NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE nine MONTHS ENDED january 31, 2018 (
unaudited
)
1. ORGANIZATION
AND BUSINESS
Business Description
—We
are a contract development and manufacturing organization (“CDMO”) that provides a comprehensive range of services
from process development to current Good Manufacturing Practices (“cGMP”) commercial manufacturing focused on biopharmaceutical
products derived from mammalian cell culture for biotechnology and pharmaceutical companies.
Sale of Research
and Development Assets
—On February 12, 2018, we entered into an Asset Assignment and Purchase Agreement with a third-party
oncology therapeutics company pursuant to which we sold to the third-party oncology therapeutics company the majority of our research
and development assets, which included the assignment of certain exclusive licenses related to our former phosphatidylserine (PS)-targeting
program (Note 10). As a result of (i) the sale of our PS-targeting program, (ii) the held for sale classification of our R84 technology,
(iii) the abandonment of our remaining research and development assets (including our intent to return the exosome technology back
to the original licensor), and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business, the operating
results from our research and development segment are reported as a loss from discontinued operations in the accompanying unaudited
condensed consolidated financial statements for all periods presented (Note 2).
Corporate Name Change
—Effective
January 5, 2018, we changed our name from Peregrine Pharmaceuticals, Inc. to Avid Bioservices, Inc. in connection with the strategic
shift in our corporate direction.
Reverse Stock Split
—On
July 7, 2017, we effected a reverse stock split of our outstanding shares of common stock at a ratio of one-for-seven pursuant
to our filed Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware.
The reverse stock split took effect with the opening of trading on July 10, 2017. The primary purpose of the reverse stock split,
which was approved by our stockholders at our 2016 Annual Meeting on October 13, 2016, was to enable us to regain compliance with
the $1.00 minimum bid price requirement for continued listing on The NASDAQ Capital Market. Pursuant to the reverse stock split,
every seven shares of our issued and outstanding shares of common stock were automatically combined into one issued and outstanding
share of common stock, without any change in the par value per share of our common stock. All share and per share amounts of our
common stock included in the accompanying unaudited condensed consolidated financial statements have been retrospectively adjusted
to give effect to the reverse stock split for all periods presented, including reclassifying an amount equal to the reduction in
par value to additional paid-in capital. No fractional shares were issued in connection with the reverse stock split. Any fractional
share of common stock created by the reverse stock split was rounded up to the nearest whole share. The number of authorized shares
of our common stock remained unchanged.
The reverse stock split
affected all issued and outstanding shares of our common stock, as well as the shares of common stock underlying our stock options,
employee stock purchase plan, warrants and the general conversion right with respect to our 10.50% Series E Convertible Preferred
Stock (the “Series E Preferred Stock”).
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles
(“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”)
related to quarterly reports on Form 10-Q. Accordingly, they do not include all of the information and disclosures required by
U.S. GAAP for a complete set of 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 year ended April 30, 2017. The condensed consolidated balance sheet at April 30, 2017 has been derived
from audited financial statements at that date. The unaudited financial information for the interim periods presented herein reflects
all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results
of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments. Results of operations
for interim periods covered by this Quarterly Report on Form 10-Q may not necessarily be indicative of results of operations for
the full fiscal year or any other interim period.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
The unaudited condensed
consolidated financial statements include the accounts of Avid Bioservices, Inc., and its subsidiaries. All intercompany accounts
and transactions among the consolidated entities have been eliminated in the unaudited condensed consolidated financial statements.
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts, as well as disclosures of commitments and contingencies in the financial statements and accompanying notes. Actual results
could differ materially from those estimates and assumptions.
Discontinued Operations
As of January 31, 2018,
our research and development segment met all the conditions to be classified as a discontinued operation (Note 1). Accordingly,
the operating results of our research and development segment are reported as a loss from discontinued operations in the accompanying
unaudited condensed consolidated financial statements for all periods presented. For additional information, see Note 10, “Sale
of Research and Development Assets”.
Going Concern
The accompanying condensed
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating
to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined
that we are unable to continue as a going concern.
We have expended substantial
funds on our contract manufacturing business and, historically, on the research and development of pharmaceutical product candidates.
As a result, we have historically experienced losses and negative cash flows from operations since our inception and, although
we have discontinued our research and development segment (Note 1), we expect negative cash flows from operations to continue for
the foreseeable future until we can generate sufficient revenue to achieve profitability. Therefore, unless and until we are able
to generate sufficient revenue, we expect such losses to continue during the remainder of fiscal year 2018 and in the foreseeable
future.
Our ability to fund
our operations is dependent on the amount of cash on hand and our ability to generate sufficient revenue to cover our operations.
At January 31, 2018, we had $17,938,000 in cash and cash equivalents and during February 2018, we raised $23,163,000 in gross proceeds
from the sale of our common stock pursuant to an underwritten public offering (Note 13). In addition, we expect to receive an aggregate
of $8,000,000 in upfront payments over the next six (6) months from the recent sale of certain of our research and development
assets (Note 10).
In the event we are
unable to secure sufficient business to support our operations beyond the next twelve months, we may need to raise additional capital
in the future. Our ability to raise additional capital in the equity markets to fund our obligations in future periods is dependent
on a number of factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity of
our common stock is subject to a number of risks and uncertainties, including but not limited to, negative economic conditions,
adverse market conditions, and adverse financial results. If we are unable to either raise sufficient capital in the equity markets
or generate additional revenue, we may need to further restructure, or cease, our operations. In addition, even if we are able
to raise additional capital, it may not be at a price or on terms that are favorable to us.
As a result, we have
concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that
our accompanying unaudited condensed consolidated financial statements are issued.
Reclassification
Certain prior year
amounts related to other assets have been reclassified to property and equipment in our accompanying condensed consolidated balance
sheet for the fiscal year ended April 30, 2017 and in our accompanying unaudited condensed consolidated statement of cash flows
for the nine months ended January 31, 2017 to conform to the current period presentation. This reclassification had no effect on
previously reported net loss.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
In addition,
certain amounts related to corporate overhead costs that were allocated to the research and development segment have been
reclassified from research and development expense to selling, general and administrative expense in our accompanying
unaudited condensed consolidated statements of operations and comprehensive loss for all periods presented (Note 10). This
reclassification had no effect on previously reported net loss.
Restructuring
Restructuring charges
consist of one-time termination benefits, including severance and other employee related costs related to a workforce reduction
pursuant to a restructuring plan we implemented in August 2017 (Note 9). One-time termination benefits are expensed at the date
we notified the employee, unless the employee was required to provide future service, in which case the benefits are expensed ratably
over the future service period.
Cash and Cash Equivalents
We consider all short-term
investments readily convertible to cash with an initial maturity of three months or less to be cash equivalents.
Restricted Cash
Under the terms of
three separate operating leases related to our facilities, we are required to maintain, as collateral, letters of credit during
the terms of such leases. At January 31, 2018 and April 30, 2017, restricted cash of $1,150,000 was pledged as collateral under
these letters of credit.
Concentrations of Credit Risk and Customer
Base
Financial instruments
that potentially subject us to a significant concentration of credit risk consist of cash and cash equivalents, restricted cash
and trade receivables. We maintain our cash and restricted cash balances primarily with one major commercial bank and our deposits
held with the bank exceed the amount of government insurance limits provided on our deposits. We are exposed to credit risk in
the event of default by the major commercial bank holding our cash and restricted cash balances to the extent of the cash and restricted
cash amounts recorded on the accompanying unaudited condensed consolidated balance sheet.
Our trade receivables
from amounts billed for contract manufacturing services have historically been derived from a small customer base. Most contracts
require up-front payments and installment payments during the service period. We perform periodic evaluations of the financial
condition of our customers and generally do not require collateral, but we can terminate any contract if a material default occurs.
At January 31, 2018 and April 30, 2017, approximately 94% and 93%, respectively, of our trade receivables were due from four customers.
In addition, contract
manufacturing revenue has historically been derived from a small customer base. Historically, these customers have not entered
into long-term contracts because their need for drug supply depends on a variety of factors, including the product’s stage
of development, the timing of regulatory filings and approvals, the product needs of their collaborators, if applicable, their
financial resources and the market demand with respect to commercial products. During the three and nine months ended January 31,
2018, approximately, 53% and 78%, respectively, of our contract manufacturing revenue was derived from our two largest customers.
Based on our current
commitments for manufacturing services from our two largest customers, we expect our future results of operations to be adversely
affected until we are able to further expand and diversify our customer base.
Comprehensive Loss
Comprehensive loss
is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources.
Comprehensive loss is equal to our net loss for all periods presented.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
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, which indicate that their carrying value may not be recoverable. Long-lived
assets are reported at the lower of carrying amount or fair value less cost to sell. For the nine months ended January 31, 2018
and 2017, there were no indicators of impairment of the value of our long-lived assets.
Fair Value Measurements
Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:
|
·
|
Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical
assets or liabilities.
|
|
·
|
Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets
or liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are
based on quoted prices of instruments with similar attributes in active markets.
|
|
·
|
Level 3 – Unobservable inputs that are supported by little or no market activity and significant
to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation
techniques and assumptions.
|
As of January 31, 2018
and April 30, 2017, we do not have any Level 2 or Level 3 financial assets or liabilities and our cash equivalents, which are primarily
invested in money market funds with one major commercial bank, are carried at fair value based on quoted market prices for identical
securities (Level 1 input). In addition, there were no transfers between any Levels of the fair value hierarchy during the three
and nine months ended January 31, 2018 and 2017.
Customer Deposits
Customer deposits primarily
represent advance billings and/or payments received for services or raw materials from our third-party customers prior to the initiation
of contract manufacturing services.
Revenue Recognition
We derive revenue from
contract manufacturing services provided to our third-party customers. We recognize revenue in accordance with the authoritative
guidance for revenue recognition when all of the following criteria are met: (i) persuasive evidence of an arrangement exists,
(ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable,
and (iv) collectability is reasonably assured. We also comply with the authoritative guidance for revenue recognition regarding
arrangements with multiple elements.
Revenue arrangements
with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered
element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated among the separate
units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate
units, which may require the use of significant judgement. Deliverables are considered separate units of accounting if (1) the
delivered item(s) has value to the customer on a stand-alone basis and (2) the arrangement includes a general right of return relative
to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.
Arrangement consideration
is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The
relative selling price for each deliverable is determined using vendor specific objective evidence (“VSOE”) of selling
price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price
exists, we use our best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is
limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting,
and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales
price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized
under any agreement.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
On
occasion, we receive requests from customers to hold product that we have manufactured on a “bill-and-hold” basis.
Revenue is recognized for these “bill-and-hold” arrangements in accordance with the authoritative guidance, which requires,
among other things, the existence of a valid business purpose for the arrangement; the “bill-and-hold” arrangement
is at the request of the customer; title and risk of ownership must pass to the customer; the product is complete and ready for
shipment; a fixed
delivery date that is reasonable and consistent with
the customer’s business practices; the product has been separated from our inventory; and no further performance obligations
by us exist.
In addition, we also
follow the authoritative guidance when reporting revenue as gross when we act as a principal versus reporting revenue as net when
we act as an agent. For transactions in which we act as a principal, have discretion to choose suppliers, bear credit and inventory
risk and perform a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated
with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.
Any amounts received
prior to satisfying our revenue recognition criteria are recorded as deferred revenue or customer deposits in the accompanying
unaudited condensed consolidated financial statements. We also record a provision for estimated contract losses, if any, in the
period in which they are determined.
Share-based Compensation
We account for stock
options and other share-based awards granted under our equity compensation plans in accordance with the authoritative guidance
for share-based compensation. The estimated fair value of share-based payments 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 modifications to share-based awards, if any, is
generally estimated using a Black-Scholes option valuation model, unless a lattice model is required. Forfeitures are recognized
as a reduction of share-based compensation expense as they occur. As of January 31, 2018, there were no outstanding share-based
awards with market or performance conditions.
Income Taxes
On December 22, 2017,
the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).
The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate
tax rate from the maximum federal statutory rate of 35% to 21%. The Tax Act states that the 21% U.S. federal corporate tax rate
is effective for tax years beginning on or after January 1, 2018. However, existing tax law, which was not amended under the Tax
Act, governs when a change in tax rate is effective. Existing tax law provides that if the taxable year includes the effective
date of any rate change (unless the change is the first date of the taxable year), taxes should be calculated by applying a blended
rate to the taxable income for the year. Section 15 of the Internal Revenue Code stipulates that our blended federal rate is 29.73%
for fiscal year 2018. We have not yet determined the impact the rate reduction will have on our gross deferred tax asset and liabilities
and offsetting valuation allowance. However, we have a full allowance against the deferred tax asset and as a result there was
no impact to income tax expense for the quarter ended January 31, 2018.
In conjunction with
the tax law changes, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application
of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The ultimate impact,
which is expected to be recorded by April 30, 2018, may differ from any provisional amounts, due to, among other things, additional
analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions
we may take as a result of the tax Act, and the fact that we cannot definitively predict what our deferred tax balance will ultimately
be as of April 30, 2018.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
Basic and Dilutive Net Loss Per Common
Share
Basic net loss per
common share is computed by dividing our net loss attributable to common stockholders by the weighted average number of shares
of common stock outstanding during the period excluding the dilutive effects of stock options, shares of common stock expected
to be issued under our Employee Stock Purchase Plan (the “ESPP”), warrants, and Series E Preferred Stock outstanding
during the period. Diluted net loss per common share is computed by dividing our net loss attributable to common stockholders by
the sum of the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effects
of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding
during the period. Net loss attributable to common stockholders represents our net loss plus Series E Preferred Stock accumulated
dividends. Series E Preferred Stock accumulated dividends include dividends declared for the period (regardless of whether or not
the dividends have been paid) and dividends accumulated for the period (regardless of whether or not the dividends have been declared).
The potential dilutive
effect of stock options, shares of common stock expected to be issued under our ESPP, and warrants outstanding during the period
are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive
effect of our Series E Preferred Stock outstanding during the period was calculated using the if-converted method assuming the
conversion of Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but are excluded
if their effect is anti-dilutive. However, because the impact of stock options, shares of common stock expected to be issued under
our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there was no difference between
basic and diluted loss per common share amounts for the three and nine months ended January 31, 2018 and 2017.
The calculation of
weighted average diluted shares outstanding for the three and nine months ended January 31, 2018 and 2017 excludes the dilutive
effect of the following weighted average outstanding stock options and shares of common stock expected to be issued under our ESPP
as their impact are anti-dilutive during periods of net loss:
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
115,425
|
|
|
|
–
|
|
|
|
78,427
|
|
|
|
–
|
|
ESPP
|
|
|
1,202
|
|
|
|
5,198
|
|
|
|
466
|
|
|
|
27,661
|
|
Total
|
|
|
116,627
|
|
|
|
5,198
|
|
|
|
78,893
|
|
|
|
27,661
|
|
The calculation of
weighted average diluted shares outstanding for the three and nine months ended January 31, 2018 and 2017 also excludes the following
weighted average outstanding stock options, warrants, shares of common stock expected to be issued under our ESPP, and Series E
Preferred Stock (assuming the if-converted method), as their exercise price, purchase price and/or conversion price were greater
than the average market price of our common stock during the respective periods, resulting in an anti-dilutive effect:
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
3,214,694
|
|
|
|
4,231,073
|
|
|
|
3,663,102
|
|
|
|
4,156,497
|
|
Warrants
|
|
|
39,040
|
|
|
|
39,040
|
|
|
|
39,040
|
|
|
|
39,040
|
|
Series E Preferred Stock
|
|
|
1,978,783
|
|
|
|
1,978,784
|
|
|
|
1,978,783
|
|
|
|
1,948,109
|
|
Total
|
|
|
5,232,517
|
|
|
|
6,248,897
|
|
|
|
5,680,925
|
|
|
|
6,143,646
|
|
During February 2018,
we sold an aggregate of 10,294,445 shares of our common stock in connection with an underwritten public offering (Note 13), which
are not included in the calculation of basic and dilutive net loss per common share for the three and nine months ended January
31, 2018.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
Recently Adopted Accounting
Pronouncements
Effective May 1, 2017,
we adopted Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330):
Simplifying the Measurement of Inventory
.
ASU 2015-11 requires that inventory should be measured at the lower of cost and net realizable value for entities that measure
inventory using the first-in, first-out method. ASU 2015-11 defines net realizable value as the estimated selling prices in the
ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The adoption of
ASU 2015-11 did not have a material impact on our condensed consolidated financial statements.
Effective May 1, 2017,
we adopted ASU 2015-17, Income Taxes (Topic 740):
Balance Sheet Classification of Deferred Taxes
. Under existing standards,
deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net long-term asset or liability.
To simplify presentation, the new guidance will require that all deferred tax assets and liabilities, along with related valuation
allowances, be classified as long-term on the balance sheet. As a result, each tax-paying jurisdiction will now only have one net
long-term deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting
deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. Due to the full valuation allowance
on our U.S. deferred tax assets, the adoption of ASU 2015-17 did not have a material impact on our condensed consolidated financial
statements.
Effective May 1, 2017,
we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting
.
ASU 2016-09 changes certain aspects of accounting for share-based payments to employees and involves several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. Specifically, ASU 2016-09 requires that all income tax effects of share-based
awards be recognized as income tax expense or benefit in the reporting period in which they occur. Additionally, ASU 2016-09 amends
existing guidance to allow forfeitures of share-based awards to be recognized as they occur. Previous guidance required that share-based
compensation expense include an estimate of forfeitures. Upon adoption of ASU 2016-09, we made a policy election to recognize forfeitures
as they occur. The adoption of ASU 2016-09 did not have a material impact on our condensed consolidated financial statements.
Pending Adoption of
Recent Accounting Pronouncements
In May 2014, the Financial
Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts
with Customers (Topic 606):
Revenue from Contracts with Customers
, which, along with subsequent amendments issued in 2015
and 2016, will replace substantially all current US GAAP revenue recognition guidance. ASU 2014-09, as amended, is based on the
principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services utilizing a new five-step revenue recognition
model. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash
flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs
incurred to obtain or fulfill a contract. ASU 2014-09, as amended, is effective for our annual reporting period beginning May 1,
2018. The new guidance permits adoption either by using (i) a full retrospective approach for all periods presented in the period
of adoption or (ii) a modified retrospective approach where the new standard is applied in the financial statements starting with
the year of adoption. Under both approaches, cumulative impact of the adoption is reflected as an adjustment to retained earnings
(accumulated deficit) as of the earliest date presented in accordance with the new standard. We are continuing to assess the impact
of the new guidance on our accounting policies and procedures and are evaluating the new requirements as applied to existing manufacturing
contracts. While we continue to assess the impact of the new guidance, we believe the adoption of ASU 2014-09 will modify the way
we analyze contracts. We have identified our revenue streams and based on our preliminary assessment, we believe the most significant
impact may relate to the recognition of contract manufacturing revenue over a period of time rather than at a point in time. We
plan to adopt ASU 2014-09, as amended, on May 1, 2018, on a modified retrospective basis.
In February 2016, the
FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-2 requires an entity to recognize right-of-use assets and lease liabilities
on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for
a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative
information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty
of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2018, which will be our fiscal year 2020 beginning May 1, 2019. Early adoption is permitted. We are currently
in the process of evaluating the impact of adoption of ASU 2016-02 on our condensed consolidated financial statements and related
disclosures.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
In November 2016,
FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash
, which addresses diversity in practice related
to the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 will require that
a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described
as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2017, which will be our fiscal year 2019 beginning May 1, 2018. Early adoption is permitted. We do
not expect the adoption of ASU 2016-18 to have a material impact on our condensed consolidated financial statements and related
disclosures.
In May 2017, the FASB
issued ASU 2017-09, Compensation - Stock Compensation (Topic 718):
Scope of Modification Accounting
, which provides guidance
about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting
in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, which will be our
fiscal year 2019 beginning May 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-09 to have a material
impact on our condensed consolidated financial statements and related disclosures.
3. Trade
and other RECEIVABLEs
Trade receivables are
recorded at the invoiced amount net of an allowance for doubtful accounts, if necessary. Other receivables are reported at amounts
expected to be collected net of an allowance for doubtful accounts, if necessary. Trade and other receivables consist of the following:
|
|
January 31,
2018
|
|
|
April 30,
2017
|
|
Trade receivables
(1)
|
|
$
|
7,967,000
|
|
|
$
|
7,274,000
|
|
Other receivables
|
|
|
–
|
|
|
|
468,000
|
|
Total trade and other receivables
|
|
$
|
7,967,000
|
|
|
$
|
7,742,000
|
|
______________
(1)
Represents amounts billed for contract manufacturing services.
We continually monitor
our allowance for doubtful accounts for all receivables. We apply judgment in assessing the ultimate realization of our receivables
and we estimate an allowance for doubtful accounts based on various factors, such as, the aging of accounts receivable balances,
historical experience, and the financial condition of our customers. Based on our analysis of our receivables as of January 31,
2018 and April 30, 2017, we determined no allowance for doubtful accounts was necessary.
4. PROPERTY
AND EQUIPMENT
Property and equipment
is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related asset, generally ranging from three to ten years. Amortization of leasehold
improvements is calculated using the straight-line method over the shorter of the estimated useful life of the asset or the remaining
lease term. Construction-in-progress, which represents direct costs related to the construction of various equipment and leasehold
improvements associated with our manufacturing facilities, are not depreciated until the asset is completed and placed into service.
No interest was incurred or capitalized as construction-in-progress as of January 31, 2018.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
Property and equipment,
net, consists of the following:
|
|
January 31,
2018
|
|
|
April 30,
2017
|
|
Leasehold improvements
|
|
$
|
20,579,000
|
|
|
$
|
20,098,000
|
|
Laboratory equipment
|
|
|
10,683,000
|
|
|
|
10,777,000
|
|
Furniture, fixtures, office equipment and software
|
|
|
4,688,000
|
|
|
|
4,499,000
|
|
Construction-in-progress
|
|
|
2,558,000
|
|
|
|
2,841,000
|
|
Total property and equipment
|
|
|
38,508,000
|
|
|
|
38,215,000
|
|
Less accumulated depreciation and amortization
|
|
|
(12,183,000
|
)
|
|
|
(11,700,000
|
)
|
Total property and equipment, net
|
|
$
|
26,325,000
|
|
|
$
|
26,515,000
|
|
Depreciation and amortization
expense for the three and nine months ended January 31, 2018 was $645,000 and $1,945,000, respectively. Depreciation and amortization
expense for the three and nine months ended January 31, 2017 was $631,000 and $1,850,000, respectively.
5. INVENTORIES
Inventories are recorded
at the lower of cost or market (net realizable value) and primarily include raw materials, work-in-process (comprised of raw materials,
direct labor and overhead costs associated with in-process manufacturing services), and finished goods (representing manufacturing
services completed and ready for shipment) associated with contract manufacturing services. Overhead costs allocated to work-in-process
inventory are based on the normal capacity of our production facilities and do not include costs from abnormally low production
or idle capacity, which are expensed directly to cost of contract manufacturing in the period incurred. During the three and nine
months ended January 31, 2018, we expensed $5,344,000 and $11,182,000, respectively, in idle capacity costs directly to cost of
contract manufacturing in the accompanying condensed consolidated financial statements. No idle capacity costs were incurred during
the same prior year periods. Cost is determined by the first-in, first-out method. Inventories consist of the following:
|
|
January 31,
2018
|
|
|
April 30,
2017
|
|
Raw materials
|
|
$
|
8,799,000
|
|
|
$
|
11,304,000
|
|
Work-in-process
|
|
|
5,419,000
|
|
|
|
13,755,000
|
|
Finished goods
|
|
|
–
|
|
|
|
8,040,000
|
|
Total inventories
|
|
$
|
14,218,000
|
|
|
$
|
33,099,000
|
|
6. STOCKHOLDERS’
EQUITY
Our ability to continue
to fund our operations is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise
additional capital to support our future operations through one or more methods, including but not limited to, issuing additional
equity.
On January 12, 2018,
we filed a universal shelf registration statement with the SEC on Form S-3, File number 333-222548 (“January 2018 Shelf”),
which was declared effective by the SEC on January 25, 2018, under which we may issue, from time to time, in one or more offerings,
offer and sale either individually or in combination up to $125,000,000 of our securities, including common stock, preferred stock,
debt securities and warrants. As of January 31, 2018, we had not issued any of our securities under the January 2018 Shelf. Subsequent
to January 31, 2018, we issued securities under the January 2018 Shelf as further discussed in Note 13, “Subsequent Events”.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
Sale of Common Stock
On August 7, 2015,
we entered into an At Market Issuance Sales Agreement (“AMI Sales Agreement”) with MLV & Co. LLC (“MLV”),
pursuant to which we were able to sell shares of our common stock through MLV, as agent, for aggregate gross proceeds of up to
$30,000,000, in registered transactions from our shelf registration statement on Form S-3 (File No. 333-201245), which was declared
effective by the SEC on January 15, 2015. Sales of our common stock through MLV were made by any method that was deemed an “at
the market offering” as defined in Rule 415 of the Securities Act. We paid MLV a commission equal to 2.5% of the gross proceeds
from the sale of our common stock pursuant to the AMI Sales Agreement. During the quarter ended July 31, 2017, we sold 1,051,258
shares of our common stock at market prices under the AMI Sales Agreement, for aggregate gross proceeds of $4,304,000 before deducting
commissions and other issuance costs of $111,000. As of July 31, 2017, we had raised the full amount of gross proceeds available
to us under the AMI Sales Agreement.
Series
E Preferred Stock Dividend
The following table
summarizes the Series E Preferred Stock quarterly dividend activity during the nine months ended January 31, 2018:
Declaration
Date
|
|
Record
Date
|
|
Payment
Date
|
|
Dividends
Paid
|
|
|
Dividend
Per Share
|
|
6/6/2017
|
|
6/19/2017
|
|
7/3/2017
|
|
$
|
1,081,000
|
|
|
$
|
0.65625
|
|
9/5/2017
|
|
9/18/2017
|
|
10/2/2017
|
|
$
|
1,081,000
|
|
|
$
|
0.65625
|
|
12/7/2017
|
|
12/18/2017
|
|
1/2/2018
|
|
$
|
1,081,000
|
|
|
$
|
0.65625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares of Common
Stock Authorized and Reserved for Future Issuance
We are authorized to
issue up to 500,000,000 shares of our common stock. As of January 31, 2018, 45,257,180 shares of our common stock were issued and
outstanding. In addition, our common stock outstanding as of January 31, 2018 excluded the following shares of our common stock
reserved for future issuance:
|
·
|
5,433,646 shares of common stock reserved for issuance under outstanding option grants and available
for issuance under our stock incentive plans;
|
|
·
|
1,303,770 shares of common stock reserved for and available for issuance under our ESPP;
|
|
·
|
39,040 shares of common stock issuable upon exercise of outstanding warrants; and
|
|
·
|
6,826,435 shares of common stock issuable upon conversion of our outstanding Series E Preferred
Stock
(1)
.
|
_____________
|
(1
)
|
The
Series E Preferred Stock is convertible into a number of shares of our common stock determined
by dividing the liquidation preference of $25.00 per share by the conversion price, currently
$21.00 per share. If all of our outstanding Series E Preferred Stock were converted at
the $21.00 per share conversion price, the holders of our Series E Preferred Stock would
receive an aggregate of 1,961,619 shares of our common stock. However, we have reserved
the maximum number of shares of our common stock that could be issued upon a change of
control event assuming our shares of common stock are acquired for consideration of $5.985
per share or less. In this scenario, each outstanding share of our Series E Preferred
Stock could be converted into 4.18 shares of our common stock, representing the Share
Cap.
|
7. equity
compensation plans
Stock Incentive Plans
As of January 31, 2018,
we had an aggregate of 5,433,646 shares of our common stock reserved for issuance under our stock incentive plans, of which, 3,989,356
shares were subject to outstanding options and 1,444,290 shares were available for future grants of share-based awards.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
The following summarizes
our stock option transaction activity for the nine months ended January 31, 2018:
Stock Options
|
|
Shares
|
|
|
Weighted Average
Exercisable Price
|
|
Outstanding, May 1, 2017
|
|
|
4,081,548
|
|
|
$
|
8.77
|
|
Granted
|
|
|
679,497
|
|
|
$
|
4.17
|
|
Exercised
|
|
|
(117,019)
|
|
|
$
|
3.40
|
|
Canceled or expired
|
|
|
(654,670)
|
|
|
$
|
8.42
|
|
Outstanding, January 31, 2018
|
|
|
3,989,356
|
|
|
$
|
8.70
|
|
Employee Stock Purchase Plan (ESPP)
We have reserved a
total of 2,142,857 shares of our common stock to be purchased under our ESPP, of which 1,303,770 shares remained available to purchase
at January 31, 2018, and are subject to adjustment as provided in the ESPP for stock splits, stock dividends, recapitalizations
and other similar events. Under the ESPP, we sell shares to participants at a price equal to the lesser of 85% of the fair market
value of our common stock at the (i) beginning of a six-month offering period, or (ii) end of the six-month offering period. The
ESPP provides for two six-month offering periods each year; the first offering period begins on the first trading day on or after
each May 1; the second offering period begins on the first trading day on or after each November 1. During the nine months ended
January 31, 2018, 55,966 shares of our common stock were purchased under the ESPP at a purchase price of $3.87 per share.
Share-Based Compensation
Total share-based compensation
expense related to share-based awards issued under our equity compensation plans is included in the accompanying unaudited condensed
consolidated statements of operations as follows:
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Cost of contract manufacturing
|
|
$
|
139,000
|
|
|
$
|
23,000
|
|
|
$
|
277,000
|
|
|
$
|
89,000
|
|
Selling, general and administrative
|
|
|
259,000
|
|
|
|
389,000
|
|
|
|
589,000
|
|
|
|
1,183,000
|
|
Discontinued operations
|
|
|
14,000
|
|
|
|
457,000
|
|
|
|
340,000
|
|
|
|
1,319,000
|
|
Total
|
|
$
|
412,000
|
|
|
$
|
869,000
|
|
|
$
|
1,206,000
|
|
|
$
|
2,591,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
374,000
|
|
|
$
|
815,000
|
|
|
$
|
1,070,000
|
|
|
$
|
2,369,000
|
|
ESPP
|
|
|
38,000
|
|
|
|
54,000
|
|
|
|
136,000
|
|
|
|
222,000
|
|
|
|
$
|
412,000
|
|
|
$
|
869,000
|
|
|
$
|
1,206,000
|
|
|
$
|
2,591,000
|
|
As of January 31, 2018,
the total estimated unrecognized compensation cost related to non-vested employee stock options was $2,605,000. This cost is expected
to be recognized over a weighted average vesting period of 2.67 years based on current assumptions.
8. WARRANTS
No warrants were issued
or exercised during the three and nine months ended January 31, 2018. As of January 31, 2018, warrants to purchase 39,040 shares
of our common stock at an exercise price of $17.29 were outstanding and are exercisable through August 30, 2018.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
9. RESTRUCTURING
On August 9, 2017,
our Board of Directors approved, and our management implemented, a restructuring plan intended to reduce operating costs and improve
cost efficiencies while we pursued strategic options for our research and development assets and focus our efforts on growing
our CDMO business. Under this restructuring plan, which we completed in October 2017, we reduced our overall workforce by 57 employees.
As a result, during the quarter ended October 31, 2017, we incurred an aggregate of $1,588,000 in restructuring costs consisting
of one-time termination benefits, including severance, and other employee-related costs, of which $330,000 related to our research
and development segment and $1,258,000 related to our contract manufacturing services segment. The restructuring costs associated
with our research and development segment are included in loss from discontinued operations in the accompanying unaudited condensed
consolidated financial statements for the nine months ended January 31, 2018 (Note 10). The restructuring costs associated with
our contract manufacturing services segment are included in operating expenses in the accompanying unaudited condensed consolidated
financial statements for the nine months ended January 31, 2018. All restructuring costs were paid as of January
31, 2018.
10. Sale
of research and development assets
Asset Assignment
and Purchase Agreement
On February 12, 2018,
we entered into an Asset Assignment and Purchase Agreement (the “Purchase Agreement”) with a third-party oncology therapeutics
company (the “Buyer”) pursuant to which we sold to the Buyer the majority of our research and development assets, which
included the assignment of certain exclusive licenses related to our former PS-targeting program, as well as certain other licenses
and assets useful and/or necessary for the potential commercialization of bavituximab.
Pursuant to the Purchase
Agreement, we expect to receive an aggregate of $8 million from the Buyer, payable in three installments over a period of approximately
six and one-half months following the date of the Purchase Agreement, the first of which is due by March 14, 2018. We are also
eligible to receive up to an additional $95 million in the event that the Buyer achieves certain development, regulatory and commercialization
milestones with respect to bavituximab. In addition, we are eligible to receive royalties on net sales that are upward tiering
into the mid-teens in the event that the Buyer commercializes and sells products utilizing bavituximab or the other transferred
assets. The Buyer is responsible for all future research, development and commercialization of bavituximab, including all related
intellectual property costs and all other future liabilities and obligations arising out of the ownership of the transferred assets
(i.e., we remain obligated for all liabilities associated with the research and development assets associated with the Purchase
Agreement incurred or arising prior to February 13, 2018). In addition, as part of the transaction, we and the Buyer agreed to
diligently work in good faith to negotiate and enter into, within 90 days after the date of the Purchase Agreement, an agreement
for us to provide future contract development and manufacturing activities to the Buyer in support of bavituximab.
Discontinued Operations
As a result of
(i) the sale of our PS-targeting program, (ii) the held for sale classification of our R84 technology, (iii) the abandonment
of our remaining research and development assets (including our intent to return the exosome technology back to the original
licensor), and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business that will have a
major effect on our operations and financial results as we will no longer incur costs associated with research and
development, the operating results from our research and development segment are reported as a loss from discontinued
operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 1).
Accordingly, the accompanying unaudited condensed consolidated financial statements for the three and nine months ended
January 31, 2018 and 2017 reflect the operations of our research and development segment as a discontinued operation. The
results of operations presented below include certain allocations that management believes fairly reflect the utilization of
services to the research and development segment. The allocations do not include amounts related to general corporate
administrative expenses or interest expense. Therefore, the results of operations from the research and development segment
do not necessarily reflect what the results of operations would have been had the research and development segment
operated as a stand-alone segment.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
The following table
summarizes the results of discontinued operations for the three and nine months ended January 31, 2018 and 2017:
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
374,000
|
|
|
$
|
5,912,000
|
|
|
$
|
7,590,000
|
|
|
$
|
21,347,000
|
|
Selling, general and administrative
|
|
|
1,315,000
|
|
|
|
293,000
|
|
|
|
2,097,000
|
|
|
|
1,256,000
|
|
Restructuring charges
|
|
|
–
|
|
|
|
–
|
|
|
|
330,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,689,000
|
|
|
|
6,205,000
|
|
|
|
10,017,000
|
|
|
|
22,603,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
387,000
|
|
|
|
–
|
|
|
|
387,000
|
|
|
|
–
|
|
Loss from discontinued operations
|
|
$
|
2,076,000
|
|
|
$
|
6,205,000
|
|
|
$
|
10,404,000
|
|
|
$
|
22,603,000
|
|
We will complete the
accounting for the Purchase Agreement during the fourth quarter of our current fiscal year ending April 30, 2018. In addition,
we expect to use a portion of our net operating losses to offset the taxable gain from the Purchase Agreement, if any, which could
result in a partial release of our valuation allowance.
Assets Held for
Sale
The carrying value
of the assets and liabilities deemed a component of the discontinued research and development segment were not classified as “assets
held for sale” in the accompanying unaudited condensed consolidated balance sheets at January 31, 2018 and April 30, 2017
since there were no related assets reported as of the respective balance sheet dates and the Buyer did not assume any liabilities
under the Purchase Agreement.
11. SEGMENT
REPORTING
Changes in our Organizational
Structure
Historically, our business
had been organized into two reportable operating segments: (i) our research and development segment, and (ii) our contract manufacturing
services segment. However, as a result of the aforementioned discontinued operation (Note 10),
management
has determined that the Company now operates in only one operating segment. Accordingly, effective January 31, 2018, we reported
our financial results for one reportable segment to reflect this new organizational structure.
The accounting policies of
our one reportable segment are the same as those described in Note 2.
In
addition, the financial results of our discontinued research and development segment are reflected as a loss from discontinued operations
in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 10).
12. commitments
and contingencies
Legal Proceedings
– In the ordinary course of business, we are at times subject to various legal proceedings and disputes. We make provisions
for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
Such provisions are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and
administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case.
avid bioservices, inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)
On October 10,
2013, a derivative and class action complaint, captioned
Michaeli v. Steven W. King, et al.
, C.A. No. 8994-VCL, was filed
in the Court of Chancery of the State of Delaware (the “Court”), purportedly on behalf of the Company, which was named
a nominal defendant, against certain of our executive officers and our three former non-employee directors (collectively, the “Defendants”).
On December 1, 2015, the plaintiffs filed an amended and supplemental derivative and class action complaint (the “Amended
Complaint”). The Amended Complaint alleged that the Defendants breached their respective fiduciary duties in connection with
certain purportedly improper compensation decisions made by our board of directors during the past four fiscal years ended April
30, 2015 and that our directors breached their fiduciary duty of candor by filing and seeking stockholder action on the basis of
an allegedly materially false and misleading proxy statement for our 2013 annual meeting of stockholders. On May 15, 2017, the
parties filed with the Court a Stipulation and Agreement of Compromise, Settlement and Release (the “Settlement”) setting
forth the terms of the proposed settlement of the claims in the Amended Complaint. At a hearing on July 27, 2017, the Court issued
an order approving the Settlement, which provided, among other things, that the three former non-employee directors agreed to pay
or cause to be paid $1,500,000 to us, which amount is included as a reduction to selling, general and administrative expense in
the accompanying unaudited condensed consolidated financial statements for the nine months ended January 31, 2018. We received
such payment in full in August 2017.
13. SUBSEQUENT EVENTS
Sale of Research
and Development Assets
On February 12, 2018,
we sold the majority of our research and development assets to a third-party oncology therapeutics company (Note 10).
Public Offering
of Common Stock
On February 14, 2018,
we entered into an underwriting agreement (the “Underwriting Agreement”) with Wells Fargo Securities, LLC, as
representative for the underwriters identified therein (collectively, the “Underwriters”), relating to the issuance
and sale in an underwritten public offering of 9,000,000 shares of our common stock, par value $0.001 per share, at a public offering
price of $2.25 per share (the “Offering”). In addition, pursuant to the Underwriting Agreement, we also granted the
Underwriters a 30-day option to purchase up to an additional 1,350,000 shares of our Common Stock under this Offering at the public
offering price of $2.25 per share less the underwriting discounts and commissions to cover over-allotments, if any (the “Overallotment
Option”).
On February 20, 2018,
we completed the Offering pursuant to which we sold 10,294,445 shares of our Common Stock, including 1,294,445 shares sold pursuant
to the Underwriter’s Overallotment Option at the public offering price of $2.25 per share. The aggregate gross proceeds we
received from the Offering, including the shares sold pursuant to the Overallotment Option, was $23,163,000, before deducting underwriting
discounts and commissions and other offering related expenses. We intend to use the net proceeds from the offering for the expansion
of our contract manufacturing business and for general corporate purposes.
The Offering was made
pursuant to a prospectus supplement filed with the SEC on February 14, 2018 under our January 2018 Shelf (Note 6). As of March
12, 2018, aggregate gross proceeds of up to $101,837,000 remained available to us under the January 2018 Shelf.
Series E Preferred
Stock Dividend
On March 7, 2018, our
Board of Directors declared a quarterly cash dividend of $0.65625 per share on our Series E Preferred Stock. The dividend payment
is equivalent to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference, accruing from January
1, 2018 through March 31, 2018. The cash dividend is payable on April 2, 2018 to holders of the Series E Preferred Stock of record
on March 19, 2018.