NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Note 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.
Effective January 5,
2018, we changed our name to Avid Bioservices, Inc. from Peregrine Pharmaceuticals, Inc. in connection with our transition to a
dedicated CDMO and the discontinuation of our research and development activities. Except where specifically noted or the context
otherwise requires, references to “Avid,” “the Company,” “we,” “us,” and “our,”
in this Annual Report refer to Avid Bioservices, Inc. and its subsidiaries.
Basis of Presentation
and Preparation
The accompanying consolidated
financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”)
and include the accounts of Avid Bioservices, Inc. and its subsidiaries. All intercompany accounts and transactions among the consolidated
entities have been eliminated in the consolidated financial statements. The preparation of our financial statements in conformity
with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ materially from these estimates.
The financial statements
have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At April 30, 2019, we had $32,351 in cash and cash equivalents.
Our ability to fund our operations is dependent on the amount of cash on hand and our ability to generate positive cash flow to
sustain our current operations. We have expended substantial funds on our contract manufacturing business and, historically, on
our legacy 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 expect negative cash flows from operations to continue until we
can generate sufficient revenue to generate positive cash flow from operations. We plan to fund our operations using our existing
cash and cash equivalents and cash generated from services provided under our customer contracts. In the event we are unable to
secure sufficient business to support our current operations, we may need to raise additional capital in the future. There can
be no assurance that equity financing will be available on acceptable terms or at all. Our ability to raise additional capital
in the equity markets to fund our future operations 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, our financial results and economic and market conditions. If we are unable to fund our continuing
operations through these sources 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. Any of these actions could materially
harm our business, results of operations, and future prospects. Further, we performed an analysis and concluded that based on
our cash and cash equivalents as of April 30, 2019 in conjunction with cash generated from services provided under our customer
contracts will provide us with adequate cash on hand to support our operations for at least one year from the date that our consolidated
financial statements are issued.
Certain prior year amounts
related to deferred revenue and customer deposits have been reclassified to contract liabilities to conform to the current period’s
presentation. This reclassification had no effect on previously reported net loss.
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 consolidated financial statements. 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 Consolidated Balance Sheet at 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
Our business had historically
been organized into two reportable operating segments: (i) contract manufacturing services and (ii) research and development. However,
as a result of the aforementioned discontinuation of our research and development segment,
management
has determined that the Company operates in only one operating segment. Accordingly, we reported our financial results for one
reportable segment
.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Note 2 – Summary of Significant
Accounting Policies
Cash and Cash Equivalents
We consider all short-term investments readily convertible
to cash, without notice or penalty, with an initial maturity of 90 days or less to be cash equivalents.
Restricted Cash
Under the terms of three
separate operating leases related to our facilities, we are required to maintain, as collateral, letters of credit during the terms
of such leases (Note 3). At April 30, 2019 and 2018, restricted cash of $1,150 was pledged as collateral under these letters of
credit.
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 generally
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.
Process development revenue
The process development revenue stream
generally represents revenue from non-manufacturing related services associated with the custom development of a manufacturing
process and analytical methods for 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.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
The
following table disaggregates our revenue for the fiscal years ended April 30, 2019, 2018 and 2017 by revenue stream.
|
|
Fiscal Year Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Manufacturing revenue
|
|
$
|
43,432
|
|
|
$
|
47,437
|
|
|
$
|
52,215
|
|
Process development revenue
|
|
|
10,171
|
|
|
|
6,184
|
|
|
|
5,415
|
|
Total Revenues
|
|
$
|
53,603
|
|
|
$
|
53,621
|
|
|
$
|
57,630
|
|
Revenues for the fiscal years ended April 30, 2018 and 2017
have not been adjusted in accordance with our modified retrospective adoption of Accounting Standards Concepts (“ASC”)
606 Revenue from Contracts with Customers (“ASC 606”) as of May 1, 2018, and continues to be reported under the accounting
standards that were in effect prior to our adoption of ASC 606 as further discussed below under the section, “
Accounting
Standards Adopted in Fiscal Year 2019
”.
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 convert to revenue as we perform our obligations under the contract.
Payment terms can vary by the type of
contract manufacturing services offered, however, the term between invoicing and when payment is due is not significant. For certain
services, payment prior to satisfaction of a performance obligation can be required, and results in recording a contract liability.
During the fiscal year ended April 30,
2019, we recognized revenue of $14,312 for which the contract liability was recorded in the prior year.
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.
Costs incurred to obtain
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 consolidated statements of operations and comprehensive loss.
Accounts Receivable
Accounts receivable generally represent
trade amounts billed for contract manufacturing services and are recorded at the invoiced amount net of an allowance for doubtful
accounts, if necessary. Accounts receivable consisted of the following:
|
|
April 30,
|
|
|
|
2019
|
|
|
2018
|
|
Trade receivables
|
|
$
|
7,374
|
|
|
$
|
3,539
|
|
Other receivables
|
|
|
–
|
|
|
|
215
|
|
Total Accounts receivable
|
|
$
|
7,374
|
|
|
$
|
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 April 30, 2019
and 2018, we determined no allowance for doubtful accounts was necessary.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
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, trade receivables and contract assets. 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 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 April 30, 2019 and 2018, approximately 95% and 93%, respectively, of our trade receivables were due from six customers. Our
contract assets are reclassified to trade receivables when our rights to consideration become unconditional.
At April 30, 2019 approximately 87% of our contract assets were attributable to eight customers.
Our revenues have 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 a product’s stage of development, the timing of regulatory
filings and approvals, the product needs of their collaborators, if applicable, their financial resources and the market demand
with respect to a commercial product.
The percentages below
represent revenues derived from each customer as a percentage of total revenues during the fiscal years ended April 30, 2019, 2018
and 2017:
Customer
|
|
Geographic Location
|
|
|
2019
|
|
|
|
2018
|
|
|
|
2017
|
|
Halozyme Therapeutics, Inc.
|
|
U.S.
|
|
|
30%
|
|
|
|
55%
|
|
|
|
58%
|
|
ADC Therapeutics America Inc.
|
|
U.S.
|
|
|
21
|
|
|
|
9
|
|
|
|
–
|
|
Coherus BioSciences, Inc.
|
|
U.S.
|
|
|
13
|
|
|
|
22
|
|
|
|
26
|
|
Other customers
|
|
U.S./non-U.S.
|
|
|
36
|
|
|
|
14
|
|
|
|
16
|
|
Total
|
|
|
|
|
100%
|
|
|
|
100%
|
|
|
|
100%
|
|
We attribute revenue to the individual
countries where the customer is headquartered. Revenues derived from U.S. based customers were 95%, 99% and 100% for the fiscal
years ended April 30, 2019, 2018 and 2017, respectively.
Inventories
Inventories are valued
at the lower of cost or net realizable value, determined by the first-in, first-out method. Subsequent to the adoption of ASC
606 (Note 2), manufacturing costs associated with work-in-process inventory (comprised of raw materials, direct labor and overhead
costs associated with in-process manufacturing services) are recorded to cost of revenues in the accompanying consolidated financial
statements as incurred. 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 revenues in the period incurred. Inventories consist of the following:
|
|
April 30,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
6,557
|
|
|
$
|
8,165
|
|
Work-in-process
|
|
|
–
|
|
|
|
7,964
|
|
Total Inventories
|
|
$
|
6,557
|
|
|
$
|
16,129
|
|
We periodically review raw materials inventory
for potential impairment and adjust inventory to its net realizable value based on the estimate of future use and reduce the carrying
value of inventory as determined necessary.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
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 primarily 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 April 30, 2019 and 2018. All of our property
and equipment are located in the U.S. Property and equipment consist of the following:
|
|
April 30,
|
|
|
|
2019
|
|
|
2018
|
|
Leasehold improvements
|
|
$
|
20,574
|
|
|
$
|
20,686
|
|
Laboratory and manufacturing equipment
|
|
|
12,858
|
|
|
|
10,258
|
|
Computer equipment and software
|
|
|
4,644
|
|
|
|
4,087
|
|
Furniture, fixtures and office equipment
|
|
|
528
|
|
|
|
510
|
|
Construction-in-progress
|
|
|
1,590
|
|
|
|
3,310
|
|
Total Property and equipment, gross
|
|
|
40,194
|
|
|
|
38,851
|
|
Less: Accumulated depreciation and amortization
|
|
|
(14,569
|
)
|
|
|
(12,372
|
)
|
Total Property and equipment, net
|
|
$
|
25,625
|
|
|
$
|
26,479
|
|
Depreciation and amortization
expense for the years ended April 30, 2019, 2018 and 2017 was $2,746, $2,562 and $2,463, respectively.
Impairment
Long-lived assets are reviewed for impairment
in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events
or changes in circumstances that indicate that their carrying value may not be recoverable. Long-lived assets are reported at the
lower of carrying amount or fair value less cost to sell. For the fiscal years ended April 30, 2019 and 2018, there were no indicators
of impairment of the value of our long-lived assets.
Fair Value of Financial
Instruments
The carrying amounts
in the accompanying Consolidated Balance Sheets for cash and cash equivalents, restricted cash, accounts receivable, accounts payable
and accrued liabilities approximate their fair values due to their short-term maturities.
Fair Value Measurements
Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:
|
·
|
Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical
assets or liabilities.
|
|
·
|
Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets
or liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are
based on quoted prices of instruments with similar attributes in active markets.
|
|
·
|
Level 3 – Unobservable inputs that are supported by little or no market activity and significant
to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation
techniques and assumptions.
|
As of April 30, 2019
and 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 fiscal years ended
April 30, 2019 and 2018.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Deferred Rent
Rent expense is recorded on a straight-line
basis over the initial term of our operating lease agreements and the difference between rent expense and the amounts paid is recorded
as a deferred rent liability. Incentives granted under our operating leases, including tenant improvements and landlord-funded
lease incentives, are recorded as a deferred rent liability, which is amortized as a reduction to rent expense over the term of
the operating lease (Note 3).
Restructuring Charges
Restructuring charges consist of one-time
termination benefits, including severance and other employee-related costs related to a workforce reduction pursuant to a restructuring
plan we implemented and completed during the fiscal year ended April 30, 2018 (Note 9). One-time termination benefits were expensed
at the date we notified the employee, unless the employee was required to provide future service, in which case the benefits were
expensed ratably over the future service period.
Stock-Based Compensation
We account for stock
options, restricted stock units and other stock-based awards granted under our equity compensation plans in accordance with the
authoritative guidance for stock-based compensation. The estimated fair value of stock options granted to employees in exchange
for services is measured at the grant date, using a fair value based method, such as a Black-Scholes option valuation model, and
is recognized as expense on a straight-line basis over the requisite service periods. The fair value of restricted stock units
is measured at the grant date based on the closing market price of our common stock on the date of grant, and is recognized as
expense on a straight-line basis over the period of vesting. Forfeitures are recognized as a reduction of stock-based compensation
expense as they occur. As of April 30, 2019, there were no outstanding stock-based awards with market or performance conditions.
Income Taxes
We utilize the liability method of accounting
for income taxes in accordance with ASC 740:
Income Taxes
(“ASC 740”). Under the liability method, deferred
taxes are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured
using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A
valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be
realized (Note 6). In addition, we recognize the impact of an uncertain tax position only when it is more likely than not the tax
position will be sustained upon examination by the tax authorities. We are required to file federal, state and foreign income tax
returns in various jurisdictions. The preparation of these returns requires us to interpret the applicable tax laws in effect in
such jurisdictions, which could affect the amount paid by us
The income tax benefit recognized in the
accompanying Consolidated Statements of Operations and Comprehensive Loss for the year ended April 30, 2019 resulted from the
“Intraperiod Tax Allocation” rules under ASC 740, which requires the allocation of an entity’s total annual
income tax provision among continuing operations and, in our case, discontinued operations. Accordingly, a tax benefit was recorded
in continuing operations with an offsetting tax expense recorded in discontinued operations (Note 10).
Comprehensive Loss
Comprehensive loss is the change in equity
during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss is equal to our
net loss for all periods presented.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Accounting Standards Adopted in Fiscal
Year 2019
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers
(Topic 606) (codified as ASC 606), which, along with subsequent amendments issued after May 2014, replaced substantially all the
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.
On May 1, 2018, we adopted ASC 606, as
amended, to all contracts that had not been completed as of May 1, 2018 using the modified retrospective method. Accordingly, results
for the reporting period beginning after May 1, 2018 are presented in accordance with ASC 606, while prior period amounts have
not been adjusted and continue to be reported under the accounting standards that were in effect for the prior periods.
The cumulative effect of adopting ASC 606
resulted in a one-time adjustment of $2,739 to the opening balance of accumulated deficit which is reflected in the accompanying
Consolidated Statements of Stockholders’ Equity for the fiscal year ended April 30, 2019. 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 revenue and the related cost of revenue 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 periods, 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 periods. 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 cumulative effect of the adoption
of ASC 606 on amounts previously reported on the Consolidated Balance Sheet at April 30, 2018 was as follows:
|
|
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 impact of the adoption of ASC 606 on
the Consolidated Balance Sheet at April 30, 2019 was as follows:
|
|
As
Reported
|
|
|
Effect of Adoption
Increase/(Decrease)
|
|
|
Balance Without Adoption of ASC 606
|
|
Contract assets
|
|
$
|
4,327
|
|
|
$
|
4,327
|
|
|
$
|
–
|
|
Inventories
|
|
|
6,557
|
|
|
|
(18,293
|
)
|
|
|
24,850
|
|
Contract liabilities
|
|
|
14,651
|
|
|
|
(19,771
|
)
|
|
|
34,422
|
|
The impact of the adoption of ASC 606 on
the Consolidated Statements of Operations and Comprehensive Loss for the fiscal year ended April 30, 2019 was as follows:
|
|
As
Reported
|
|
|
Effect of Adoption
Increase/(Decrease)
|
|
|
Balance Without Adoption of ASC 606
|
|
Revenues
|
|
$
|
53,603
|
|
|
$
|
13,243
|
|
|
$
|
40,360
|
|
Cost of revenues
|
|
|
46,379
|
|
|
|
9,743
|
|
|
|
36,636
|
|
Gross profit
|
|
|
7,224
|
|
|
|
3,500
|
|
|
|
3,724
|
|
Operating loss
|
|
|
(5,622
|
)
|
|
|
3,500
|
|
|
|
(9,122
|
)
|
Loss from continuing operations
|
|
|
(5,056
|
)
|
|
|
3,500
|
|
|
|
(8,556
|
)
|
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
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 consolidated statements of
cash flows have been adjusted to include restricted cash for each of the periods presented.
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 consolidated financial statements and related disclosures.
New Accounting Standards
Not Yet Adopted
In February 2016, the
FASB issued ASU 2016-02, Leases and its related amendments (collectively referred to as Topic 842) (codified as “ASC 842”).
The new standard requires lessees to recognize right-of-use assets and corresponding lease liabilities for leases with durations
of greater than 12 months on the balance sheet as well as provide disclosures with respect to certain qualitative and quantitative
information regarding the amount, timing and uncertainty of cash flows arising from leases. The right-of-use assets and lease
liabilities will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent
measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a
finance lease or an operating lease. ASC 842 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.
On May 1, 2019, we adopted
ASC 842 and have elected the optional transition method to apply the standard as of the effective date and therefore, we will not
apply the standard to the comparative periods presented in the consolidated financial statements. We have elected the transition
package of three practical expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions
about lease identification, lease classification, and initial direct costs. Further, we have elected a short-term lease exception
policy, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e., leases with terms
of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain
classes of assets. While we are finalizing our evaluation of the impact of the adoption of ASC 842 on our consolidated financial
statements and related disclosures, we expect to recognize on our balance sheet right-of-use assets ranging from $22,000 to $25,000,
in aggregate, and lease liabilities ranging from $24,000 to $27,000, in aggregate, which are primarily related to our facility
operating leases (Note 3). The difference between the right-of-use assets and lease liabilities is primarily attributed to the
elimination of deferred rent. The adoption of ASC 842 is also expected to impact our consolidated financial statement disclosures.
We do not anticipate the adoption of ASC 842 will have a material impact to our Consolidated Statements of Operations and Comprehensive
Loss or to require a cumulative-effect adjustment to the opening balance of accumulated deficit.
The estimated impact
of adopting ASC 842 is based on our best estimates at the time of the preparation of this Annual Report. The actual impact is subject
to change prior to our first quarterly filing of our fiscal year 2020. We are finalizing our implementation related to policies,
processes and internal controls to comply with this guidance.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit
Losses (Topic 326)
, Measurement of Credit Losses on Financial Instruments.
This standard update requires that certain financial
assets be measured at amortized cost net of an allowance for estimated credit losses such that the net receivable represents the
present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured
at amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate
of credit losses must be based on all relevant information including historical information, current conditions and reasonable
and supportable forecasts that affect the collectability of the amounts. ASU 2016-13 is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2019, which will be our fiscal year 2021 beginning May 1, 2020;
however, early adoption is permitted. We are currently evaluating the timing and impact of adopting ASU 2016-13 on our consolidated
financial statements.
In August 2018, the FASB
issued ASU 2018-13, Fair Value Measurement (Topic 820):
Disclosure Framework—Changes to the Disclosure Requirements for
Fair Value Measurement,
which modifies the disclosure requirements in Topic 820 by removing certain disclosure requirements
related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new
disclosure requirements, primarily surrounding Level 3 fair value measurements and transfers between Level 1 and Level 2. ASU 2018-13
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, which will be our
fiscal year 2021 beginning May 1, 2020. Early adoption is permitted for any removed or modified disclosures. We are currently evaluating
the new guidance and do not expect the adoption of ASU 2018-13 to have a material impact on our consolidated financial statements
and related disclosures.
Note 3 – Leases
Operating Leases
We currently lease office,
manufacturing and warehouse space in five buildings under four separate non-cancellable operating lease agreements. All of our
leased facilities are located in close proximity in Tustin, California, have original lease terms ranging from 7 to 12 years, contain
two multi-year renewal options, and scheduled rent increases of 3% on either an annual or biennial basis. Three of our leases provide
for periods of free rent, lessor improvements and tenant improvement allowances, of which, certain of these improvements have been
classified as leasehold improvements and are being amortized over the shorter of the estimated useful life of the improvements
or the remaining life of the lease. As collateral for three of our leases we are required to maintain letters of credit, which
in aggregate is $1,150 and is included in restricted cash in the accompanying Consolidated Balance Sheets as of April 30, 2019 and 2018.
Future minimum lease
payments under our non-cancelable operating leases as of April 30, 2019 are as follows:
Fiscal Year
|
|
|
Total
|
|
|
2020
|
|
|
$
|
3,032
|
|
|
2021
|
|
|
|
3,116
|
|
|
2022
|
|
|
|
3,193
|
|
|
2023
|
|
|
|
3,281
|
|
|
2024
|
|
|
|
2,789
|
|
|
Thereafter
|
|
|
|
8,062
|
|
|
Total
|
|
|
$
|
23,473
|
|
We record rent expense on a straight-line
basis over the initial term of the lease. The difference between rent expense and the amounts paid under the operating leases is
recorded as a deferred rent liability in the accompanying consolidated financial statements. Annual rent expense under facility
operating lease agreements totaled $2,869, $2,935, and $2,180 for the fiscal years ended April 30, 2019, 2018, and 2017, respectively.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Note
4
–
Stockholders’ Equity
Stockholder
Rights Agreement
On March 16, 2006, our
Board of Directors adopted a Stockholder Rights Agreement, which was amended and restated on March 16, 2016 (the “Rights
Agreement”), that is designed to strengthen the ability of the Board of Directors to protect the interests of our stockholders
against potential abusive or coercive takeover tactics and to enable all stockholders the full and fair value of their investment
in the event that an unsolicited attempt is made to acquire Avid. The Rights Agreement is not intended to prevent an offer the
Board of Directors concludes is in the best interest of Avid and its stockholders.
Under the Rights Agreement,
the Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each share of our
common stock held by stockholders of record as of the close of business on March 27, 2006. Each Right entitles holders of each
share of our common stock to buy seven one thousandths (7/1,000th) of a share of Avid’s Series D Participating Preferred
Stock, par value $0.001 per share, at an exercise price of $77.00 per share, subject to adjustment. The Rights are neither exercisable
nor traded separately from our common stock. The Rights will become exercisable and will detach from the common shares if a person
or group acquires 15% or more of our outstanding common stock, without prior approval from our Board of Directors, or announces
a tender or exchange offer that would result in that person or group owning 15% or more of our common stock. Each Right, when exercised,
entitles the holder (other than the acquiring person or group) to receive our common stock (or in certain circumstances, voting
securities of the acquiring person or group) with a value of twice the Rights’ exercise price upon payment of the exercise
price of the Rights.
Avid will be entitled
to redeem the Rights at $0.007 per Right at any time prior to a person or group achieving the 15% threshold. The Rights will expire
on March 16, 2021.
Series E Preferred
Stock
On February 12, 2014, we filed with the
Secretary of State of the State of Delaware a Certificate of Designations of Rights and Preferences (the “Certificate of
Designations”) to designate the 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”).
The Certificate of Designations designated 2,000,000 shares of Series E Preferred Stock out of our 5,000,000 shares of authorized
but unissued shares of preferred stock. The Series E Preferred Stock is classified as permanent equity in accordance with FASB
ASC Topic 480,
Distinguishing Liabilities from Equity
. As of April 30, 2019, 1,647,760 shares of our Series E Preferred
Stock were issued and outstanding.
Each share of Series
E Preferred Stock is convertible at any time, at the option of the holder, into a number of whole shares of our common stock at
an initial conversion price of $21.00. The Series E Preferred Stock is also subject to conversion upon certain events constituting
a change of control and a market trigger conversion, at our option, as defined in the Certificate of Designations. The Series E
Preferred Stock has no stated maturity date or mandatory redemption and is senior to all of our other securities. We may redeem
the Series E Preferred Stock for cash, in whole or in part, by paying the redemption price of $25.00 per share, plus any accrued
and unpaid dividends to the redemption date. Holders of the Series E Preferred Stock have no voting rights, except as defined in
the Certificate of Designations.
Holders of our Series
E Preferred Stock are entitled to receive cumulative dividends at the rate of 10.50% per annum based on the liquidation preference
of $25.00 per share, and are payable quarterly in cash, on or about the 1
st
day of each January, April, July, and October.
The Series E Preferred Stock dividend for all issued and outstanding shares is set at $2.625 per annum per share. For the fiscal
years ended April 30, 2019, 2018, and 2017, we paid aggregate cash dividends of $4,325, $4,325, and $4,279, respectively, for issued
and outstanding shares of our Series E Preferred Stock.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Sales
of Common Stock and Series E Preferred Stock
During the fiscal year
ended April 30, 2019, we had no offerings of our common stock or Series E Preferred Stock.
During February 2018,
we completed an underwriting public offering pursuant to which we sold 10,294,445 shares of our common stock at the public offering
price of $2.25 per share. The aggregate gross proceeds we received from the public offering was $23,163, before deducting underwriting
discounts and commissions and other offering related expenses of $1,669.
During the fiscal years
ended April 30, 2018 and 2017, we sold an aggregate of 1,051,259 and 6,137,403 shares of our common stock, respectively, pursuant
to an At Market Issuance Sales Agreement (“AMI Sales Agreement) for aggregate gross proceeds of $4,304 and $18,246, respectively.
We paid a commission equal to 2.5% of the gross proceeds from the sale of our common stock pursuant to the AMI Sales Agreement.
As of April 30, 2018, we had raised the full amount of gross proceeds available to us under the AMI Sales Agreement.
During the fiscal year
ended April 30, 2017, we sold an aggregate of 3,750,323 shares of our common stock pursuant to an Equity Distribution Agreement
for aggregate gross proceeds of $13,031. We paid a commission equal to 2.5% of the gross proceeds from the sale of our common stock
pursuant to the Equity Distribution Agreement. As of April 30, 2017, we had raised the full amount of gross proceeds available
to us under the Equity Distribution Agreement.
During the fiscal year
ended April 30, 2017, we sold an aggregate of 70,320 shares of our Series E Preferred Stock pursuant to an At Market Issuance
Sales Agreement (“Series E AMI Sales Agreement) for aggregate gross proceeds of $1,634. We paid a commission of up to 5%
of the gross proceeds from the sale of our Series E Preferred Stock pursuant to the Series E AMI Sales Agreement. As of April
30, 2017, we are no longer issuing shares of our Series E Preferred Stock under the Series E AMI Sales Agreement.
Warrants
On August 30, 2018, warrants
to purchase 39,040 shares of our common stock expired unexercised. As of April 30, 2019, we had no warrants issued and outstanding
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 April 30, 2019,
56,135,697 shares of our common stock were issued and outstanding. Our common stock outstanding as of April 30, 2019 excluded the
following shares of common stock reserved for future issuance:
|
Shares
|
Stock Incentive Plans
|
7,264,713
|
Employee Stock Purchase Plan
|
1,196,261
|
Conversion of our outstanding Series E Preferred Stock
(1)
|
6,826,435
|
_____________
(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.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Note
5 – Benefit Plans
Stock
Incentive Plans
On October 4, 2018 (the
“Effective Date”), 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, restricted stock units and other forms
of stock-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 the Effective Date. 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.
In addition, we currently
maintain three expired stock incentive plans referred to as the 2005, 2003 and 2002 Stock Incentive Plans (collectively, the “Expired
Plans”). No future grants of stock-based awards can be issued from the Expired Plans, however, all outstanding awards granted
under the Expired Plans will remain subject to the terms of the Expired Plans until they are exercised, canceled or expired.
The 2018 Plan, the Prior
Plans, and the Expired Plans are collectively referred to as the “Stock Plans”. As of April 30, 2019, we had an aggregate
of 7,264,713 shares of our common stock reserved for issuance under the Stock Plans, of which, 3,474,590 shares were subject to
outstanding stock options and restricted stock units and 3,790,123 shares were available for future grants of stock-based awards.
Stock Options
Stock options granted
under our Stock Plans are granted at an exercise price not less than the fair market value of our common stock on the date of grant.
Stock option grants to employees generally vest 25% on each of the first, second, third and fourth anniversaries of the date of
grant, and stock option grants to non-employee directors generally vest over a period of one to three years from the date of grant.
The maximum contractual term of any stock option granted under the Stock Plans is ten years.
The estimated fair value
of stock options are measured at the grant date, using a fair value based method, such as a Black-Scholes option valuation model,
and is amortized as stock-based compensation expense on a straight-line basis over the requisite service period of the award, which
is generally the vesting period. The use of a valuation model requires us to make certain estimates and assumptions with respect
to selected model inputs. The expected volatility is based on the daily historical volatility of our common stock covering the
estimated expected term. The expected term of options granted reflects actual historical exercise activity and assumptions regarding
future exercise activity of unexercised, outstanding options. The risk-free interest rate is based on U.S. Treasury notes with
terms within the contractual life of the option at the time of grant. The expected dividend yield assumption is based on our expectation
of future dividend payouts. We have never declared or paid any cash dividends on our common stock and currently do not anticipate
paying such cash dividends.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
The fair value of stock
options on the date of grant and the weighted-average assumptions used to estimate the fair value of the stock options using the
Black-Scholes option valuation model for fiscal years ended April 30, 2019, 2018 and 2017, were as follows:
|
|
Fiscal Year Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
|
2.81%
|
|
|
|
2.21%
|
|
|
|
1.32%
|
|
Expected life (in years)
|
|
|
5.57
|
|
|
|
6.19
|
|
|
|
6.12
|
|
Expected volatility
|
|
|
76.56%
|
|
|
|
110.43%
|
|
|
|
111.30%
|
|
Expected dividend yield
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
The following summarizes our stock option
transaction activity for fiscal year ended April 30, 2019:
|
|
Stock Options
|
|
|
Grant Date
Weighted
Average Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (in years)
|
|
|
Aggregate
Intrinsic
Value
(1)
|
|
Outstanding at May 1, 2018
|
|
|
3,597,738
|
|
|
$
|
8.74
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
973,614
|
|
|
$
|
5.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(371,327
|
)
|
|
$
|
3.45
|
|
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(925,810
|
)
|
|
$
|
11.28
|
|
|
|
|
|
|
|
|
|
Outstanding at April 30, 2019
|
|
|
3,274,215
|
|
|
$
|
7.51
|
|
|
|
5.53
|
|
|
$
|
1,238
|
|
Vested and expected to vest
|
|
|
3,274,215
|
|
|
$
|
7.51
|
|
|
|
5.53
|
|
|
$
|
1,238
|
|
Exercisable at April 30, 2019
|
|
|
1,932,527
|
|
|
$
|
9.45
|
|
|
|
3.87
|
|
|
$
|
700
|
|
______________
|
(1)
|
Aggregate
intrinsic value represents the difference between the exercise price of an option and
the closing market price of our common stock on April 30, 2019, which was $4.79 per share.
|
The weighted-average
grant date fair value of options granted to employees during the fiscal years ended April 30, 2019, 2018 and 2017 was $3.30, $3.50
and $2.86 per share, respectively.
The aggregate intrinsic
value of stock options exercised during the fiscal years ended April 30, 2019, 2018 and 2017 was $547, $173 and $11, respectively.
Cash received from stock options exercised during fiscal years ended April 30, 2019, 2018 and 2017, totaled $1,278, $752 and $31,
respectively.
We issue shares of common
stock that are reserved for issuance under the Stock Plans upon the exercise of stock options, and we do not expect to repurchase
shares of common stock from any source to satisfy our obligations under our compensation plans.
As of April 30, 2019,
the total estimated unrecognized compensation cost related to non-vested employee stock options was $3,880. This cost is expected
to be recognized over a weighted average vesting period of 2.70 years based on current assumptions.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Restricted Stock
A restricted stock unit
(“RSU”) represents the right to receive one share of our common stock upon the vesting of each unit. RSUs generally
vest over four years at the rate of one-fourth of the shares granted on each anniversary of the date of grant. The estimated fair
value of RSUs is based on the closing market value of our common stock on the date of grant, and is amortized as stock-based compensation
expense on a straight-line basis over the period of vesting.
The following summarizes
our RSUs transaction activity for fiscal year ended April 30, 2019:
|
|
|
Shares
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
Outstanding at May 1, 2018
|
|
|
|
–
|
|
|
$
|
–
|
|
|
Granted
|
|
|
|
217,200
|
|
|
|
4.28
|
|
|
Vested
|
|
|
|
–
|
|
|
|
–
|
|
|
Forfeited
|
|
|
|
(16,825
|
)
|
|
|
3.78
|
|
|
Outstanding at April 30, 2019
|
|
|
|
200,375
|
|
|
$
|
4.32
|
|
There were no RSUs granted
during the fiscal years ended April 30, 2018 and 2017. As of April 30, 2019, the total estimated unrecognized compensation cost
related to non-vested RSUs was $733. This cost is expected to be recognized over a weighted average vesting period of 3.34 years.
Employee
Stock Purchase Plan
The Employee Stock Purchase
Plan (the “ESPP”) is a stockholders’-approved plan under which allows eligible employees to purchase shares of
our common stock through payroll deductions at a price equal to 85% of the lower of the fair market value our common stock as of
the first trading day of the offering period or on the last trading day of the six-month offering period. Employee participants
are limited to purchase no more than $25,000 of stock in any one calendar year. During the fiscal years ended April 30, 2019, 2018
and 2017, a total of 75,148, 88,327 and 270,075 shares of our common stock were purchased, respectively, under the ESPP at a weighted
average purchase price per share of $3.44, $3.59 and $1.95, respectively. As of April 30, 2019, we had 1,196,261 shares of our
common stock reserved for issuance under the ESPP.
The fair value of the
shares purchased under the ESPP was determined using a Black-Scholes option pricing model (see explanation of valuation model inputs
above under “Stock Options”), and is recognized as expense on a straight-line basis over the requisite service period
(or six-month offering period).
The weighted average
grant date fair value of purchase rights under the ESPP during fiscal years ended April 30, 2019, 2018 and 2017 was $1.49, $1.65
and $1.07, respectively, based on the following Black-Scholes option valuation model inputs:
|
|
Fiscal Year Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
|
2.26%
|
|
|
|
1.10%
|
|
|
|
0.46%
|
|
Expected life (in years)
|
|
|
0.50
|
|
|
|
0.50
|
|
|
|
0.50
|
|
Expected volatility
|
|
|
71.10%
|
|
|
|
75.18%
|
|
|
|
105.27%
|
|
Expected dividend yield
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
401(k) Plan
We have a 401(k) Plan (the “Plan”)
pursuant to section 401(k) of the Internal Revenue Code that allows participating employees to contribute up to 100% of their compensation
on a tax deferred basis up to the maximum amount permitted by the Internal Revenue Code. We match 50% of employee contributions
of up to 6% of their annual eligible compensation. The expense related to our matching contributions to the Plan was $377, $564
and $845 for the fiscal years ended April 30, 2019, 2018 and 2017, respectively.
Stock-based
Compensation Expense
Stock-based compensation
expense for the fiscal years ended April 30, 2019, 2018 and 2017 was comprised of the following:
|
|
Fiscal Year Ended April 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Cost of revenues
|
|
$
|
474
|
|
|
$
|
378
|
|
|
$
|
108
|
|
Selling, general and administrative expense
|
|
|
1,121
|
|
|
|
820
|
|
|
|
1,553
|
|
Discontinued operations
|
|
|
–
|
|
|
|
340
|
|
|
|
1,702
|
|
Total
|
|
$
|
1,595
|
|
|
$
|
1,538
|
|
|
$
|
3,363
|
|
Due to our net loss position,
no tax benefits have been recognized in the Consolidated Statements of Cash Flows.
Note 6 – Income Taxes
We are primarily subject
to U.S. federal and California state jurisdictions. To our knowledge, all tax years remain open to examination by U.S. federal
and state authorities.
In accordance
with ASC 740, we are required to recognize the impact of an uncertain tax position in the consolidated financial statements when
it is more likely than not the position will be sustained upon examination by the tax authorities. An uncertain tax position will
not be recognized if it has less than a 50% likelihood of being sustained upon examination by the tax authorities. We had no unrecognized
tax benefits from uncertain tax positions as of April 30, 2019 and 2018. It is also our policy, in accordance with authoritative
guidance, to recognize interest and penalties related to income tax matters in interest and other expense in our consolidated statements
of operations and comprehensive loss. We did not recognize interest or penalties related to income taxes for fiscal years ended
April 30, 2019, 2018, and 2017, and we did not accrue for interest or penalties as of April 30, 2019 and 2018.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Deferred income tax assets
and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting
and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. A valuation allowance is provided for the amount of deferred tax assets that,
based on available evidence, are not expected to be realized. As a result of our cumulative losses, management has concluded that
a full valuation allowance against our net deferred tax assets is appropriate.
At April 30, 2019,
we had net deferred tax assets of $119,516. Due to uncertainties surrounding our ability to generate future taxable income to
realize these tax assets, a full valuation has been established to offset our net deferred tax assets. Additionally, the
future utilization of our net operating loss carry forwards to offset future taxable income may be subject to an annual
limitation, pursuant to Internal Revenue Code Section 382, as a result of ownership changes that may have occurred previously
or that could occur in the future. A Section 382 analysis was completed as of the fiscal year ended April 30, 2018 and we
subsequently reviewed ownership activity through April 30, 2019, which it was determined that no significant change in
ownership had occurred. However, ownership changes occurring subsequent to April 30, 2019 may impact the utilization of net
operating loss carry forwards and other tax attributes.
At April 30, 2019, we
had federal net operating loss carry forwards of approximately $425,841. The federal net operating loss carry forwards generated
prior to January 1, 2018 expire in fiscal years 2020 through 2038. The federal net operating loss generated after January 1, 2018
of $6,609 can be carried forward indefinitely and be available to offset up to 80% of future taxable income each year. We also
have California state net operating loss carry forwards of approximately $273,581 at April 30, 2019, which begin to expire in fiscal
year 2029.
The provision for income
taxes on our loss from continuing operations for the fiscal years ended April 30, 2019, 2018 and 2017 are comprised of the following:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Federal income taxes at statutory rate
|
|
$
|
(1,120
|
)
|
|
$
|
(6,112
|
)
|
|
$
|
475
|
|
State income taxes
|
|
|
(48
|
)
|
|
|
155
|
|
|
|
309
|
|
Expiration and adjustments of deferred tax assets
|
|
|
2,507
|
|
|
|
1,840
|
|
|
|
1,693
|
|
Change in valuation allowance
|
|
|
(2,480
|
)
|
|
|
(57,599
|
)
|
|
|
(2,616
|
)
|
Stock-based compensation
|
|
|
1,309
|
|
|
|
1,584
|
|
|
|
–
|
|
Other, net
|
|
|
(452
|
)
|
|
|
6
|
|
|
|
139
|
|
Tax Cuts and Jobs Act
|
|
|
–
|
|
|
|
60,126
|
|
|
|
–
|
|
Income tax benefit
|
|
$
|
(284
|
)
|
|
$
|
–
|
|
|
$
|
–
|
|
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Deferred income taxes reflect the net effects
of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
for income tax purposes. Significant components of our deferred tax assets and deferred tax liabilities at April 30, 2019 and 2018
are as follows:
|
|
2019
|
|
|
2018
|
|
Net operating losses
|
|
$
|
113,612
|
|
|
$
|
115,236
|
|
Stock-based compensation
|
|
|
3,416
|
|
|
|
4,828
|
|
Deferred revenue
|
|
|
1,610
|
|
|
|
2,852
|
|
Deferred rent
|
|
|
555
|
|
|
|
568
|
|
Other
|
|
|
1,256
|
|
|
|
879
|
|
Total deferred tax assets
|
|
|
120,449
|
|
|
|
124,363
|
|
Less valuation allowance
|
|
|
(119,516
|
)
|
|
|
(123,555
|
)
|
Total deferred tax assets, net of valuation allowance
|
|
$
|
933
|
|
|
$
|
808
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
(933
|
)
|
|
|
(808
|
)
|
Total deferred tax liabilities
|
|
|
(933
|
)
|
|
|
(808
|
)
|
Net deferred tax assets
|
|
$
|
–
|
|
|
$
|
–
|
|
On
May 1, 2018, we adopted ASC 606 (Note 2). Upon adoption, no change in retained earnings was recorded related to income taxes as
we maintain a full valuation allowance. However, an adjustment of approximately $700 was recorded as a deferred tax liability and
a corresponding reduction to the valuation allowance.
On
May 1, 2017, we adopted ASU 2016-09. Upon adoption, we have excess tax benefits for which a benefit could not previously be recognized
of approximately $2,400. The balance of the unrecognized excess tax benefits has been reversed with the impact recorded to retained
earnings including any change to the valuation allowance as a result of the adoption. Due to the full valuation allowance on the
U.S. deferred tax assets, there was no impact to the accompanying consolidated financial statements as a result of adopting ASU
2016-09 other than what is reflected in the accompanying Consolidated Statements of Stockholders’ Equity for the fiscal year ended April 30,
2018.
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% to 21% 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, we recorded a provisional increase in tax expense and a corresponding decrease in net
deferred tax assets of $60,126, 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 completed our accounting for the enactment-date
income tax effects of the Tax Act during the quarter ended January 31, 2019. 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 provisional amount recognized
for the fiscal year ended April 30, 2018 did not change; therefore, there was no adjustment to tax expense.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Note 7 – 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 years ended April 30, 2019.
The calculation of weighted
average diluted shares outstanding 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:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
138,822
|
|
|
|
53,978
|
|
|
|
–
|
|
RSUs
|
|
|
34,122
|
|
|
|
–
|
|
|
|
–
|
|
ESPP
|
|
|
10,589
|
|
|
|
1,972
|
|
|
|
45,767
|
|
Total
|
|
|
183,533
|
|
|
|
55,950
|
|
|
|
45,767
|
|
The calculation of weighted
average diluted shares outstanding 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:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
Stock options
|
|
|
2,712,454
|
|
|
|
3,636,699
|
|
|
|
4,156,421
|
|
RSUs
|
|
|
33,532
|
|
|
|
–
|
|
|
|
–
|
|
Warrants
|
|
|
12,942
|
|
|
|
39,040
|
|
|
|
39,040
|
|
Series E Preferred Stock
|
|
|
1,978,783
|
|
|
|
1,978,783
|
|
|
|
1,955,588
|
|
Total
|
|
|
4,737,711
|
|
|
|
5,654,522
|
|
|
|
6,151,049
|
|
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
Note 8 – Commitments and Contingencies
In the ordinary course
of business, we are at times subject to various legal proceedings and disputes. We make provisions for liabilities when it is both
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions, if any,
are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative
rulings, advice of legal counsel, and other information and events pertaining to a particular case. We currently are not
a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate,
would have a material adverse effect on our consolidated results of operations or financial position.
Note 9 – Restructuring
Charges
In August 2017, we implemented
a restructuring plan intended to reduce operating costs and improve cost efficiencies while we pursued strategic options for our
research and development assets and focused our efforts on growing our CDMO business. Under this restructuring plan, which we
completed in October 2017, we reduced our overall workforce by 57 employees. As a result, during the fiscal quarter ended October
31, 2017, we incurred an aggregate of $1,588 in restructuring costs consisting of termination benefits, including severance, and
other employee-related costs, of which $330 related to our discontinued research and development segment and $1,258 related to
our contract manufacturing services segment. The restructuring costs associated with our discontinued research and development
segment are included in income (loss) from discontinued operations, net of tax, in the accompanying consolidated financial statements
for the fiscal year ended April 30, 2018 (Note 10). The restructuring costs associated with our contract manufacturing services
segment are included in operating expenses in the accompanying consolidated financial statements for the fiscal year ended April
30, 2018. All restructuring costs were paid in full during fiscal year 2018.
Note 10 –
Sale of Research and Development Assets
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, of which $3,000 was received in fiscal year 2018 and
$5,000 was received in fiscal year 2019. 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 April 30, 2019, no development, regulatory or commercialization
milestones 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 12, 2018).
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.
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
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 April 30, 2019, no development,
regulatory or commercialization milestones 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 consolidated financial
statements for all periods presented. During the fiscal years ended April 30, 2019 and 2018, we recorded a gain of $1,000 and $8,000,
respectively, upon the completion of the September 2018 Purchase Agreement and the February 2018 Purchase Agreement, which amounts
are included in income (loss) from discontinued operations, net of tax, in the accompanying Consolidated Statements of Operations
and Comprehensive Loss for the fiscal years ended April 30, 2019 and 2018, respectively. The results of operations from discontinued
operations presented below include certain allocations that management believes fairly reflect the utilization of services provided
to the former research and development segment. The allocations do not include amounts related to general corporate administrative
expenses or interest expense. Therefore, these results of operations do not necessarily reflect what the results of operations
would have been had the former research and development segment operated as a stand-alone segment.
The following table summarizes the results
of discontinued operations for the fiscal years ended April 30, 2019, 2018 and 2017:
|
|
2019
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
License revenue
|
|
$
|
–
|
|
|
$
|
25
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
–
|
|
|
|
6,782
|
|
|
|
27,992
|
|
Selling, general and administrative
|
|
|
–
|
|
|
|
2,163
|
|
|
|
1,560
|
|
Restructuring charges
|
|
|
–
|
|
|
|
330
|
|
|
|
–
|
|
Total operating expenses
|
|
|
–
|
|
|
|
9,275
|
|
|
|
29,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
|
|
|
125
|
|
|
|
–
|
|
|
|
–
|
|
Gain on sale of research and development assets before income taxes
|
|
|
1,000
|
|
|
|
8,000
|
|
|
|
–
|
|
Income tax expense
|
|
|
284
|
|
|
|
–
|
|
|
|
–
|
|
Income (loss) from discontinued operations, net of tax
|
|
$
|
841
|
|
|
$
|
(1,250
|
)
|
|
$
|
(29,552
|
)
|
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
The following table includes the assets
and liabilities of discontinued operations as of April 30, 2018. There were no assets or liabilities related to discontinued operations
as of April 30, 2019:
|
|
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
|
|
|
291
|
|
Total liabilities of discontinued operations
|
|
$
|
4,550
|
|
The carrying value of
the assets and liabilities deemed a component of the discontinued research and development segment were not classified as “held
for sale” in the accompanying 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.
Note
11 – Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial
information for each of the two most recent fiscal years is as follows:
|
|
Fiscal Year Ended April 30, 2019
(a)
|
|
|
|
|
First Quarter
|
|
|
|
Second Quarter
|
|
|
|
Third Quarter
|
|
|
|
Fourth Quarter
|
|
Revenues
|
|
$
|
12,589
|
|
|
$
|
10,178
|
|
|
$
|
13,781
|
|
|
$
|
17,055
|
|
Gross profit
|
|
$
|
1,192
|
|
|
$
|
334
|
|
|
$
|
2,050
|
|
|
$
|
3,648
|
|
(Loss) income from continuing operations
|
|
$
|
(1,961
|
)
|
|
$
|
(2,190
|
)
|
|
$
|
(1,139
|
)
|
|
$
|
234
|
|
Income from discontinued operations, net of tax
(b)(c)
|
|
$
|
–
|
|
|
$
|
739
|
|
|
$
|
–
|
|
|
$
|
102
|
|
Net (loss) income
|
|
$
|
(1,961
|
)
|
|
$
|
(1,451
|
)
|
|
$
|
(1,139
|
)
|
|
$
|
336
|
|
Net loss attributable to common stockholders
|
|
$
|
(3,403
|
)
|
|
$
|
(2,893
|
)
|
|
$
|
(2,581
|
)
|
|
$
|
(1,106
|
)
|
Basic and diluted net (loss) income per common share attributable to common stockholders
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
Discontinued operations
|
|
$
|
–
|
|
|
$
|
0.01
|
|
|
$
|
–
|
|
|
$
|
–
|
|
Net loss per common share attributable to common stockholders
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.02
|
)
|
avid bioservices, inc.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share
information)
|
|
Fiscal
Year Ended April 30, 2018
(a)
|
|
|
|
|
First Quarter
|
|
|
|
Second Quarter
|
|
|
|
Third Quarter
|
|
|
|
Fourth Quarter
|
|
Revenues
|
|
$
|
27,077
|
|
|
$
|
12,782
|
|
|
$
|
6,819
|
|
|
$
|
6,943
|
|
Gross profit (loss)
|
|
$
|
6,629
|
|
|
$
|
(3,460
|
)
|
|
$
|
(4,132
|
)
|
|
$
|
(1,961
|
)
|
Income (loss) from continuing operations
|
|
$
|
2,800
|
|
|
$
|
(8,301
|
)
|
|
$
|
(8,928
|
)
|
|
$
|
(6,134
|
)
|
(Loss) income from discontinued operations, net of tax
(b)(c)
|
|
$
|
(4,005
|
)
|
|
$
|
(4,323
|
)
|
|
$
|
(2,076
|
)
|
|
$
|
9,154
|
|
Net (loss) income
|
|
$
|
(1,205
|
)
|
|
$
|
(12,624
|
)
|
|
$
|
(11,004
|
)
|
|
$
|
3,020
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(2,647
|
)
|
|
$
|
(14,066
|
)
|
|
$
|
(12,446
|
)
|
|
$
|
1,578
|
|
Basic and diluted net income (loss) per common share attributable to common stockholders
(d)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.03
|
|
|
$
|
(0.21
|
)
|
|
$
|
(0.23
|
)
|
|
$
|
(0.14
|
)
|
Discontinued operations
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
0.17
|
|
Net (loss) income per common share attributable to common stockholders
|
|
$
|
(0.06
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
0.03
|
|
________________
|
(a)
|
On
May 1, 2018, we adopted ASC 606 using the modified retrospective method applied to all
contracts not completed as of May 1, 2018 (Note 2). Under the modified retrospective
method, results for the reporting periods beginning on or after May 1, 2018 are presented
in accordance with ASC 606, while prior period amounts are not adjusted and continue
to be reported under the accounting standards that were in effect prior to May 1, 2018.
|
|
(b)
|
For
all periods presented, the operating results of our former research and development segment
are reported as income (loss) from discontinued operations, net of tax (Note 1).
|
|
(c)
|
Income
from discontinued operations, net of tax, for the quarters ended October 31, 2018 and
April 30, 2018 include a gain on sale of research and development assets before tax of
$1,000 and $8,000, respectively (Note 10).
|
|
(d)
|
Basic
and diluted net income (loss) per common share attributable to common stockholders calculations
for each of the quarters are based on the basic and diluted weighted average common shares
outstanding for each period. As such, the sum of the quarters may not necessarily equal
the basic and diluted net income (loss) per common share amount for the fiscal year.
|
Note
12 – Subsequent Events
On June 5, 2019, our Board of Directors
declared a quarterly cash dividend of $0.65625 per share on our Series E Preferred Stock. The dividend payment is equivalent
to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference, accruing from April 1, 2019 through
June 30, 2019. The cash dividend of $1,081 is payable on July 1, 2019 to holders of the Series E Preferred Stock of record
on June 17, 2019.