NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 1 – Description of Company
and Basis of Presentation
Avid Bioservices, Inc. is 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.
The accompanying unaudited
condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles
(“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”)
related to quarterly reports on Form 10-Q, and accordingly, they do not include all of the information and disclosures required
by U.S. GAAP for annual financial statements. These unaudited condensed consolidated financial statements and notes thereto should
be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form
10-K for the fiscal year ended April 30, 2019, as filed with the SEC on June 27, 2019. The condensed consolidated balance sheet
at April 30, 2019 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.
Certain prior period
amounts within the accompanying unaudited condensed consolidated financial statements have been reclassified to conform to the
current period presentation. These reclassifications did not affect our financial position, net loss, cash flows as of and for
the periods presented.
Note 2 – Summary of Significant Accounting Policies
Information regarding our significant accounting
policies is contained in Note 2, “Summary of Significant Accounting Policies”, of the consolidated financial statements
in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019.
Revenue Recognition
Revenue is recognized from contract manufacturing
services provided under our customer contracts, which we have disaggregated into manufacturing and process development revenue
streams:
Manufacturing revenue
Manufacturing revenue generally represents
revenue from the manufacturing of customer product(s) derived from mammalian cell culture recognized over time utilizing an input
method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance
obligation. Under a manufacturing contract, a quantity of manufacturing runs are ordered 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.
avid bioservices, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Process development revenue
Process development revenue 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. Process development revenue is recognized over time utilizing an input method that compares
the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation.
Under a process development contract, the customer owns the product details and process, which has no alternative use. These process
development projects are customized to each customer to meet 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.
The following table summarizes our manufacturing and process
development revenue streams (in thousands):
|
|
Three Months Ended July 31,
|
|
|
|
2019
|
|
|
2018
|
|
Manufacturing revenue
|
|
$
|
12,908
|
|
|
$
|
10,300
|
|
Process development revenue
|
|
|
2,346
|
|
|
|
2,289
|
|
Total revenues
|
|
$
|
15,254
|
|
|
$
|
12,589
|
|
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 accounts receivable 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.
During the three months ended July 31, 2019 and 2018, we recognized revenue of $6,245 and $6,962, respectively, for which the
contract liability was recorded in a prior year period.
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.
Leases
On May 1, 2019, we adopted the Accounting
Standards Update (“ASU”) No. 2016-02, Leases (“ASC 842”) using the modified retrospective approach.
Accordingly, prior period financial information and disclosures have not been adjusted and will continue to be reported in accordance
with our historic accounting under the previous lease standard. In addition, we elected the package of practical expedients available
for existing contracts, which allowed us to carryforward our historical assessments of lease identification, lease classification,
and initial direct costs. As a result of adopting ASC 842, we recognized right-of-use assets and lease liabilities of $23.3 million
and $25.5 million, respectively, on May 1, 2019, 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. There was no
adjustment to the opening balance of accumulated deficit as a result of the adoption of ASC 842.
We determine if an arrangement is or contains
a lease at inception. Our operating leases with a term greater than one year are included in operating lease right-of-use assets,
operating lease liabilities and operating lease liabilities, less current portion in our condensed consolidated balance sheet at
July 31, 2019. Right-of-use assets represent our right to use an underlying asset during the lease term and lease liabilities represent
our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized
at the lease commencement date based on the present value of lease payments over the lease term. In determining the net present
value of lease payments, we use our incremental borrowing rate which represents an estimated rate of interest that we would have
to pay to borrow equivalent funds on a collateralized basis at the lease commencement date.
Our operating leases may include options
to extend the lease which are included in the lease term when it is reasonably certain that we will exercise a renewal option(s).
Operating lease expense is recognized on a straight-line basis over the expected lease term.
avid bioservices, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
We elected the post-transition practical
expedient to not separate lease components from non-lease components for all existing leases. We also elected a policy to not apply
the recognition requirements of ASC 842 for short-term leases.
Inventory
Inventory consists of raw materials inventory and are valued at the lower of cost or net realizable value,
determined by the first-in, first-out method. We periodically review raw materials inventory for potential impairment and adjust
inventory to its net realizable value based on the estimate of future use and reduce the carrying value of inventory as deemed
necessary.
Property and Equipment
Property and equipment
is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line
method over the estimated useful lives of the related asset, 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 July 31, 2019 and April 30, 2019.
All of our property and
equipment are located in the U.S. Property and equipment consist of the following (in thousands):
|
|
July 31, 2019
|
|
|
April 30, 2019
|
|
Leasehold improvements
|
|
$
|
20,574
|
|
|
$
|
20,574
|
|
Laboratory and manufacturing equipment
|
|
|
12,983
|
|
|
|
12,858
|
|
Computer equipment and software
|
|
|
4,662
|
|
|
|
4,644
|
|
Furniture, fixtures and office equipment
|
|
|
528
|
|
|
|
528
|
|
Construction-in-progress
|
|
|
3,001
|
|
|
|
1,590
|
|
Total property and equipment, gross
|
|
$
|
41,748
|
|
|
$
|
40,194
|
|
Less: accumulated depreciation and amortization
|
|
|
(15,295
|
)
|
|
|
(14,569
|
)
|
Total property and equipment, net
|
|
$
|
26,453
|
|
|
$
|
25,625
|
|
Depreciation and amortization
expense for the three months ended July 31, 2019 and 2018 was $0.7 million and $0.6 million, respectively.
Impairment
Long-lived assets are
reviewed for impairment in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets
are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. 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, 2019 and
2018, there were no indicators of impairment of the value of our long-lived assets.
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 July 31, 2019, there were no outstanding stock-based awards with market or performance conditions.
avid bioservices, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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.
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, 2019 and
April 30, 2019, 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, 2019 and 2018.
Recent Accounting
Standards Not Yet Adopted
In June 2016, the Financial Accounting
Standards Board (“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.
avid bioservices, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 3 – 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. With respect to multi-year renewal options,
a multi-year renewal option was used in determining the right-of-use asset and lease liability for two of our leases as we considered
it reasonably certain that we would exercise such renewal options. In addition, three of our leases provide for periods of free
rent, lessor improvements and tenant improvement allowances, of which, certain of these improvements have been classified as leasehold
improvements and 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 condensed consolidated balance sheets as of July 31, 2019 and April 30, 2019.
The operating lease right-of-use assets and liabilities on our July 31, 2019 condensed consolidated balance sheets primarily relate
to these facility leases.
Our operating lease expense for the three
months ended July 31, 2019 was $0.9 million and was included in our condensed consolidated statements of operations. Cash paid
for amounts included in the measurement of lease liabilities for the three months ended July 31, 2019 was $0.8 million and was
included in net cash used in operating activities in our condensed consolidated statements of cash flows.
As of July 31, 2019, the maturities of
our operating lease liabilities were as follows (in thousands):
Fiscal Year Ending April 30,
|
|
|
Total
|
|
2020 (remaining period)
|
|
|
$
|
2,489
|
|
2021
|
|
|
|
3,391
|
|
2022
|
|
|
|
3,422
|
|
2023
|
|
|
|
3,445
|
|
2024
|
|
|
|
3,341
|
|
Thereafter
|
|
|
|
22,020
|
|
Total lease payments
|
|
|
$
|
38,108
|
|
Less: imputed interest
|
|
|
|
(13,275
|
)
|
Total operating lease liabilities
|
|
|
$
|
24,833
|
|
The balance sheet classification of our
operating lease liabilities was as follows (in thousands):
|
|
July 31, 2019
|
|
Operating lease liabilities
|
|
$
|
1,382
|
|
Operating lease liabilities, less current portion
|
|
|
23,451
|
|
Total operating lease liabilities
|
|
$
|
24,833
|
|
As of July 31, 2019, the weighted average remaining lease term
and weighted average discount rate of our operating leases was 10.8 years and 8.0%, respectively.
avid bioservices, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note
4 – Stockholders’ Equity
Series E Preferred
Stock Dividend
On June 5, 2019, 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, 2019 through June 30, 2019. The cash dividend
of $1.1 million was paid on July 1, 2019 to holders of the Series E Preferred Stock of record on June 17, 2019.
Each share of Series
E Preferred Stock is convertible into a whole 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. As of July 31, 2019, if all of our issued and 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
4.14 shares of our common stock, or 6,826,435 in aggregate.
Note
5 – Equity Compensation Plans
Stock Incentive Plans
As of July 31, 2019,
we had an aggregate of 7,161,429 shares of our common stock reserved for issuance under our stock incentive plans, of which 3,908,148
shares were subject to outstanding stock options and restricted stock units and 3,253,281 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, 2019:
|
|
Stock Options
|
|
|
Grant Date Weighted Average Exercise Price
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Outstanding at May 1, 2019
|
|
|
3,274
|
|
|
$
|
7.51
|
|
Granted
|
|
|
564
|
|
|
$
|
5.79
|
|
Exercised
|
|
|
(74
|
)
|
|
$
|
3.50
|
|
Canceled or expired
|
|
|
(217
|
)
|
|
$
|
3.71
|
|
Outstanding at July 31, 2019
|
|
|
3,547
|
|
|
$
|
7.56
|
|
avid bioservices, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Restricted Stock Units
(“RSUs”)
The following summarizes
our RSUs transaction activity for the three months ended July 31, 2019:
|
|
Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Outstanding at May 1, 2019
|
|
|
200
|
|
|
$
|
4.32
|
|
Granted
|
|
|
194
|
|
|
$
|
5.91
|
|
Vested
|
|
|
(27
|
)
|
|
$
|
3.62
|
|
Forfeited
|
|
|
(6
|
)
|
|
$
|
4.31
|
|
Outstanding at July 31, 2019
|
|
|
361
|
|
|
$
|
5.23
|
|
Employee Stock Purchase Plan
The Employee Stock Purchase
Plan (the “ESPP”) is a stockholder-approved plan under which eligible employees are allowed 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. No shares of our common stock were purchased under
the ESPP during the three months ended July 31, 2019 as the current six-month offering period ends on October 31, 2019. As of July
31, 2019, we had 1,196,261 shares of our common stock reserved for issuance under the ESPP.
Stock-Based Compensation
Stock-based compensation expense for the
three months ended July 31, 2019 and 2018 was comprised of the following (in thousands):
|
|
Three Months Ended July 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of revenues
|
|
$
|
187
|
|
|
$
|
85
|
|
Selling, general and administrative
|
|
|
416
|
|
|
|
212
|
|
Total stock-based compensation
|
|
$
|
603
|
|
|
$
|
297
|
|
As of July 31, 2019, the total estimated
unrecognized compensation cost related to non-vested employee stock options and non-vested RSUs was $4.9 million and $1.8 million,
respectively. These costs are expected to be recognized over weighted average vesting periods of 3.03 years and 3.55 years, respectively.
avid bioservices, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Note 6 – 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 months ended July 31, 2019 and 2018.
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
(in thousands):
|
|
Three Months Ended July 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
107
|
|
|
|
102
|
|
RSUs
|
|
|
46
|
|
|
|
7
|
|
ESPP
|
|
|
2
|
|
|
|
3
|
|
Total
|
|
|
155
|
|
|
|
112
|
|
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 (in thousands):
|
|
Three Months Ended July 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock options
|
|
|
2,858
|
|
|
|
2,695
|
|
RSUs
|
|
|
42
|
|
|
|
–
|
|
Warrants
|
|
|
–
|
|
|
|
39
|
|
Series E Preferred Stock
|
|
|
1,979
|
|
|
|
1,979
|
|
Total
|
|
|
4,879
|
|
|
|
4,713
|
|
Note 7 – Subsequent
Events
On September 4, 2019,
our Board of Directors declared a quarterly cash dividend of $0.65625 per share on our outstanding Series E Preferred Stock. The
dividend payment is equivalent to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference,
accruing from July 1, 2019 through September 30, 2019. The cash dividend is payable on October 1, 2019 to holders
of the Series E Preferred Stock of record on September 16, 2019.