Issuance costs | |
| – | | |
| (1,620 | ) |
Net carrying amount (1) | |
$ | – | | |
$ | 42,431 | |
________________
| (1) | As discussed above, the adoption of ASU 2020-06 on May 1, 2021 resulted in the re-combination of the debt
and equity components of the Convertible Notes into a single debt instrument. Accordingly, the unamortized debt discount balance and the
net carrying amount of the equity component were derecognized. |
As of April 30, 2022, the estimated fair value
of the Convertible Notes was approximately $167.1 million. The fair value was determined based on the last actively traded price per $100
of the Convertible Notes for the period ended April 30, 2022 (Level 2).
The following table summarizes the interest expense
recognized related to the Convertible Notes for the fiscal years ended April 30, 2022 and 2021 (in thousands).
Schedule of Interest expense | |
| | | |
| | |
| |
Year Ended April 30, 2022 | | |
Year Ended April 30, 2021 | |
Contractual interest expense | |
$ | 1,603 | | |
$ | 245 | |
Amortization of debt discount | |
| – | | |
| 862 | |
Amortization of issuance costs | |
| 1,030 | | |
| 54 | |
Total interest expense | |
$ | 2,633 | | |
$ | 1,161 | |
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 $12,83712.8
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. During fiscal years 2022 and 2021, 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 April 30, 2022 and 2021.
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.
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 $0.3550.4 million, which amount is included in loss on lease termination in the consolidated statements of operations
and comprehensive income (loss) for the fiscal year ended April 30, 2020.
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.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The components of operating
lease costs for the fiscal years ended April 30, 2022, 2021 and 2020, were as follows (in thousands):
Schedule of lease costs | |
| | | |
| | | |
| | |
| |
Fiscal Year Ended April 30, | |
| |
2022 | | |
2021 | | |
2020 | |
Operating lease cost | |
$ | 3,872 | | |
$ | 3,151 | | |
$ | 3,339 | |
Variable lease cost | |
| 944 | | |
| 676 | | |
| 603 | |
Short-term lease cost | |
| 515 | | |
| 388 | | |
| 171 | |
Total operating lease cost | |
$ | 5,331 | | |
$ | 4,215 | | |
$ | 4,113 | |
We also lease certain manufacturing equipment
under a 5-year finance lease that commenced in October 2021. Finance lease costs were immaterial for the fiscal years ended April 30,
2022, 2021 and 2020.
Supplemental consolidated balance sheet and other
information related to our operating and finance leases as of April 30, 2022 and 2021 were as follows (in thousands, expect weighted
average data):
Balance sheet classification of operating lease liabilities | |
| |
| | | |
| | |
| |
| |
April 30, | |
Leases | |
Classification | |
2022 | | |
2021 | |
Assets | |
| |
| | |
| |
Operating | |
Operating lease right-of-use assets | |
$ | 36,806 | | |
$ | 18,691 | |
Finance | |
Property and equipment, net | |
| 2,728 | | |
| – | |
Total leased assets | |
| |
$ | 39,534 | | |
$ | 18,691 | |
| |
| |
| | | |
| | |
Liabilities | |
| |
| | | |
| | |
Current: | |
| |
| | | |
| | |
Operating | |
Current portion of operating lease liabilities | |
$ | 2,969 | | |
$ | 1,355 | |
Finance | |
Other current liabilities | |
| 505 | | |
| – | |
Non-current: | |
| |
| | | |
| | |
Operating | |
Operating lease liabilities, less current portion | |
| 37,886 | | |
| 19,889 | |
Finance | |
Finance lease liabilities, less current portion | |
| 2,093 | | |
| – | |
Total lease liabilities | |
| |
$ | 43,453 | | |
$ | 21,244 | |
Weighted average remaining lease term (years): | |
| | |
| |
Operating leases | |
| 12.4 | | |
| 9.6 | |
Finance lease | |
| 4.7 | | |
| – | |
Weighted average discount rate | |
| | | |
| | |
Operating leases | |
| 3.3% | | |
| 8.0% | |
Finance lease | |
| 5.3% | | |
| – | |
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Cash paid for amounts included in the measurement
of operating lease liabilities for the fiscal years ended April 30, 2022, 2021 and 2020 was $2.4 million, $3.0 million and $3.1 million,
respectively, and is included in net cash used in operating activities in our consolidated statements of cash flows. Cash paid for amounts
included in the measurement of finance lease liabilities was immaterial for the fiscal years ended April 30, 2022, 2021 and 2020.
As of April 30, 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 | |
$ | 4,279 | | |
$ | 629 | | |
$ | 4,908 | |
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 | |
| 28,709 | | |
| – | | |
| 28,709 | |
Total lease payments | |
$ | 49,554 | | |
$ | 2,935 | | |
$ | 52,489 | |
Less: imputed interest | |
| (8,699 | ) | |
| (337 | ) | |
| (9,036 | ) |
Total lease liabilities | |
$ | 40,855 | | |
$ | 2,598 | | |
$ | 43,453 | |
Note 5 – Stockholders’ Equity
Series E Preferred Stock
Redemption and Dividends
During the fourth quarter of fiscal 2021 and prior
to the redemption discussed below, holders of our 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”)
converted an aggregate of 28,168 shares of Series E Preferred Stock into 33,514 shares of our common stock determined by dividing the
liquidation amount of $25.00 per share by the conversion price of $21.00 per share, rounded down to the nearest whole number.
On April 12, 2021 (the “Redemption
Date”), we redeemed all then current remaining outstanding shares of our Series E Preferred Stock at a per share price equal to
the $25.00 liquidation amount plus accrued and unpaid dividends up to, but excluding, the Redemption Date. In connection with the completed
redemption, we incurred a charge of $3.4 million related to the excess of the redemption value paid upon redemption over the carrying
value of our Series E Preferred Stock which is included in impact of preferred stock redemption in the consolidated statements of operations
and comprehensive income (loss) for the fiscal year ended April 30, 2021. As a result of the completed redemption, our Series E Preferred
Stock is no longer issued and outstanding.
Holders of our Series E Preferred
Stock were 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 were payable quarterly in cash, on or about the first day of each January, April, July, and
October. In addition, in April 2021, accrued and unpaid dividends of $0.08021 per share was paid to holders of Series E Preferred Stock
in connection with the redemption of our Series E Preferred Stock discussed above. For the fiscal years ended April 30, 2021 and 2020,
we paid aggregate cash dividends of $4.5 million and $4.3 million, respectively for issued and outstanding shares of our Series E Preferred
Stock. No cash dividend amounts were paid for the fiscal year ended April 30, 2022.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Sale
of Common Stock
In December 2020, we completed
an underwritten public offering pursuant to which we sold 3,833,335 shares of our common stock at the public offering price of $9.00 per
share, including 500,000 shares sold pursuant to the underwriters’ full exercise of their option to purchase additional shares.
The aggregate gross proceeds we received from the public offering were $34.5 million, before deducting underwriting discounts and commissions
and other offering related expenses of $2.4 million.
During the fiscal years ended
April 30, 2022 and 2020, we had no offerings of our common stock.
Shares of Common Stock Authorized and Reserved
for Future Issuance
As of April 30, 2022, 61,807,261
shares of our common stock were issued and outstanding.
Our common stock outstanding
as of April 30, 2022 excluded the following shares of common stock reserved for future issuance (in thousands):
Schedule of common stock reserved for future issuance | |
| | |
| |
Shares | |
Stock Incentive Plans | |
| 9,028 | |
Employee Stock Purchase Plan | |
| 1,032 | |
Conversion of Convertible Notes | |
| 6,776 | |
Total common stock reserved for future issuance | |
| |
Note
6 – Equity Compensation 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, performance 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 continue to 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 automatically become available for issuance under the 2018 Plan. In October 2021, our stockholders approved an amendment
to the 2018 Plan to increase the number of authorized shares reserved for issuance under the 2018 plan by 3.4 million shares.
The 2018 Plan and the Prior
Plans are collectively referred to as the “Stock Plans”. As of April 30, 2022, we had an aggregate of 9,027,886 shares of
our common stock reserved for issuance under the Stock Plans, of which 3,496,494 shares were subject to outstanding stock options, restricted
stock units and performance stock units and 5,531,392 shares were available for future grants of stock-based awards.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 over a four-year period from 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 granted under the 2018 Plan 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 is 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 were as follows:
Fair value assumptions for options | |
| | | |
| | | |
| | |
| |
Fiscal Year Ended April 30, | |
| |
2022 | | |
2021 | | |
2020 | |
Risk-free interest rate | |
| 0.86% | | |
| 0.32% | | |
| 1.86% | |
Expected life (in years) | |
| 4.37 | | |
| 4.69 | | |
| 5.06 | |
Expected volatility | |
| 68.64% | | |
| 81.42% | | |
| 77.45% | |
Expected dividend yield | |
| – | | |
| – | | |
| – | |
The following summarizes our stock option transaction
activity for the fiscal year ended April 30, 2022:
Schedule of stock option activity | |
| | | |
| | | |
| | | |
| | |
| |
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, 2021 | |
| 3,130 | | |
$ | 6.56 | | |
| | | |
| | |
Granted | |
| 35 | | |
$ | 24.42 | | |
| | | |
| | |
Exercised | |
| (470 | ) | |
$ | 5.80 | | |
| | | |
| | |
Canceled or expired | |
| (190 | ) | |
$ | 7.64 | | |
| | | |
| | |
Outstanding at April 30, 2022 | |
| 2,505 | | |
$ | 6.88 | | |
| 4.48 | | |
$ | 16,934 | |
Vested and expected to vest | |
| 2,505 | | |
$ | 6.88 | | |
| 4.48 | | |
$ | 16,934 | |
Exercisable at April 30, 2022 | |
| 1,536 | | |
$ | 6.70 | | |
| 4.15 | | |
$ | 10,432 | |
______________
| (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 29, 2022 (the last trading day of fiscal year 2022), which was $13.46 per share. |
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average grant date fair value of
options granted during the fiscal years ended April 30, 2022, 2021 and 2020 was $13.09, $4.74 and $3.74 per share, respectively.
The aggregate intrinsic value
of stock options exercised during the fiscal years ended April 30, 2022, 2021 and 2020 was $8.1 million, $3.9 million and $0.7 million,
respectively. Cash received from stock options exercised during fiscal years ended April 30, 2022, 2021 and 2020 totaled $2.7 million,
$3.6 million and $0.9 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, 2022, the total
estimated unrecognized compensation cost related to non-vested stock options was $3.0 million. This cost is expected to be recognized
over a weighted average vesting period of 1.74 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 such unit. RSUs granted to employees generally vest
over a four-year period from the date of grant and RSUs granted to non-employee directors generally vest over a period of one to three
years from 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.
The following summarizes our
RSUs transaction activity for the fiscal year ended April 30, 2022:
Schedule of RSU activity | |
| | | |
| | |
| |
Shares (in thousands) | | |
Weighted Average Grant Date Fair Value | |
Outstanding at May 1, 2021 | |
| 560 | | |
$ | 6.52 | |
Granted | |
| 360 | | |
$ | 25.20 | |
Vested | |
| (224 | ) | |
$ | 10.33 | |
Forfeited | |
| (54 | ) | |
$ | 15.87 | |
Outstanding at April 30, 2022 | |
| 642 | | |
$ | 14.89 | |
The weighted-average grant date
fair value of RSUs granted during the fiscal years ended April 30, 2022, 2021 and 2020 was $25.20, $7.29 and $5.91 per share, respectively.
The total fair value of RSUs
vested during the fiscal years ended April 30, 2022, 2021 and 2020 was $5.5 million, $0.7 million and $0.3 million, respectively.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
As of April 30, 2022, the total
estimated unrecognized compensation cost related to non-vested RSUs was $8.3 million. This cost is expected to be recognized over a weighted
average vesting period of 2.34 years.
Performance Stock Units
During the fiscal year ended
April 30, 2022, the Compensation Committee of the Board of Directors granted performance stock units (“PSUs”) to our officers.
The PSUs are subject to annual vesting, as to one-third of the PSUs, over our three fiscal years ending April 30, 2022, 2023 and 2024
(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”). In the event that 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 estimated
fair value of PSUs is based on the closing market value of our common stock on the date of grant.
The following summarizes our
PSUs transaction activity for the fiscal year ended April 30, 2022:
Schedule of PSU activity | |
| | | |
| | |
| |
Shares | | |
Weighted Average
Grant Date
Fair Value | |
| |
| (in thousands) | | |
| | |
Outstanding at May 1, 2021 | |
| – | | |
$ | – | |
Granted | |
| 380 | | |
$ | 25.36 | |
Vested | |
| (84 | ) | |
$ | 25.31 | |
Forfeited | |
| (63 | ) | |
$ | 25.66 | |
Outstanding at April 30, 2022 | |
| 233 | | |
$ | 25.31 | |
The weighted-average grant date
fair value of PSUs granted during the fiscal year ended April 30, 2022, was $25.36 per share. There were no PSUs granted during the fiscal
years ended April 30, 2021 and 2020.
The total fair value of PSUs
vested during the fiscal year ended April 30, 2022 was $2.1 million. No PSUs vested during the fiscal years ended April 30, 2021 and 2020.
As
of April 30, 2022, there was $5.9 million of total estimated unrecognized compensation cost related to non-vested PSUs associated with
the Performance Periods ending April 30, 2023 and 2024 based on the Maximum Performance Target achievement of each financial metric
during such Performance Periods. This cost is expected to be recognized over a weighted average vesting period of 1.5 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.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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. In October 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, 2022, 2021 and 2020, a total of 44,364, 72,409 and 47,526 shares of our common stock were purchased, respectively, under the
ESPP at a weighted average purchase price per share of $14.50, $5.84 and $3.94, respectively. As of April 30, 2022, we had 1,031,962 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).
The weighted average grant date fair value of purchase
rights under the ESPP during fiscal years ended April 30, 2022, 2021 and 2020 was $8.62,
$3.17
and $1.81,
respectively, based on the following weighted-average Black-Scholes option valuation model inputs:
ESPP Fair value assumptions | |
| | | |
| | | |
| | |
| |
Fiscal Year Ended April 30, | |
| |
2022 | | |
2021 | | |
2020 | |
Risk-free interest rate | |
| 0.15% | | |
| 0.14% | | |
| 2.08% | |
Expected life (in years) | |
| 0.50 | | |
| 0.50 | | |
| 0.50 | |
Expected volatility | |
| 59.91% | | |
| 75.50% | | |
| 56.71% | |
Expected dividend yield | |
| – | | |
| – | | |
| – | |
Stock-based
Compensation Expense
Stock-based compensation expense
included in our consolidated statements of operations and comprehensive income (loss) was comprised of the following (in thousands):
Share-based compensation expense | |
| | | |
| | | |
| | |
| |
Fiscal Year Ended April 30, | |
| |
2022 | | |
2021 | | |
2020 | |
Cost of revenues | |
$ | 2,540 | | |
$ | 1,404 | | |
$ | 922 | |
Selling, general and administrative expense | |
| 4,840 | | |
| 2,450 | | |
| 1,577 | |
Total | |
$ | 7,380 | | |
$ | 3,854 | | |
$ | 2,499 | |
Due to the utilization of our
tax carryforward attributes, no tax benefits have been recognized in the consolidated statements of cash flows.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 – Income Taxes
Deferred income tax assets and
liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting and tax
bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which those temporary differences are
expected to be recovered or settled. A valuation allowance is provided for the amount of deferred tax assets that, based on available
evidence, are not expected to be realized.
At April 30, 2022,
management assessed the realizability of deferred tax assets and evaluated the need for a valuation allowance for deferred tax
assets on a jurisdictional basis. This evaluation utilizes the framework contained in ASC 740 wherein management analyzes all
positive and negative evidence available at the balance sheet date to determine whether all or some portion of our deferred tax
assets will not be realized. Under this guidance, a valuation allowance must be established for deferred tax assets when it is
more-likely-than-not that the asset will not be realized. In assessing the realization of our deferred tax assets, management
considers all available evidence, both positive and negative. Management’s evaluation placed significant emphasis on guidance
in ASC 740, which states that “a cumulative loss in recent years is a significant piece of negative evidence that is difficult
to overcome.” As of April 30, 2022, we have transitioned from a cumulative loss in recent years to cumulative income. This
transition coupled with additional positive evidence enabled us to fully release our valuation allowance.
The valuation allowance
decreased by $111.4
million and $6.7
million for the fiscal years ended April 30, 2022 and 2021, respectively. $122.7
million was released through our consolidated statements of operations and comprehensive income (loss) for the fiscal year ended
April 30, 2022 and $(11.3)
million was recognized related to the valuation adjustments for the adoption of ASU 2020-06, which was reflected as an adjustment to
our opening consolidated balance sheet on May 1, 2022.
We are subject to taxation in
the United States and various states jurisdictions. We have not been notified that we are under audit by the IRS or any state taxing authorities
and our federal and state returns from April 30, 2019 and April 30, 2018, respectively, remain open for examination. Due to the presence
of net operating loss net operating loss (“NOL”) carryforwards the tax authorities can also examine prior year returns.
At April 30, 2022, we had federal
NOL carry forwards of approximately $383.7 million. The federal NOL carry forwards generated prior to January 1, 2018 expire in fiscal
years 2024 through 2038, unless previously utilized. The federal NOL generated after January 1, 2018 of $19.6 million can be carried forward
indefinitely. Utilization of NOLs generated subsequent to 2020 are limited to 80% of future taxable income. We also have California state
NOL carry forwards of approximately $312.2 million at April 30, 2022, which begin to expire in fiscal year 2023. We also have other state
NOL carry forwards of approximately $0.3 million at April 30, 2022, which begin to expire in fiscal year 2037.
Additionally, the future utilization
of our NOL 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. A Section 382 analysis has been completed through April 30, 2022, and it was determined that no
significant change in ownership had occurred. However, ownership changes occurring subsequent to April 30, 2022 may impact the utilization
of NOL carry forwards and other tax attributes in future periods.
At April 30, 2022, we had $5.8
million and $1.5 million of federal and California research and development credit carry forwards. The California research credits do
not expire and the federal credits begin to expire in fiscal year 2026.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The provision for income taxes
on our net income (loss) before income taxes for the fiscal years ended April 30, 2022, 2021 and 2020 is comprised of the following (in
thousands):
Provision for income taxes | |
| | | |
| | | |
| | |
| |
2022 | | |
2021 | | |
2020 | |
Federal income taxes at statutory rate | |
$ | 2,659 | | |
$ | 2,355 | | |
$ | (2,197 | ) |
State income taxes, net of valuation allowance | |
| 605 | | |
| – | | |
| – | |
Expiration and adjustments of deferred tax assets | |
| – | | |
| 451 | | |
| 2,588 | |
Change in federal valuation allowance | |
| (122,703 | ) | |
| 2,450 | | |
| (1,664 | ) |
Stock-based compensation | |
| (1,153 | ) | |
| (240 | ) | |
| 1,138 | |
Research and development credits | |
| – | | |
| (4,958 | ) | |
| – | |
Adjustment for federal benefit of state | |
| 5,326 | | |
| – | | |
| – | |
Other, net | |
| 255 | | |
| (58 | ) | |
| 135 | |
Income tax expense (benefit) | |
$ | (115,011 | ) | |
$ | – | | |
$ | – | |
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, 2022 and 2021 are as
follows (in thousands):
Deferred income taxes | |
| | | |
| | |
| |
2022 | | |
2021 | |
Net operating losses | |
$ | 99,710 | | |
$ | 109,663 | |
Research and development credits | |
| 5,550 | | |
| 7,566 | |
Stock-based compensation | |
| 2,710 | | |
| 2,776 | |
Deferred revenue | |
| 5,494 | | |
| 1,086 | |
Lease liabilities | |
| 11,107 | | |
| 6,260 | |
Debt issuance costs | |
| – | | |
| 470 | |
Accrued liabilities and other | |
| 785 | | |
| 942 | |
Accrued compensation | |
| 1,705 | | |
| 2,263 | |
Total deferred tax assets | |
| 127,061 | | |
| 131,026 | |
Less valuation allowance | |
| – | | |
| (111,388 | ) |
Total deferred tax assets, net of valuation allowance | |
| 127,061 | | |
| 19,638 | |
Deferred tax liabilities: | |
| | | |
| | |
Fixed assets | |
| (1,972 | ) | |
| (1,404 | ) |
ROU assets | |
| (10,007 | ) | |
| (5,508 | ) |
Beneficial conversion feature | |
| – | | |
| (12,726 | ) |
Total deferred tax liabilities | |
| (11,979 | ) | |
| (19,638 | ) |
Net deferred tax assets | |
$ | 115,082 | | |
$ | – | |
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. Unrecognized tax positions at April 30, 2022 and 2021 are as follows
(in thousands):
Schedule of unrecognized tax positions | |
| | | |
| | |
| |
2022 | | |
2021 | |
Unrecognized tax positions, beginning of year | |
$ | 1,600 | | |
$ | – | |
Gross increase – prior period tax positions | |
| 3,553 | | |
| 1,600 | |
Unrecognized tax positions, end of year | |
$ | 5,133 | | |
$ | 1,600 | |
If recognized, the unrecognized tax positions
will impact our income tax benefit or effective tax rate. We do not expect any significant increases or decreases to our unrecognized
tax positions within the next 12 months.
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 consolidated statements of operations
and comprehensive income (loss). For the fiscal year ended April 30, 2022, we recognized an immaterial amount of interest and penalties.
For the fiscal years ended April 30, 2021 and 2020, we did not incur any interest or penalties.
Note 8 – Net Income
(Loss) Per Common Share
Basic net income (loss) per
common share is computed by dividing our net income (loss) attributable to common stockholders by the weighted average number of shares
of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing our net income (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 and PSUs, shares of common stock expected to be issued under our
ESPP, Convertible Notes and Series E Preferred Stock outstanding during the period.
Net income attributable to common
stockholders represents our net income less Series E Preferred Stock accumulated dividends and impact of Series E Preferred Stock redemption.
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 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 and Series E Preferred Stock outstanding during the period are calculated using the if-converted method assuming the
conversion of our Convertible Notes and 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. A reconciliation of the numerators and the denominators of the basic and dilutive net
income (loss) per common share computations are as follows (in thousands, expect per share amounts):
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Schedule of earnings per share, basic and diluted | |
| | | |
| | | |
| | |
| |
Fiscal Year Ended April 30, | |
| |
2022 | | |
2021 | | |
2020 | |
Numerator | |
| | |
| | |
| |
Net income (loss) | |
$ | 127,672 | | |
$ | 11,212 | | |
$ | (10,466 | ) |
Series E preferred stock accumulated dividends | |
| – | | |
| (4,455 | ) | |
| (4,686 | ) |
Impact of Series E preferred stock redemption | |
| – | | |
| (3,439 | ) | |
| – | |
Net income (loss) attributable to common stockholders, basic | |
$ | 127,672 | | |
$ | 3,318 | | |
$ | (15,152 | ) |
Add interest expense on Convertible Notes, net of tax | |
| 1,954 | | |
| – | | |
| – | |
Net income (loss) attributable to common stockholders, diluted | |
$ | 129,626 | | |
$ | 3,318 | | |
$ | (15,152 | ) |
Denominator | |
| | | |
| | | |
| | |
Weighted average basic common shares outstanding | |
| 61,484 | | |
| 58,222 | | |
| 56,326 | |
Effect of dilutive securities: | |
| | | |
| | | |
| | |
Stock options | |
| 1,830 | | |
| 909 | | |
| – | |
RSUs, PSUs and ESPP | |
| 384 | | |
| 295 | | |
| – | |
Convertible Notes | |
| 6,776 | | |
| – | | |
| – | |
Weighted average dilutive
common shares outstanding | |
| 70,474 | | |
| 59,426 | | |
| 56,326 | |
| |
| | | |
| | | |
| | |
Net income (loss) per share attributable to common stockholders: | |
| | | |
| | | |
| | |
Basic | |
$ | 2.08 | | |
$ | 0.06 | | |
$ | (0.27 | ) |
Diluted | |
$ | 1.84 | | |
$ | 0.06 | | |
$ | (0.27 | ) |
The following table presents
the potential dilutive securities excluded from the calculation of diluted net income (loss) per share for the periods presented as the
effect of their inclusion would have been anti-dilutive (in thousands):
Antidilutive shares | |
| | | |
| | | |
| | |
| |
Fiscal Year Ended April 30, | |
| |
2022 | | |
2021 | | |
2020 | |
Stock options | |
| 43 | | |
| 829 | | |
| 2,795 | |
RSUs, PSUs and ESPP | |
| 9 | | |
| – | | |
| 90 | |
Convertible Notes | |
| – | | |
| 928 | | |
| – | |
Series E Preferred Stock | |
| – | | |
| 1,864 | | |
| 1,979 | |
Total | |
| 52 | | |
| 3,621 | | |
| 4,864 | |
Note 9 – Employee Benefit 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. Total expense recognized by us for matching contributions to the 401(k) Plan for the fiscal years ended April 30, 2022,
2021 and 2020 was $0.6 million, $0.5 million and $0.5 million, respectively.
AVID BIOSERVICES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 – 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.
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. Since the announcement we have been 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 may impact 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 the extent to which normal economic and operating conditions can resume.
Note 11 – Sale of
Research and Development Assets
During fiscal year 2018, we entered into an Asset
Assignment and Purchase Agreement (the “Fiscal Year 2018 Purchase Agreement”) with OncXerna Therapeutics, Inc. (“OncXerna”)
(formerly known as Oncologie, Inc.), pursuant to which we sold to OncXerna certain 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 Fiscal Year
2018 Purchase Agreement, we are eligible to receive up to $95.0 million in the event that OncXerna 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 if OncXerna commercializes and sells products utilizing bavituximab or the other transferred assets.
As of April 30, 2022, no development, regulatory or commercialization milestones have been achieved by OncXerna under the Fiscal Year
2018 Purchase Agreement.
During fiscal year 2019, we
entered into a separate Asset Assignment and Purchase Agreement (the “Fiscal Year 2019 Purchase Agreement”) with OncXerna,
pursuant to which we sold to OncXerna 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 Fiscal Year
2019 Purchase Agreement, we are eligible to receive up to $21.0 million in the event that OncXerna 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 if OncXerna commercializes and sells products utilizing the r84 technology. As of April 30, 2022, no development,
regulatory or commercialization milestones have been achieved by OncXerna under the Fiscal Year 2019 Purchase Agreement.