The following table provides a reconciliation
of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets to the total
of the same amounts shown above:
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
1. DESCRIPTION
OF COMPANY AND BASIS OF PRESENTATION
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.
Basis of Presentation
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles
(“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”)
related to quarterly reports on Form 10-Q, and accordingly, they do not include all of the information and disclosures required
by U.S. GAAP for annual financial statements. These unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form
10-K for the fiscal year ended April 30, 2018. The condensed consolidated balance sheet at April 30, 2018 has been derived
from audited financial statements at that date. The unaudited financial information for the interim periods presented herein reflects
all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results
of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments. Results of operations
for interim periods covered by this Quarterly Report on Form 10-Q may not necessarily be indicative of results of operations for
the full fiscal year or any other interim period.
The unaudited condensed
consolidated financial statements include the accounts of Avid Bioservices, Inc., and its subsidiaries. All intercompany accounts
and transactions among the consolidated entities have been eliminated in the unaudited condensed consolidated financial statements.
The preparation of
financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported
amounts, as well as disclosures of commitments and contingencies in the financial statements and accompanying notes. Actual results
could differ materially from those estimates and assumptions.
Discontinued Operations
For all periods presented,
the operating results of our former research and development segment have been excluded from continuing operations and reported
as income (loss) from discontinued operations, net of tax in the accompanying unaudited condensed consolidated financial statements
for all periods presented. In addition, the assets and liabilities related to our discontinued research and development segment
are reported as assets and liabilities of discontinued operations in the accompanying unaudited condensed consolidated balance
sheets at January 31, 2019 and April 30, 2018. For additional information on the discontinuation of our research and development
segment, refer to Note 10, “Sale of Research and Development Assets”.
Segment Reporting
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 of our research and development segment (Note
10),
management has determined that the Company now operates in only one
operating segment. Accordingly, we reported our financial results for one reportable segment to reflect this new organizational
structure.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
Restructuring
Restructuring
charges consist of one-time termination benefits, including severance and other employee related costs related to a workforce
reduction pursuant to a restructuring plan we implemented in August 2017 (fiscal year 2018). Under this restructuring plan,
which we completed in October 2017 (fiscal year 2018), we incurred an aggregate of $1,588 in restructuring charges, of which $330
related to our discontinued research and development segment (Note 10) and $1,258 related to our contract manufacturing
services segment.
Going Concern
The accompanying condensed
consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating
to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined
that we are unable to continue as a going concern.
At January 31, 2019,
we had $27,758 in cash and cash equivalents. Our ability to fund our operations depends on the amount of cash on hand and our ability
to generate sufficient revenue to cover our operations. We have expended substantial funds on our legacy research and development
of pharmaceutical product candidates (discontinued operations) and our contract manufacturing business (continuing operations).
As a result, we have experienced losses and negative cash flows from operations since our inception, and although we have discontinued
our research and development segment, we expect negative cash flows from operations to continue until we can generate sufficient
revenue to generate positive cash flow from operations.
In the event we are
unable to obtain sufficient business to support our operations beyond the next twelve months, we may need to raise additional capital.
Our ability to raise additional capital in the equity markets to fund our obligations in future periods depends on a number of
factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock
is subject to a number of risks and uncertainties, including but not limited to, negative economic conditions, adverse market conditions,
and adverse financial results. If we are unable to either raise sufficient capital in the equity markets or generate additional
revenue, we may need to further restructure, or cease, our operations. In addition, even if we are able to raise additional capital,
it may not be at a price or on terms that are favorable to us.
As a result of the
above factors, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year
after the date that our accompanying unaudited condensed consolidated financial statements are issued.
Reclassifications
Certain prior year
amounts related to deferred revenue and customer deposits have been reclassified to contract liabilities in our accompanying consolidated
balance sheet for the fiscal year ended April 30, 2018 and in our accompanying consolidated statement of cash flows for the nine
months ended January 31, 2018 to conform to the current period presentation (Note 2). This reclassification had no effect on previously
reported net loss.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Revenue from Contracts with Customers
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
(“ASC 606”), which, along with subsequent
amendments issued after May 2014, replaced substantially all then relevant U.S. GAAP revenue recognition guidance. ASC 606, as
amended, is based on the principle that revenue is recognized to depict the contractual transfer of goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services
utilizing a new five-step revenue recognition model, which steps include (i) identify the contract(s) with a customer; (ii) identify
the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the
performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
On May 1, 2018, we
adopted ASC 606, as amended, to all contracts not completed as of May 1, 2018 using the modified retrospective method. Results
for the reporting period beginning after May 1, 2018 are presented in accordance with ASC 606, while prior period amounts continue
to be reported under the accounting standards that were in effect for the prior period. The accounting policy for revenue recognition
for periods prior to May 1, 2018 is described in Note 2 of the Notes to the Consolidated Financial Statements included in our Annual
Report on Form
10-K for the fiscal year ended April 30,
2018.
The cumulative effect
of adopting ASC 606 resulted in a one-time adjustment of $2,739 to the opening balance of accumulated deficit. The cumulative effect
adjustment relates to the recognition of revenue and related costs for customer contracts that transfer goods or services over
time. Under ASC 606, the timing of the recognition of contract manufacturing revenue and the related cost of contract manufacturing
associated with goods or services provided to customers with no alternative use are recognized over time utilizing an input method
that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance
obligation. By contrast, in the prior period, contract manufacturing revenue and the related costs were recognized upon completion
of the performance obligation in accordance with accounting standards that were in effect in the prior period. Under these customer
contracts the customer retains control of the product as it is being created or enhanced by our services and/or we are entitled
to compensation for progress to date that includes an element of profit margin.
The following table
summarizes the cumulative effect of the adoption of ASC 606 on amounts previously reported in our consolidated balance sheet at
April 30, 2018:
|
|
As
Reported
April 30, 2018
|
|
|
ASC 606 Transition Adjustment
|
|
|
Balance at
May 1, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
–
|
|
|
$
|
2,888
|
|
|
$
|
2,888
|
|
Inventories
|
|
|
16,129
|
|
|
|
(7,871
|
)
|
|
|
8,258
|
|
Contract liabilities
|
|
|
27,935
|
|
|
|
(7,913
|
)
|
|
|
20,022
|
|
Other current liabilities
|
|
|
905
|
|
|
|
191
|
|
|
|
1,096
|
|
Accumulated deficit
|
|
|
(559,129
|
)
|
|
|
2,739
|
|
|
|
(556,390
|
)
|
The following tables
summarize the effect of the adoption of ASC 606 on our unaudited condensed consolidated balance sheet at January 31, 2019 and our
unaudited condensed consolidated statements of operations and comprehensive loss for the three and nine months ended January 31,
2019:
|
|
As
Reported
|
|
|
Effect of Change
Higher/(Lower)
|
|
|
Balance Without Adoption of ASC 606
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
3,912
|
|
|
$
|
3,912
|
|
|
$
|
–
|
|
Inventories
|
|
|
8,660
|
|
|
|
(15,635
|
)
|
|
|
24,295
|
|
Contract liabilities
|
|
|
14,620
|
|
|
|
(17,617
|
)
|
|
|
32,237
|
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
|
|
Three Months Ended January 31, 2019
|
|
|
|
As
Reported
|
|
|
Effect of Change
Higher/(Lower)
|
|
|
Balance Without Adoption of ASC 606
|
|
|
|
|
|
|
|
|
|
|
|
Contract manufacturing revenue
|
|
$
|
13,781
|
|
|
$
|
(1,153
|
)
|
|
$
|
14,934
|
|
Cost of contract manufacturing
|
|
|
11,731
|
|
|
|
(621
|
)
|
|
|
12,352
|
|
Gross profit
|
|
|
2,050
|
|
|
|
(532
|
)
|
|
|
2,582
|
|
Operating loss
|
|
|
(1,192
|
)
|
|
|
(532
|
)
|
|
|
(660
|
)
|
Loss from continuing operations
|
|
|
(1,139
|
)
|
|
|
(532
|
)
|
|
|
(607
|
)
|
|
|
Nine Months Ended January 31, 2019
|
|
|
|
As
Reported
|
|
|
Effect of Change
Higher/(Lower)
|
|
|
Balance Without Adoption of ASC 606
|
|
|
|
|
|
|
|
|
|
|
|
Contract manufacturing revenue
|
|
$
|
36,548
|
|
|
$
|
10,678
|
|
|
$
|
25,870
|
|
Cost of contract manufacturing
|
|
|
32,972
|
|
|
|
7,284
|
|
|
|
25,688
|
|
Gross profit
|
|
|
3,576
|
|
|
|
3,394
|
|
|
|
182
|
|
Operating loss
|
|
|
(5,697
|
)
|
|
|
3,394
|
|
|
|
(9,091
|
)
|
Loss from continuing operations
|
|
|
(5,290
|
)
|
|
|
3,394
|
|
|
|
(8,684
|
)
|
Revenue Recognition
We derive revenue
from contract manufacturing services provided under our customer contracts, which we have disaggregated into the following revenue
streams:
Manufacturing revenue
The manufacturing
revenue stream represents revenue from the manufacturing of customer product(s) derived from mammalian cell culture covering clinical
through commercial manufacturing runs. Under a manufacturing contract, a quantity of manufacturing runs are ordered and the product
is manufactured according to the customer’s specifications and typically only one performance obligation is included. Each
manufacturing run represents a distinct service that is sold separately and has stand-alone value to the customer. The product(s)
are manufactured exclusively for a specific customer and have no alternative use. The customer retains control of their product
during the entire manufacturing process and can make changes to the process or specifications at their request. Under these agreements,
we are entitled to consideration for progress to date that includes an element of profit margin. Revenue associated with this stream
is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current
estimates for the entire cost of the performance obligation.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
Process development
revenue
The process development
revenue stream represents revenue from non-manufacturing related services associated with the custom development of a customer’s
product. Under a process development contract, the customer owns the product details and process, which has no alternative use.
These process development projects are customized to each customer to meet their specifications and typically only one performance
obligation is included. Each process represents a distinct service that is sold separately and has stand-alone value to the customer.
The customer also retains control of their product as the product is being created or enhanced by our services and can make changes
to their process or specifications upon request. Revenue associated with this stream is recognized over time utilizing an input
method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance
obligation.
The following table
disaggregates our contract manufacturing revenue for the three and nine months ended January 31, 2019 and 2018 by revenue stream.
Contract manufacturing revenue for the three and nine months ended January 31, 2018 has not been adjusted in accordance with our
modified retrospective adoption of ASC 606 and continues to be reported under the accounting standards that were in effect prior
to our adoption of ASC 606 on May 1, 2018:
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Manufacturing revenue
|
|
$
|
10,770
|
|
|
$
|
6,045
|
|
|
$
|
28,313
|
|
|
$
|
42,281
|
|
Process development revenue
|
|
|
3,011
|
|
|
|
774
|
|
|
|
8,235
|
|
|
|
4,397
|
|
Total contract manufacturing revenue
|
|
$
|
13,781
|
|
|
$
|
6,819
|
|
|
$
|
36,548
|
|
|
$
|
46,678
|
|
Contract balances
The timing of revenue
recognition, billings and cash collections results in billed trade receivables, contract assets (unbilled receivables), and contract
liabilities (customer deposits and deferred revenue). Contract assets are recorded when our right to consideration is conditioned
on something other than the passage of time. Contract assets are reclassified to trade receivables on the balance sheet when our
rights become unconditional. Contract liabilities represent customer deposits and deferred revenue billed and/or received in advance
of our fulfillment of performance obligations. Contract liabilities will convert to contract manufacturing revenue as we perform
our obligations under the contract.
We recognized contract
manufacturing revenue of $2,208 and $12,233, respectively, during the three and nine months ended January 31, 2019 for which the
contract liability was recorded in the prior year.
Practical expedients
and contract costs
We apply the practical
expedient available under ASC 606 that permits us not to disclose the value of unsatisfied performance obligations for contracts
with an original expected length of one year or less. In addition, we currently do not have any unsatisfied performance obligations
for contracts greater than one year.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
Costs incurred to
obtain or fulfill a contract are not material. These costs are generally employee sales commissions, which are expensed when incurred
and included in selling, general and administrative expense in the accompanying condensed consolidated statements of operations
and comprehensive loss.
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, 2019 and April 30, 2018, restricted cash of $1,150 was pledged as collateral under these
letters of credit.
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, 2019
and 2018, 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, 2019
and April 30, 2018, 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, 2019 and 2018.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
Stock-based Compensation
We account for stock
options, restricted stock units and restricted stock rights (collectively referred to as “RSUs”) and other stock-based
awards granted under our equity compensation plans in accordance with the authoritative guidance for stock-based compensation.
The estimated fair value of stock options granted to employees in exchange for services is measured at the grant date, using a
fair value based method, such as a Black-Scholes option valuation model, and is recognized as expense on a straight-line basis
over the requisite service periods. In addition, the fair value of RSUs is measured at the grant date based on the closing market
price of our common stock on the date of grant, and is recognized as expense on a straight-line basis over the period of vesting.
Forfeitures are recognized as a reduction of stock-based compensation expense as they occur. As of January 31, 2019, there were
no outstanding stock-based awards with market or performance conditions.
Income Taxes
Deferred income tax
assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial
reporting and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which those
temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount of deferred tax
assets that, based on available evidence, are not expected to be realized. As a result of our cumulative losses, management has
concluded that a full valuation allowance against our net deferred tax assets is appropriate.
The income tax benefit
recognized in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss during the three
and nine months ended January 31, 2019 resulted from the “Intraperiod Tax Allocation” rules under ASC 740:
Income
Taxes
(“ASC 740”), which requires the allocation of an entity’s total annual income tax provision among continuing
operations and, in our case, discontinued operations. Accordingly, a tax benefit was recorded in continuing operations with an
offsetting tax expense recorded in discontinued operations (Note 10).
In December 2017, the
Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act includes a number of changes to existing U.S. tax laws
that impact us, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years, effective
January 1, 2018. We performed a review of the Tax Act for the fiscal year ended April 30, 2018, and based on the information available
at that time, recorded certain provisional amounts related to the revaluation of our deferred tax assets and liabilities, which
were fully offset by a valuation allowance.
We applied the guidance
under Staff Accounting Bulletin No. 118 when accounting for the enactment-date effects of the Tax Act for the fiscal year ended
April 30, 2018 as we had not completed our accounting for all the enactment-date income tax effects of the Tax Act under ASC 740
for the remeasurement of deferred tax assets and liabilities. We have now completed our accounting for the enactment-date income
tax effects of the Tax Act. Upon further analyses of the Tax Act and Notices and regulations issued and proposed by the U.S. Department
of the Treasury and the Internal Revenue Service our provisional amount recognized for the fiscal year ended April 30, 2018 did
not change; therefore, there was no adjustment to tax expense.
Adoption of Other Recent Accounting
Pronouncements
In November 2016, the
FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):
Restricted Cash
, which clarifies the presentation requirements
of restricted cash within the statement of cash flows. ASU 2016-18 will require that a statement of cash flows explain the change
during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash
equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with
cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash
flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We
adopted ASU 2016-18 on May 1, 2018 and the cash and cash equivalents at the beginning-of-period and end-of-period total amounts
in our condensed consolidated statements of cash flows have been adjusted to include $1,150 of restricted cash for each of the
periods presented.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
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 stock-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. We adopted ASU 2017-09
on May 1, 2018. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and
related disclosures.
New Accounting Standards
Not Yet Adopted
In February 2016,
the FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to recognize right-of-use assets and lease liabilities
on its balance sheet for all leases with lease terms greater than 12 months 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. While we continue to assess the impact of the new guidance, we believe the primary effect
of adopting ASU 2016-02 will be to record right-of-use assets and corresponding obligations for our operating leases, which we
believe will have a material impact our condensed consolidated financial statements and related disclosures.
3. Trade
and other RECEIVABLEs
Trade receivables represent
amounts billed for contract manufacturing services and are recorded at the invoiced amount net of an allowance for doubtful accounts,
if necessary. Other receivables are reported at amounts expected to be collected net of an allowance for doubtful accounts, if
necessary. Trade and other receivables consist of the following:
|
|
January 31,
2019
|
|
|
April 30,
2018
|
|
Trade receivables
|
|
$
|
7,884
|
|
|
$
|
3,539
|
|
Other receivables
|
|
|
1
|
|
|
|
215
|
|
Total trade and other receivables
|
|
$
|
7,885
|
|
|
$
|
3,754
|
|
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,
2019 and April 30, 2018, we determined no allowance for doubtful accounts was necessary.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
4. INVENTORIES
Inventories are recorded
at the lower of cost or market (net realizable value) and include raw materials and work-in-process (comprised of raw materials,
direct labor and overhead costs associated with in-process manufacturing services) associated with contract manufacturing services.
Overhead costs allocated to work-in-process inventory are based on the normal capacity of our production facilities and do not
include costs from under absorption of overhead costs 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, 2019 and 2018, we expensed $1,740 and $6,392, respectively,
and $5,344 and $11,182, respectively, in idle capacity costs directly to cost of contract manufacturing in the accompanying condensed
consolidated financial statements. Subsequent to the adoption of ASC 606 (Note 2), manufacturing costs associated with work-in-process
are recorded to cost of contract manufacturing in the accompanying condensed consolidated financial statements as incurred. Cost
is determined by the first-in, first-out method. Inventories consist of the following:
|
|
January 31,
2019
|
|
|
April 30,
2018
|
|
Raw materials
|
|
$
|
8,660
|
|
|
$
|
8,165
|
|
Work-in-process
|
|
|
–
|
|
|
|
7,964
|
|
Total inventories
|
|
$
|
8,660
|
|
|
$
|
16,129
|
|
5. 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, 2019 and April 30, 2018. All of our property
and equipment are located in the U.S.
Property and equipment,
net, consists of the following:
|
|
January 31,
2019
|
|
|
April 30,
2018
|
|
Leasehold improvements
|
|
$
|
20,648
|
|
|
$
|
20,686
|
|
Laboratory and manufacturing equipment
|
|
|
12,427
|
|
|
|
10,258
|
|
Furniture, fixtures, office equipment and software
|
|
|
5,210
|
|
|
|
4,597
|
|
Construction-in-progress
|
|
|
1,656
|
|
|
|
3,310
|
|
Total property and equipment
|
|
|
39,941
|
|
|
|
38,851
|
|
Less accumulated depreciation and amortization
|
|
|
(14,065
|
)
|
|
|
(12,372
|
)
|
Total property and equipment, net
|
|
$
|
25,876
|
|
|
$
|
26,479
|
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
Depreciation and amortization
expense for the three and nine months ended January 31, 2019 was $681 and $2,006, respectively. Depreciation and amortization expense
for the three and nine months ended January 31, 2018 was $645 and $1,945, respectively.
6. STOCKHOLDERS’
EQUITY
Series E Preferred
Stock Dividend
The following table
summarizes the 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”) quarterly dividend activity
during the nine months ended January 31, 2019:
Declaration
Date
|
|
Record
Date
|
|
Payment
Date
|
|
Dividends
Paid
|
|
|
Dividend
Per Share
|
|
6/6/2018
|
|
6/18/2018
|
|
7/2/2018
|
|
$
|
1,081
|
|
|
$
|
0.65625
|
|
9/5/2018
|
|
9/17/2018
|
|
10/1/2018
|
|
$
|
1,081
|
|
|
$
|
0.65625
|
|
12/5/18
|
|
12/17/2018
|
|
1/2/2019
|
|
$
|
1,081
|
|
|
$
|
0.65625
|
|
Shares of Common
Stock Authorized and Reserved for Future Issuance
On October 4, 2018,
our stockholders approved an amendment to our Certificate of Incorporation to decrease our authorized number of shares of common
stock from 500,000,000 shares to 150,000,000 shares (the “Certificate of Amendment”). The Certificate of Amendment
became effective upon filing with the Secretary of State of the State of Delaware on October 4, 2018.
As of January 31, 2019,
56,072,291 shares of our common stock were issued and outstanding. In addition, our common stock outstanding as of January 31,
2019 excluded the following shares of our common stock reserved for future issuance:
|
·
|
7,294,508 shares of common stock reserved for issuance under outstanding option grants and RSUs,
and available for issuance under our stock incentive plans;
|
|
·
|
1,231,699 shares of common stock reserved for and available for issuance under our Employee Stock
Purchase Plan; 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 shares of 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.
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
7. equity
compensation plans
Stock Incentive Plans
On October 4, 2018,
our stockholders approved the Avid Bioservices, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”) which provides,
among other things, the ability for us to grant stock options, RSUs, stock appreciation rights and other forms of share-based awards.
The number of shares
of our common stock authorized for issuance under the 2018 Plan is the sum of (A) 2,350,000 and (B) the aggregate number of shares
of common stock available for the grant of awards under our 2009, 2010, and 2011 Stock Incentive Plans (the “Prior Plans”)
as of October 4, 2018 (the “Effective Date” of the 2018 Plan). The 2018 Plan replaced the Prior Plans, and no new awards
will be granted under the Prior Plans as of the Effective Date. However, any awards outstanding under the Prior Plans on the Effective
Date will remain subject to and be paid under the applicable Prior Plan, and any shares subject to outstanding awards under the
Prior Plans that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will
automatically become available for issuance under the 2018 Plan.
As of January 31, 2019,
we had an aggregate of 7,294,508 shares of our common stock reserved for issuance under our stock incentive plans, of which, 3,507,748
shares were subject to outstanding options and RSUs and 3,786,760 shares were available for future grants of stock-based awards.
Stock Options
The following summarizes
our stock option transaction activity for the nine months ended January 31, 2019:
Stock Options
|
|
Shares
|
|
|
Weighted Average
Exercisable Price
|
|
Outstanding, May 1, 2018
|
|
|
3,597,738
|
|
|
$
|
8.74
|
|
Granted
|
|
|
925,939
|
|
|
$
|
5.04
|
|
Exercised
|
|
|
(343,359
|
)
|
|
$
|
3.47
|
|
Canceled or expired
|
|
|
(878,820
|
)
|
|
$
|
11.53
|
|
Outstanding, January 31, 2019
|
|
|
3,301,498
|
|
|
$
|
7.51
|
|
Restricted Stock
Units (“RSUs”)
During the nine months
ended January 31, 2019, the Compensation Committee of the Board of Directors granted an aggregate of 217,200 RSUs to substantially
all of our employees, excluding executive officers, which entitles the employee the right to be issued a share of our common stock
upon the vesting of each RSU. The RSUs have an aggregate grant date fair value of $929, based on the closing market price of our
common stock on the date of grant, and vest at the rate of one-fourth of the shares underlying the RSUs granted on each anniversary
of the date of grant.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
The following summarizes
our RSU transaction activity for the nine months ended January 31, 2019:
RSUs
|
|
|
Shares
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Outstanding, May 1, 2018
|
|
|
|
–
|
|
|
$
|
–
|
|
Granted
|
|
|
|
217,200
|
|
|
|
4.28
|
|
Vested
|
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
|
(10,950
|
)
|
|
|
3.62
|
|
Outstanding, January 31, 2019
|
|
|
|
206,250
|
|
|
$
|
4.31
|
|
Employee Stock Purchase Plan
We have reserved a
total of 2,142,857 shares of our common stock to be purchased under our Employee Stock Purchase Plan (“ESPP”), of which
1,231,699 shares remained available to purchase at January 31, 2019, 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, 2019, 39,710 shares of our common stock were purchased under the
ESPP at a purchase price of $2.87 per share.
Stock-Based Compensation
Total stock-based compensation
expense related to stock-based awards issued under our equity compensation plans is included in the accompanying unaudited condensed
consolidated statements of operations and comprehensive loss as follows:
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Cost of contract manufacturing
|
|
$
|
147
|
|
|
$
|
139
|
|
|
$
|
317
|
|
|
$
|
277
|
|
Selling, general and administrative
|
|
|
311
|
|
|
|
259
|
|
|
|
763
|
|
|
|
589
|
|
Discontinued operations
|
|
|
–
|
|
|
|
14
|
|
|
|
–
|
|
|
|
340
|
|
Total
|
|
$
|
458
|
|
|
$
|
412
|
|
|
$
|
1,080
|
|
|
$
|
1,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
385
|
|
|
$
|
374
|
|
|
$
|
914
|
|
|
$
|
1,070
|
|
RSUs
|
|
|
40
|
|
|
|
–
|
|
|
|
82
|
|
|
|
–
|
|
ESPP
|
|
|
33
|
|
|
|
38
|
|
|
|
84
|
|
|
|
136
|
|
Total
|
|
$
|
458
|
|
|
$
|
412
|
|
|
$
|
1,080
|
|
|
$
|
1,206
|
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
As of January 31, 2019,
the total estimated unrecognized compensation cost related to non-vested employee stock options and non-vested RSUs was $4,287
and $807, respectively. These costs are expected to be recognized over a weighted average vesting periods of 2.87 years and 3.59
years, respectively.
8. NET
LOSS PER COMMON SHARE
Basic net loss per
common share is computed by dividing our net loss attributable to common stockholders by the weighted average number of shares
of common stock outstanding during the period, excluding the dilutive effects of stock options, unvested RSUs, shares of common
stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Diluted net loss
per common share is computed by dividing our net loss attributable to common stockholders by the sum of the weighted average number
of shares of common stock outstanding during the period plus the potential dilutive effects of stock options, unvested RSUs, shares
of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Net
loss attributable to common stockholders represents our net loss plus Series E Preferred Stock accumulated dividends. Series E
Preferred Stock accumulated dividends include dividends declared for the period (regardless of whether or not the dividends have
been paid) and dividends accumulated for the period (regardless of whether or not the dividends have been declared).
The potential dilutive
effect of stock options, unvested RSUs, shares of common stock expected to be issued under our ESPP, and warrants outstanding during
the period are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The
potential dilutive effect of our Series E Preferred Stock outstanding during the period was calculated using the if-converted method
assuming the conversion of Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but
are excluded if their effect is anti-dilutive. However, because the impact of stock options, unvested RSUs, shares of common stock
expected to be issued under our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there
was no difference between basic and diluted loss per common share amounts for the three and nine months ended January 31, 2019
and 2018.
The calculation of
weighted average diluted shares outstanding for the three and nine months ended January 31, 2019 and 2018 excludes the dilutive
effect of the following weighted average outstanding stock options, unvested RSUs and shares of common stock expected to be issued
under our ESPP as their impact is anti-dilutive during periods of net loss:
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
116,962
|
|
|
|
115,425
|
|
|
|
160,937
|
|
|
|
78,427
|
|
RSUs
|
|
|
38,466
|
|
|
|
–
|
|
|
|
33,606
|
|
|
|
–
|
|
ESPP
|
|
|
86
|
|
|
|
1,202
|
|
|
|
9,773
|
|
|
|
466
|
|
Total
|
|
|
155,514
|
|
|
|
116,627
|
|
|
|
204,316
|
|
|
|
78,893
|
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
The calculation of
weighted average diluted shares outstanding for the three and nine months ended January 31, 2019 and 2018 also excludes the following
weighted average outstanding stock options, unvested RSUs, warrants, and Series E Preferred Stock (assuming the if-converted method),
as their exercise prices or conversion price were greater than the average market price of our common stock during the respective
periods, resulting in an anti-dilutive effect:
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
2,779,142
|
|
|
|
3,214,694
|
|
|
|
2,659,632
|
|
|
|
3,663,102
|
|
RSUs
|
|
|
47,482
|
|
|
|
–
|
|
|
|
15,827
|
|
|
|
–
|
|
Warrants
|
|
|
–
|
|
|
|
39,040
|
|
|
|
17,115
|
|
|
|
39,040
|
|
Series E Preferred Stock
|
|
|
1,978,783
|
|
|
|
1,978,783
|
|
|
|
1,978,783
|
|
|
|
1,978,783
|
|
Total
|
|
|
4,805,407
|
|
|
|
5,232,517
|
|
|
|
4,671,357
|
|
|
|
5,680,925
|
|
9. WARRANTS
On August 30, 2018,
warrants to purchase 39,040 shares of our common stock expired unexercised. As of January 31, 2019, we had no warrants issued and
outstanding.
10. Sale
of research and development assets
February 2018 Asset
Assignment and Purchase Agreement
On February 12, 2018,
we entered into an Asset Assignment and Purchase Agreement (the “February 2018 Purchase Agreement”) with Oncologie,
Inc. (“Oncologie”) pursuant to which we sold to Oncologie the majority of our research and development assets, which
included the assignment of certain exclusive licenses related to our former phosphatidylserine (PS)-targeting program, as well
as certain other licenses and assets useful and/or necessary for the potential commercialization of bavituximab.
Pursuant to the February
2018 Purchase Agreement, we received an aggregate of $8,000 from Oncologie, paid over three installments, of which $3,000 was received
in March 2018 (first installment), $3,000 was received in June 2018 (second installment) and $2,000 was received in September 2018
(third installment). We are also eligible to receive up to an additional $95,000 in the event that Oncologie achieves certain development,
regulatory and commercialization milestones with respect to bavituximab. In addition, we are eligible to receive royalties on net
sales that are upward tiering into the mid-teens in the event that Oncologie commercializes and sells products utilizing bavituximab
or the other transferred assets. As of January 31, 2019, no development, regulatory and commercialization milestones as defined
in the February 2018 Purchase Agreement have been achieved by Oncologie. Oncologie is responsible for all future research, development
and commercialization of bavituximab, including all related intellectual property costs and all other future liabilities and obligations
arising out of the ownership of the transferred assets (i.e., we remain obligated for all liabilities associated with the research
and development assets associated with the February 2018 Purchase Agreement incurred or arising prior to February 13, 2018). In
addition, during May 2018, we entered into a separate services agreement with Oncologie to provide contract development and manufacturing
services, at our commercial rates, in support of the research and development assets sold under the February 2018 Purchase Agreement.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
September 2018 Asset
Assignment and Purchase Agreement
On September 13, 2018,
we entered into a separate Asset Assignment and Purchase Agreement (the “September 2018 Purchase Agreement”) with Oncologie
pursuant to which we sold to Oncologie our r84 technology, which included the assignment of certain licenses, patents and other
assets useful and/or necessary for the potential commercialization of the r84 technology.
Pursuant to the September
2018 Purchase Agreement, we received $1,000 from Oncologie, which amount was paid to us in October 2018. We are also eligible to
receive up to an additional $21,000 in the event that Oncologie achieves certain development, regulatory and commercialization
milestones with respect to r84. In addition, we are eligible to receive royalties on net sales ranging from the low to mid-single
digits in the event that Oncologie commercializes and sells products utilizing the r84 technology. As of January 31, 2019, no development,
regulatory and commercialization milestones as defined in the September 2018 Purchase Agreement have been achieved by Oncologie.
Oncologie is responsible for all future research, development and commercialization of r84, including all related intellectual
property costs and all other future liabilities and obligations arising out of the ownership of the transferred assets (i.e., we
remain obligated for all liabilities associated with the research and development assets associated with the September 2018 Purchase
Agreement incurred or arising prior to September 13, 2018).
Discontinued Operations
As a result of the
sale of our PS-targeting program and our r84 technology, the abandonment of our remaining research and development assets, and
the strategic shift in our corporate direction to focus solely on our CDMO business, the operating results from our former research
and development segment and the related assets and liabilities have been presented as discontinued operations in the accompanying
unaudited condensed consolidated financial statements for all periods presented (Note 1). The results of operations from discontinued
operations presented below include certain allocations that management believes fairly reflect the utilization of services provided
to the former research and development segment. The allocations do not include amounts related to general corporate administrative
expenses or interest expense. Therefore, the results of operations from the former research and development segment do not necessarily
reflect what the results of operations would have been had the former research and development segment operated as a stand-alone
segment.
The following table
summarizes the results of discontinued operations for the three and nine months ended January 31, 2019 and 2018:
|
|
Three Months Ended
January 31,
|
|
|
Nine Months Ended
January 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
–
|
|
|
$
|
374
|
|
|
$
|
–
|
|
|
$
|
7,590
|
|
Selling, general and administrative
|
|
|
–
|
|
|
|
1,315
|
|
|
|
–
|
|
|
|
2,097
|
|
Restructuring charges
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
330
|
|
Total operating expenses
|
|
$
|
–
|
|
|
$
|
1,689
|
|
|
$
|
–
|
|
|
$
|
10,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expense
|
|
|
–
|
|
|
|
387
|
|
|
|
–
|
|
|
|
387
|
|
Gain on sale of research and development assets before income taxes
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
1,000
|
|
|
|
–
|
|
Income tax expense
|
|
|
–
|
|
|
|
–
|
|
|
|
(261
|
)
|
|
|
–
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
–
|
|
|
$
|
(2,076
|
)
|
|
$
|
739
|
|
|
$
|
(10,404
|
)
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
The following table summarizes the assets
and liabilities of discontinued operations as of January 31, 2019 and April 30, 2018:
|
|
January 31, 2019
|
|
|
April 30, 2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
Other receivables
|
|
$
|
–
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Total assets of discontinued operations
|
|
$
|
–
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
–
|
|
|
$
|
32
|
|
Accrued clinical trial and related fees
|
|
|
–
|
|
|
|
3,613
|
|
Accrued payroll and related costs
|
|
|
–
|
|
|
|
614
|
|
Other liabilities
|
|
|
125
|
|
|
|
291
|
|
Total liabilities of discontinued operations
|
|
$
|
125
|
|
|
$
|
4,550
|
|
The carrying value
of the assets and liabilities deemed a component of discontinued operations were not classified as “held for sale”
in the accompanying unaudited condensed consolidated balance sheet at January 31, 2019 and the accompanying condensed consolidated
balance sheet at April 30, 2018, as Oncologie did not purchase or assume any of the reported assets or liabilities under the aforementioned
February 2018 Purchase Agreement and September 2018 Purchase Agreement.
11. SUBSEQUENT EVENTS
On March 6, 2019, our
Board of Directors declared a quarterly cash dividend of $0.65625 per share on our outstanding Series E Preferred Stock. The dividend
payment is equivalent to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference, accruing
from January 1, 2019 through March 31, 2019. The cash dividend is payable on April 1, 2019 to holders of the Series E Preferred
Stock of record on March 18, 2019.