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. Accordingly, they do not include all of the information and disclosures required by
U.S. GAAP for a complete set of financial statements. These unaudited condensed consolidated financial statements and notes thereto
should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report
on Form 10-K for the year ended April 30, 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 a loss from discontinued operations 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 July 31,
2018 and April 30, 2018. For additional information on the discontinuation of our research and development segment, refer to Note
11, “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
11),
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.
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.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
At July 31, 2018, we
had $37,484 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 contract manufacturing
business and, historically, on the research and development of pharmaceutical product candidates. 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, 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 construction-in-progress included in other assets (investing activities) have been reclassified to property
and equipment (investing activities) in our accompanying unaudited condensed consolidated statement of cash flows for the three
months ended July 31, 2017 to conform to the current period presentation. This reclassification had no effect on previously reported
net loss.
In addition, 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 three months ended July 31, 2017 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 table
summarizes the effect of the adoption of ASC 606 on our unaudited condensed consolidated balance sheet at July 31, 2018:
|
|
As
Reported
|
|
|
Effect of Change
Higher/(Lower)
|
|
|
Balance Without Adoption of ASC 606
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
4,775
|
|
|
$
|
4,775
|
|
|
$
|
–
|
|
Inventories
|
|
|
9,168
|
|
|
|
(16,047
|
)
|
|
|
25,215
|
|
Contract liabilities
|
|
|
17,994
|
|
|
|
(16,641
|
)
|
|
|
34,635
|
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
The following table
summarizes the effect of the adoption of ASC 606 on our unaudited condensed consolidated statement operations and comprehensive
loss for the three months ended July 31, 2018:
|
|
As
Reported
|
|
|
Effect of Change
Higher/(Lower)
|
|
|
Balance Without Adoption of ASC 606
|
|
|
|
|
|
|
|
|
|
|
|
Contract manufacturing revenue
|
|
$
|
12,589
|
|
|
$
|
10,616
|
|
|
$
|
1,973
|
|
Cost of contract manufacturing
|
|
|
11,397
|
|
|
|
7,984
|
|
|
|
3,413
|
|
Gross profit (loss)
|
|
|
1,192
|
|
|
|
2,632
|
|
|
|
(1,440
|
)
|
Operating loss
|
|
|
(2,023
|
)
|
|
|
2,632
|
|
|
|
(4,655
|
)
|
Net loss
|
|
|
(1,961
|
)
|
|
|
2,632
|
|
|
|
(4,593
|
)
|
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.
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 and 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 months ended July 31, 2018 by revenue stream:
Manufacturing revenue
|
|
$
|
10,300
|
|
Process development revenue
|
|
|
2,289
|
|
Total contract manufacturing revenue
|
|
$
|
12,589
|
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
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 $6,962
in contract manufacturing revenue for the three months ended July 31, 2018 for which the contract liability was recorded in the
prior period.
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.
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 July 31, 2018 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 three months ended July 31, 2018 and
2017, there were no indicators of impairment of the value of our long-lived assets.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
Fair Value Measurements
Fair value is defined
as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:
|
·
|
Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical
assets or liabilities.
|
|
·
|
Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets
or liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are
based on quoted prices of instruments with similar attributes in active markets.
|
|
·
|
Level 3 – Unobservable inputs that are supported by little or no market activity and significant
to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation
techniques and assumptions.
|
As of July 31, 2018
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
months ended July 31, 2018 and 2017.
Stock-based Compensation
We account for stock
options, restricted stock rights 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 restricted
stock rights 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 July 31, 2018, there were no outstanding stock-based awards with market or performance
conditions.
Income Taxes
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.
In December 2017, the
SEC issued interpretive guidance under Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations
when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable
detail to complete the accounting for certain income tax effects of the Tax Act. As discussed above, for the fiscal year ended
April 30, 2018, we recognized provisional tax impacts related to the revaluation of deferred tax assets and liabilities, which
amounts were fully offset by a valuation allowance. The ultimate impact may differ from these provisional amounts, due to among
other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that
may be issued, and actions we may take as a result of the Tax Act. The accounting for these provisions is expected to be complete
when our 2017 U.S. corporate income tax return is filed in calendar year 2018.
Adoption of Other Recent Accounting
Pronouncements
In November 2016, 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. We are currently in the process of evaluating the impact of adoption of ASU 2016-02 on
our condensed consolidated financial statements and related disclosures.
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:
|
|
July 31,
2018
|
|
|
April 30,
2018
|
|
Trade receivables
|
|
$
|
2,834
|
|
|
$
|
3,539
|
|
Other receivables
|
|
|
117
|
|
|
|
215
|
|
Total trade and other receivables
|
|
$
|
2,951
|
|
|
$
|
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 July 31, 2018
and April 30, 2018, we determined no allowance for doubtful accounts was necessary.
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 abnormally low production or idle capacity, which are expensed directly to cost of contract manufacturing in
the period incurred. During the three months ended July 31, 2018 and 2017, we expensed $1,729 and $900, respectively, in
idle capacity costs directly to cost of contract manufacturing in the accompanying condensed consolidated financial statements.
Cost is determined by the first-in, first-out method. Inventories consist of the following:
|
|
July 31,
2018
|
|
|
April 30,
2018
|
|
Raw materials
|
|
$
|
8,979
|
|
|
$
|
8,165
|
|
Work-in-process
|
|
|
189
|
|
|
|
7,964
|
|
Total inventories
|
|
$
|
9,168
|
|
|
$
|
16,129
|
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
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 July 31, 2018 and April 30, 2018. All of our property
and equipment are located in the U.S.
Property and equipment,
net, consists of the following:
|
|
July 31,
2018
|
|
|
April 30,
2018
|
|
Leasehold improvements
|
|
$
|
20,686
|
|
|
$
|
20,686
|
|
Laboratory equipment
|
|
|
11,230
|
|
|
|
10,258
|
|
Furniture, fixtures, office equipment and software
|
|
|
5,159
|
|
|
|
4,597
|
|
Construction-in-progress
|
|
|
2,275
|
|
|
|
3,310
|
|
Total property and equipment
|
|
|
39,350
|
|
|
|
38,851
|
|
Less accumulated depreciation and amortization
|
|
|
(13,014
|
)
|
|
|
(12,372
|
)
|
Total property and equipment, net
|
|
$
|
26,336
|
|
|
$
|
26,479
|
|
Depreciation and amortization
expense for the three months ended July 31, 2018 and 2017 was $642 and $642, respectively.
6.
|
Capital lease obligation
|
In June 2018, we financed
certain software under a capital lease agreement that bears interest at a rate of approximately 4.19% per annum. The gross value
of software purchased under the capital lease of $245 and the related accumulated amortization of $14 are included in property
and equipment, net in the accompanying unaudited condensed consolidated balance sheet at July 31, 2018.
Minimum future lease
payments under the capital lease as of July 31, 2018 are as follows:
Fiscal Year ending April 30,:
|
|
|
|
2019 (remainder of fiscal year)
|
|
$
|
–
|
|
2020
|
|
|
85
|
|
2021
|
|
|
97
|
|
Total minimum lease payments
|
|
|
182
|
|
Amount representing interest
|
|
|
(11
|
)
|
Net present value minimum lease payments
|
|
|
171
|
|
Less current portion included in other current liabilities
|
|
|
(78
|
)
|
Long-term portion included in capital lease obligation, less current portion
|
|
$
|
93
|
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
Series E Preferred
Stock Dividend
On June 6, 2018, our
Board of Directors declared a quarterly cash dividend of $0.65625 per share on our 10.50% Series E Convertible Preferred Stock
(the “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, 2018 through June 30, 2018. The cash dividend
of $1,081 was paid on July 2, 2018 to holders of the Series E Preferred Stock of record on June 18, 2018.
Shares of Common
Stock Authorized and Reserved for Future Issuance
We are authorized to
issue up to 500,000,000 shares of our common stock. As of July 31, 2018, 55,990,274 shares of our common stock were issued and
outstanding. In addition, our common stock outstanding as of July 31, 2018 excluded the following shares of our common stock reserved
for future issuance:
|
·
|
5,005,142 shares of common stock reserved for issuance under outstanding option grants and restricted
stock rights and available for issuance under our stock incentive plans;
|
|
·
|
1,271,409 shares of common stock reserved for and available for issuance under our Employee Stock Purchase Plan;
|
|
·
|
39,040 shares of common stock issuable upon exercise of outstanding warrants; and
|
|
·
|
6,826,435 shares of common stock issuable upon conversion of our outstanding Series E Preferred
Stock
(1)
.
|
_____________
|
(1)
|
The Series E Preferred Stock is convertible into a number of shares of our common stock determined by dividing
the liquidation preference of $25.00 per share by the conversion price, currently $21.00 per share. If all of our outstanding 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.
|
8.
|
equity compensation plans
|
Stock Incentive Plans
As of July 31, 2018,
we had an aggregate of 5,005,142 shares of our common stock reserved for issuance under our stock incentive plans, of which, 3,088,084
shares were subject to outstanding options and restricted stock rights and 1,917,058 shares were available for future grants of
stock-based awards.
Stock Options
The following summarizes
our stock option transaction activity for the three months ended July 31, 2018:
Stock Options
|
|
Shares
|
|
|
Weighted Average
Exercisable Price
|
|
Outstanding, May 1, 2018
|
|
|
3,597,738
|
|
|
$
|
8.74
|
|
Granted
|
|
|
162,948
|
|
|
|
3.80
|
|
Exercised
|
|
|
(301,052
|
)
|
|
|
3.37
|
|
Canceled or expired
|
|
|
(499,600
|
)
|
|
|
11.00
|
|
Outstanding, July 31, 2018
|
|
|
2,960,034
|
|
|
$
|
8.64
|
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
Restricted Stock
Rights
On June 15, 2018,
the Compensation Committee of the Board of Directors granted an aggregate of 128,050 restricted stock right (“RSR”)
awards 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 vesting of the RSR. The RSR’s were granted under our 2011 Stock Incentive Plan and vest
annually in equal installments over a four-year period. The RSR’s have an aggregate grant date fair value of $464, based
on the closing market price of our common stock on the date of grant, which is amortized as stock-based compensation expense on
a straight-line basis over the period of vesting.
The following summarizes
our restricted stock right transaction activity for the three months ended July 31, 2018:
Restricted Stock Rights
|
|
Shares
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
Outstanding, May 1, 2018
|
|
|
–
|
|
|
$
|
–
|
|
Granted
|
|
|
128,050
|
|
|
|
3.62
|
|
Vested
|
|
|
–
|
|
|
|
–
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Outstanding, July 31, 2018
|
|
|
128,050
|
|
|
$
|
3.62
|
|
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
1,271,409 shares remained available to purchase at July 31, 2018, and are subject to adjustment as provided in the ESPP for stock
splits, stock dividends, recapitalizations and other similar events. Under the ESPP, we sell shares to participants at a price
equal to the lesser of 85% of the fair market value of our common stock at the (i) beginning of a six-month offering period, or
(ii) end of the six-month offering period. The ESPP provides for two six-month offering periods each year; the first offering period
begins on the first trading day on or after each May 1; the second offering period begins on the first trading day on or after
each November 1. No shares of our common stock were purchased under the ESPP during the three months ended July 31, 2018 as the
current six-month offering period ends on October 31, 2018.
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
July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Cost of contract manufacturing
|
|
$
|
85
|
|
|
$
|
–
|
|
Selling, general and administrative
|
|
|
212
|
|
|
|
205
|
|
Discontinued operations
|
|
|
–
|
|
|
|
280
|
|
Total
|
|
$
|
297
|
|
|
$
|
485
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation from:
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
254
|
|
|
$
|
409
|
|
Restricted stock rights
|
|
|
15
|
|
|
|
–
|
|
ESPP
|
|
|
28
|
|
|
|
76
|
|
|
|
$
|
297
|
|
|
$
|
485
|
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
As of July 31, 2018,
the total estimated unrecognized compensation cost related to non-vested employee stock options and non-vested restricted stock
rights was $2,370 and $449, respectively. These costs are expected to be recognized over a weighted average vesting periods
of 2.81 years and 3.87 years, respectively, based on current assumptions.
9.
|
NET (LOSS) INCOME PER COMMON SHARE
|
Basic net (loss) income
per common share is computed by dividing our net (loss) income 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 RSRs, shares
of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Diluted
net (loss) income per common share is computed by dividing our net (loss) income 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 RSRs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding
during the period. Net (loss) income attributable to common stockholders represents our net (loss) income 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 RSRs, 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. A reconciliation of the numerators and the denominators of the basic and dilutive
net (loss) income per common share computations is as follows (in thousands, expect share and per share amounts):
|
|
Three Months Ended
July 31, 2018
|
|
|
Three Months Ended
July 31, 2017
|
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(1,961
|
)
|
|
$
|
–
|
|
|
$
|
2,800
|
|
|
$
|
(4,005
|
)
|
Series E preferred stock accumulated dividends
|
|
|
(1,442
|
)
|
|
|
–
|
|
|
|
(1,442
|
)
|
|
|
–
|
|
Net (loss) income attributable to common stockholders
|
|
$
|
(3,403
|
)
|
|
$
|
–
|
|
|
$
|
1,358
|
|
|
$
|
(4,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
|
|
55,770,108
|
|
|
|
55,770,108
|
|
|
|
44,773,727
|
|
|
|
44,773,727
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
–
|
|
|
|
–
|
|
|
|
102,074
|
|
|
|
102,074
|
|
ESPP
|
|
|
–
|
|
|
|
–
|
|
|
|
2,184
|
|
|
|
2,184
|
|
Weighted average common shares outstanding, dilutive
|
|
|
55,770,108
|
|
|
|
55,770,108
|
|
|
|
44,877,985
|
|
|
|
44,877,985
|
|
Net (loss) income per share, basic
|
|
$
|
(0.06
|
)
|
|
$
|
–
|
|
|
$
|
0.03
|
|
|
$
|
(0.09
|
)
|
Net (loss) income per share, diluted
|
|
$
|
(0.06
|
)
|
|
$
|
–
|
|
|
$
|
0.03
|
|
|
$
|
(0.09
|
)
|
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
For the three months
ended July 31, 2018, we excluded from the calculation of diluted net loss per share, the potential dilutive effect of 112,225
weighted average shares of outstanding stock options, unvested RSRs and shares of common stock expected to
be issued under our ESPP because their impact is anti-dilutive in periods of net loss. In addition, the calculation of weighted
average diluted shares outstanding for the three months ended July 31, 2018 and 2017 excludes the following weighted average outstanding
stock options, 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:
|
|
July 31,
2018
|
|
|
July 31,
2017
|
|
|
|
|
|
|
|
|
Stock Options
|
|
|
2,694,732
|
|
|
|
3,602,628
|
|
Warrants
|
|
|
39,040
|
|
|
|
39,040
|
|
Series E Preferred Stock
|
|
|
1,978,783
|
|
|
|
1,978,783
|
|
Total
|
|
|
4,712,555
|
|
|
|
5,620,451
|
|
No warrants were issued
or exercised during the three months ended July 31, 2018. As of July 31, 2018, warrants to purchase 39,040 shares of our common
stock at an exercise price of $17.29 were outstanding. Subsequent to July 31, 2018, these warrants expired unexercised on August
30, 2018.
11.
|
Sale of research and development assets
|
Asset Assignment
and Purchase Agreement
On February 12, 2018,
we entered into an Asset Assignment and Purchase Agreement (the “Purchase Agreement”) with 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 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 July 31, 2018, no development, regulatory and commercialization milestones
as defined in the 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 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 Purchase Agreement. To date no services
have been contracted under the separate services agreement.
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share
and per share information)
Discontinued Operations
As a result of (i)
the sale of our PS-targeting program, (ii) the held for sale classification of our R84 technology, (iii) the abandonment of our
remaining research and development assets (including our intent to return the exosome technology back to the original licensor),
and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business that will have a major effect on our
operations and financial results, 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 months ended July 31, 2018 and 2017:
|
|
Three Months Ended
July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
–
|
|
|
$
|
3,566
|
|
Selling, general and administrative
|
|
|
–
|
|
|
|
439
|
|
Total operating expenses
|
|
|
–
|
|
|
|
4,005
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
–
|
|
|
$
|
4,005
|
|
The following table
summarizes the assets and liabilities of discontinued operations as of July 31, 2018 and April 30, 2018:
|
|
July 31, 2018
|
|
|
April 30, 2018
|
|
Assets:
|
|
|
|
|
|
|
|
|
Other receivables
|
|
$
|
2,014
|
|
|
$
|
5,000
|
|
Total assets of discontinued operations
|
|
$
|
2,014
|
|
|
$
|
5,000
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
8
|
|
|
$
|
32
|
|
Accrued clinical trial and related fees
|
|
|
1,334
|
|
|
|
3,613
|
|
Accrued payroll and related costs
|
|
|
326
|
|
|
|
614
|
|
Other liabilities
|
|
|
301
|
|
|
|
291
|
|
Total liabilities of discontinued operations
|
|
$
|
1,969
|
|
|
$
|
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 sheets at July 31, 2018 and April 30, 2018 as Oncologie did not purchase
or assume any of the reported assets or liabilities under the Purchase Agreement.
On September 5, 2018, our Board of Directors declared a quarterly cash dividend of $0.65625 per share on our Series E Preferred
Stock. The dividend payment is equivalent to an annualized 10.50% per share, based on the $25.00 per share stated liquidation
preference, accruing from July 1, 2018 through September 30, 2018. The cash dividend is payable on October 1, 2018 to holders
of the Series E Preferred Stock of record on September 17, 2018.