Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-K

(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended April 30, 20182020

ORor

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____

 

Commission file number:001-32839

 

AVID BIOSERVICES, INC.

(Exact name of Registrant as specified in its charter)

Delaware95-3698422

(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)

2642 Michelle Drive, Suite 200, Tustin, California92780

(Address of principal executive offices)(Zip Code)

(714) 508-6100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
DelawareCommon Stock, $0.001 par value per share95-3698422CDMOThe NASDAQ Stock Market LLC
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
2642 Michelle Drive, Suite 200, Tustin, California92780
(Address of principal executive offices)(Zip Code)
(714) 508-6100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassName of Each Exchange on Which Registered

Common Stock ($0.001 par value per share)

Preferred Stock Purchase Rights

10.50% Series E Convertible Preferred Stock, ($0.001$0.001 par value per share)

share

CDMOP

The NASDAQ Stock Market LLC

The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes o   No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes o   No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yesx   Noo

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yesx   Noo

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer oAccelerated filer xoNon-accelerated filer ox
(Do not check if a smaller reporting company)
Smaller reporting company ox
Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No x

 

The aggregate market value of the shares of common stock held by non-affiliates of the registrant as of October 31, 20172019, the last business day of the registrant’s most recently completed second fiscal quarter, was $206,312,000.approximately $300,503,000, calculated based on the closing price of the registrant’s common stock as reported by The NASDAQ Capital Market.

 

NumberAs of June 19, 2020, the number of shares of registrant’s common stock outstanding as of July 10, 2018: 55,793,107was 56,511,294.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Part III of this report incorporates certain information by reference from the registrant’s proxy statement for the annual meeting of stockholders, which proxy statement will be filed no later than 120 days after the close of the registrant’s fiscal year ended April 30, 2018.

to which this report relates.

 

 

   

 

AVID BIOSERVICES, INC.

Fiscal Year 2018

Annual Report on Form 10-K

For the Fiscal Year Ended April 30, 2020

Table of ContentsTABLE OF CONTENTS

 

PART I 
Item 1.   Business2
Item 1A.   Risk Factors87
Item 1B.   Unresolved Staff Comments1917
Item 2.   Properties2017
Item 3.   Legal Proceedings2017
Item 4.   Mine Safety Disclosures2017
  
PART II 
Item 5.   Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities2118
Item 6.   Selected Financial Data2320
Item 7.   Management’s Discussion And Analysis Of Financial Condition And Results Of Operations2421
Item 7A.   Quantitative And Qualitative Disclosures About Market Risk3230
Item 8.   Financial Statements And Supplementary Data3230
Item 9.   Changes In And Disagreements With Accountants On Accounting And Financial Disclosures3260
Item 9A.   Controls And Procedures3260
Item 9B.   Other Information3261
  
PART III 
Item 10.   Directors, Executive Officers And Corporate Governance3562
Item 11.   Executive Compensation3562
Item 12.   Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters3562
Item 13.   Certain Relationships And Related Transactions, And Director Independence3663
Item 14.   Principal Accounting Fees and Services3663
  
PART IV 
Item 15.   Exhibits And Financial Statement Schedules3764
Item 16.   Form 10-K Summary64
SIGNATURES4167

 

 

 

 1i 

 

PART ICautionary Note on Forward-Looking Statements

 

In this Annual Report on Form 10-K (the “Annual Report”), unless the context otherwise indicates, the terms “we,” “us,” “our,” “Company” and “Avid” refer to Avid Bioservices, Inc. (formerly known as Peregrine Pharmaceuticals, Inc.) and its consolidated subsidiaries. In addition to historical information, this Annual Report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties. The inclusion of forward-looking statements should not be regarded as a representation by us or any other person that the objectives or plans will be achieved because our actual results may differ materially from any forward-looking statement. The words “may,” “should,” “plans,” “believe,” “anticipate,” “estimate,” “expect,” their opposites and similar expressions are intended to identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. We caution readers that such statements are not guarantees of future performance or events and are subject to a number of factors that may tend to influence the accuracy of the statements including, but not limited to, those risk factors outlined in the section titled, “Risk Factors”Factors,” as well as those discussed elsewhere in this Annual Report. You should not dulyunduly rely on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Annual Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describe in the reports that we file from time to time with the Securities and Exchange Commission (“SEC”) after the date of this Annual Report.

 

Avid Bioservices® is a registered trademark of Avid Bioservices, Inc. All other brand names or trademarks appearing in this Annual Report are the property of their respective holders.

 

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PART I

Item 1.Business

 

Overview

 

We are a dedicated contract development and manufacturing organization (“CDMO”) that provides a comprehensive range of services from process development to currentCurrent Good Manufacturing Practices (“cGMP”CGMP”) clinical and commercial manufacturing, focused on biopharmaceutical productsdrug substances derived from mammalian cell culture. With 2527 years of experience producing monoclonal antibodies and recombinant proteins, in batch, fed-batch and perfusion modes, our services include cGMPCGMP clinical and commercial productdrug substance manufacturing, purification, bulk packaging, release and stability testing and regulatory submissions and support. We also provide a variety of process development services, including cell lineupstream and downstream development and optimization, cell cultureanalytical method development, testing and feed optimization, analytical methods development and product characterization.

We have experience in performing process All our services are available as either stand-alone or bundled for full development and manufacturing of biologics since 1993 in our Franklin biomanufacturing facility (“Franklin Facility”) located at our headquarters in Tustin, California. In March 2016, we expanded our manufacturing capacity through the commissioning of our Myford biomanufacturing facility (“Myford Facility”) which more than doubled our manufacturing capacity. The 42,000 square foot facility, which is our second biomanufacturing facility, includes multiple single-use bioreactors up to the 2,000-liter manufacturing scale. The Myford Facility was designed to accommodate a fully disposable biomanufacturing process for products in clinical development to commercial. The Myford Facility is located adjacent to our Franklin Facility.programs.

 

Business Transition in Fiscal 2018

 

InDuring the fallfourth quarter of 2017,fiscal year 2018, we announced our intent to cease our research and development activities and to transitiontransitioned our business to a dedicated CDMO which we completed during the fourth quarter of fiscal year 2018.and ceased our research and development activities. As part of our transition, efforts, we completedwe: (i) amended our Certificate of Incorporation to change our corporate name to Avid Bioservices, Inc., effective January 5, 2018, and adopted the following initiatives:

·In August 2017, we instituted a number of strategic actions, including the reduction of our research and development workforce, designed to reduce costs and better position ourselves as a dedicated CDMO;

“CDMO” as our ticker symbol on The NASDAQ Capital Market; (ii) sold our phosphatidylserine (“PS”)-targeting and r84 technologies in fiscal 2018 and 2019, respectively, under two separate Asset Assignment and Purchase Agreements (as described in Note 11 of the Notes to Consolidated Financial Statements) and abandoned our remaining research and development assets; and (iii) closed an underwritten public offering of our common stock in February 2018 for aggregate net proceeds of $21.5 million.

 

Business Strategy

 

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·In September 2017, we named Roger J. Lias, Ph.D., who has more than 20 years of management experience in the biologics CDMO industry, as the president of our contract manufacturing subsidiary. Subsequently, in December 2017, we appointed Dr. Lias as our President and Chief Executive Officer as we transitioned to a dedicated CDMO;

·In October and November 2017, we appointed a total of six new independent members to our board of directors, each of whom has relevant CDMO industry experience;

·In November 2017, we named Tracy Kinjerski as our Vice President of Business Operations, who will focus on executing new business development initiatives with the objective of growing our commercial customer base;

·On January 5, 2018, we amended our Certificate of Incorporation to change our corporate name to Avid Bioservices, Inc. and we adopted the new ticker symbol “CDMO” on The NASDAQ Capital MarketWe have a growth strategy that seeks to align with the new end-market focus and strategic positioning of our business;

·By January 31, 2018, we classified our R84 technology as held for sale and abandoned our remaining research and development assets (including our intent to return the exosome technology back to the original licensor);

·On February 12, 2018, we sold our phosphatidylserine (PS)-targeting program pursuant to an Asset Assignment and Purchase Agreement (as described in Note 9 to the accompanying consolidated financial statements); and

·On February 20, 2018 we closed an underwritten public offering of our common stock pursuant to which we sold 10,294,445 shares of our common stock at an offering price of $2.25 per share for aggregate gross proceeds of $23,163,000 before deducting underwriting discounts, commissions and other offering related expenses of $1,669,000 (as described in Note 4 to the accompanying consolidated financial statements).

During our transition, we established and began executing on the growth of the biopharmaceutical drug substance contract services market. That strategy encompasses the following near-term strategic objectives:

 

·Expand existing customer relationshipsInvest in additional manufacturing capacity and diversifyresources required for us to achieve our customer base by securing additional customerslong-term growth strategy and meet the growth-demand of our customers’ programs, moving from development through to supportcommercial manufacturing;
·Broaden our potential future revenue growth beyond fiscal year 2018. Since undertaking our transition tomarket awareness through a dedicated CDMO in the fall of 2017, we have executed service agreements with 5 new customers, as well as expanded existing client programs and added additional projects from existing customers.diversified yet flexible marketing strategy;

·Continue to invest in manufacturing facilitiesexpand our customer base and infrastructure to maximize our facility utilization and support our clients’ clinical and commercialprograms with existing customers for both process development and manufacturing requirements. We are currently in the process of expandingservice offerings; and optimizing our process development capabilities and laboratory space, which includes expanding our total available process development laboratory space to more than 6,000 square feet, upgrading the infrastructure and equipment within our existing process development laboratories, and implementing new state-of-the-art technologies and equipment designed to facilitate efficient, high-throughput development of innovative upstream and downstream manufacturing processes.  We are strategically conducting this work in phases to avoid disruption to current customer programs, with the first new laboratories expected to be operational during the third quarter of calendar year 2018. In addition, on May 8, 2018, we announced the appointment of Magnus Schroeder, Ph.D., as Vice President of Process Sciences, further strengthening our Process Development department and senior executive management team.

·Broaden our sales force by hiring sales representativesIncrease operating profit margin to execute our business development initiativesbest in key markets. For the first time, we have hired a business development lead on the east coast, who has more than 26 years of relevantclass industry experience, including a 22-year tenure with a global integrated solutions provider to the pharmaceutical and biotechnology industries. This individual will play a key role in our new customer acquisition efforts in the eastern half of North America, while supporting our existing clients in the same territory. In addition, we recently hired a business development lead for the western half of North America. This individual brings more than 25 years of sales experience, of which 18 years include direct biologics CDMO experience.standards.

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Our Competitive Strengths

 

We believe that we are well-positionedwell positioned to address the market for outsourced development and manufacturing of biopharmaceuticals derived from mammalian biologicscell culture, due to the following factors:

 

·Expertise in Mammalian BiologicsCell Culture Manufacturing: We believe that recentcontinued consolidation in the CDMO industry has resulted in a limited number of nimble,qualified, agile and independent CDMOs with mammalian cell culture-based biologics development and manufacturing capabilities. The mammalian cell culture production method is highly suitable for manufacturing complex molecules (examples include monoclonal antibodies, next-generation antibodies and recombinant proteins), and we believe the benefits of the mammalian cell culture production method have played a significant role in accelerating the proliferation of biologics therapies. We believe we are well positioned in the industry, given our expertise in mammalian biologics.cell culture for biologics manufacturing.

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·Broad Spectrum of Services to Support Customers from Early Stage Development to Commercial: We provide fully integrated and customized biomanufacturing services that support our clientscustomers from the early preclinical stage to commercial launch and supply. PharmaceuticalWe believe pharmaceutical companies generally prefer to engage with CDMOs that are able to work with a product throughout its lifecycle and have long-standing track records of regulatory compliance and quality control. Our Process Development, cGMPCGMP Drug Substance Biomanufacturing, Project Management, Quality Systems and Quality Control are all supported by modern facilities designed to meet customer needs from early stage development to commercial supply. We further differentiate ourselves in the market as follows:

Customer-Centric Approach: We have an extensive track record of tailoring our developmentcapabilities through several key criteria: (i) we employ a customer-centric approach and manufacturing solutions to meet the specific demands of each of our customers.

Agile Manufacturing and Development: We strive to collaborate with our customers throughout the duration of their projects, enabling us to rapidly respondtailor customized development and manufacturing services; (ii) our agile manufacturing and development capabilities allow for rapid responses to evolvingshifting production requirements.

Cost-Effective Solutions: Ourrequirements, leading to strong customer satisfaction and retention; and (iii) our single-use bioreactors and widespread use of other disposable technologies throughout the manufacturing cycle reduce facility space and the cost of manufacturing materials, enabling uscontribute to deliver economically viable processes and enhanced manufacturing efficiency for our customers.customers and reduces our capital spending needs.

 

·Strong Regulatory Track Record: Historically, developing the expertise to comply with stringent regulatory audits and validation requirements has been a challenge for both pharmaceutical companies and CDMOs, and can servehas been seen as a significant barrier to entry for many CDMOs, as facilities can take years to construct and properly validate. PharmaceuticalWe believe pharmaceutical companies place a premium on working with CDMOs that can ensure a high degree of regulatory compliance, which decreases execution risk. We have a strong regulatory track record, consisting of a 15-year17-year inspection history with no significant impact on our business. In addition, betweensince 2005 and 2017, we completed six successful pre-approval inspections. We also completed four U.S. Food and Drug Administration (“FDA”) inspections between 2013 toand the most recently completed inspection in early calendar year 2018, none of which resulted in any Form 483 observations by the FDA. Further, we haveroutinely successfully compliedcomply with audits fromby large pharmaceutical companies.

·Modern and Optimized Infrastructure: As a result ofWith the development of our Myford Facility (whichand the recent commissioning of our new process development laboratory space in late calendar year 2019, we commissioned in March 2016),believe we have positioned our business to capitalize on increasing demand in the biologics manufacturing industry for modular cleanroom space, onsite process development laboratory and single-use bioreactors. Increasingly efficient manufacturing techniques with improved fundamental cell line productivity have led to higher yields, which allow manufacturers to meet customer demand while using less manufacturing capacity. These developments have driven demand among pharmaceutical companies for facilities that can match bioreactor sizedevelop and produce pilot scale batches (up to smaller volume production runs.200 liters) in process development using a process train that matches the single-use bioreactors in CGMP production. With single-use bioreactors ranging from 200 to 2,000 liters, our CGMP Myford Facility is designed to provide our customers with the desired efficiency and flexibility.

 

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·Significant Manufacturing Experience and Seasoned Management Team with a Proven Track Record: We have 2527 years of experience producing monoclonal antibodies and recombinant proteins, over 1315 years of cGMPCGMP commercial manufacturing experience and over 1012 years of experience with single-use bioreactor technology. OurWe believe this experience, combined with our management team and board of directors have adirectors’ deep understanding ofexperience in the CDMO industry, and have contributed their collective expertisepositions us to our transition to a dedicated CDMO.

·Strong Revenue Growth: Although we experienced a moderate decline in revenues for fiscal year 2018, primarily due to an unanticipated decline in demand from our two largest customers, over the prior seven fiscal years our CDMO business experienced significant revenue growth, increasing from gross revenuetake advantage of $8.5 million in fiscal year 2011 to $57.6 million in fiscal year 2017.positive long term industry trends.

 

Our Growth Strategy

 

We believe we have a significant opportunity to drive organic growth by leveraging our strengths, broadening our capabilities, increasing our capacity and improving our market visibility. Further, our transition to a dedicated CDMO has allowed us to re-allocate resources previously utilized for our research and development activities and focus on the growth of our CDMO business.

·Diversify Customer Base: We have taken and continue to take steps to diversify and expand our customer base and have developed marketing and sales strategies designed to drive new customer acquisitions, while also continuing to leverage our existing relationships to support new programs with our existing customers.

·Expand Process Development Capabilities: Most recently, we expanded our process development capabilities in order to make our operations more attractive to emerging, mid-sized and large pharmaceutical companies. This expansion included increasing our total available process development and laboratory space, upgraded infrastructure and equipment within our existing process development laboratories, and implemented new state-of-the-art technologies and equipment (including benchtop bioreactors and pilot scale manufacturing up to 200 liters) designed to facilitate efficient, high-throughput development of innovative upstream and downstream manufacturing processes that transfer directly into our CGMP manufacturing facility. 

 

We have taken and continue to take steps to diversify and expand our customer base and have developed marketing and sales strategies designed to drive new client acquisitions, while also continuing to leverage our existing relationships to pursue additional collaborations with our existing customers. We also continue to expand our process development capabilities in order to make our operations more attractive to emerging, mid-sized and large pharmaceutical companies. We also leased an additional 42,000 square feet of vacant warehouse space within the same building as our existing Myford Facility. The proximity of this space to our Myford Facility will allow us to utilize existing manufacturing and quality infrastructure that we believe should enhance our manufacturing efficiencies and reduce the overall cost and timeframe to construct a third biomanufacturing facility. This space should house a facility that can accommodate up to six additional 2,000-liter bioreactors. However, we currently do not expect to commence construction of the new facility until our manufacturing capacity at our existing facilities is close to full utilization or we determine that we require additional capacity to meet specific customer demand.

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·Expand Manufacturing Footprint and Enhance Efficiencies: Our existing Myford Facility has 42,000 square feet of vacant warehouse space, which will allow us to utilize existing manufacturing and quality infrastructure that we believe should enhance our manufacturing efficiencies and reduce the overall cost and timeframe to construct a third biomanufacturing facility. This space could house a facility that can accommodate up to six additional 2,000-liter single-use bioreactors. As we continue to fill capacity in our current CGMP facilities, we will refine our plans and determine the appropriate time to execute this expansion that will more than double our installed liters of manufacturing capacity.

·Increase Operating Margins: We believe we have the opportunity to drive operating margin expansion by utilizing our available capacity, and implementing continuous process efficiencies. We believe increased facility capacity utilization resulting from the growth strategies described herein, will drive significantly improved operating margins.

·Reinvest in Equipment and Facilities: We believe that re-investing in our laboratory and manufacturing equipment and facilities is strategically important to meet future customer demand.

Our Facilities

 

Our 12,000 square-foot Franklin Facility includes stainless steel bioreactors (100-liter to 1,000-liter) and single-use bioreactors (200-liter to 1,000-liter), water-for-injection, an autoclave and depyrogenation oven, material storage (including a walk-in cold room) and cell bank cryofreezers. The Franklin Facility is located at our headquarters in Tustin, California.

Our 42,000 square-foot Myford Facility ishas 42,000 square feet of space designed to utilize single-use equipment up to the 2,000-liter manufacturing scale to accommodate a fully disposable biomanufacturing process for products from clinical development to commercial supply. Our Myford Facility includes single-use bioreactors (200-liter to 2,000-liter), quality control labs for environmental and analytical testing, warehousing and material storage (including two walk-in cold rooms) and cell bank cyrofreezers.cryofreezers. The Myford Facility is located adjacent to our Franklin Facility.Facility and has an additional 42,000 square-feet of space available for future expansion.

 

Our Capabilities12,000 square-foot Franklin Facility includes stainless steel bioreactors (100-liter to 1,000-liter) and single-use bioreactors (200-liter to 1,000-liter), water-for-injection, an autoclave and depyrogenation oven, material storage (including a walk-in cold room) and cell bank cryofreezers. The Franklin Facility is located adjacent to our headquarters in Tustin, California.

Manufacturing and Raw Materials

 

We provide a wide range of development and manufacturing services that span the product lifecycle from discovery and preclinical stages to commercialization and are continuously monitoring our processes in order to increase efficiency. We provide a wide range of development and scale-up servicesmanufacture CGMP pharmaceutical-grade products for our clients, including cell line developmentcustomers. The process for manufacturing generally uses commercially available raw materials from multiple suppliers, and selectionin some instances, from a single source supplier. See “Risk Factors—Risks Related to Our Business” for additional discussion of clones, upstreamraw materials supplied by third party vendors for the products we manufacture for our customers. We rely on third parties to supply most of the necessary raw materials and downstream process development, regulatory support including investigational new drug application-ready chemistry, manufacturing,supplies for the products we manufacture on behalf of our customers and control (“CMC”) submission packageour inability to obtain such raw materials or supplies may adversely impact our business, financial condition, and assay development and testing. We also provide a wide rangeresults of cGMP clinical and commercial biomanufacturing services, including characterization assay development, regulatory support, comparability studies, second source supply, process characterization, analytical method validation, supporting the final Biologics License Application CMC package and commercial launch for global markets.operations.

 

We differentiate our capabilities through several key criteria: (i) we employ a customer-centric approach and collaborate with our clients to tailor customized development and manufacturing services; (ii) our agile manufacturing and development capabilities allow for rapid responses to shift production requirements, leading to strong client satisfaction and retention; and (iii) our usage of single-use bioreactors contributes to enhanced manufacturing efficiency for our customers.Regulatory Matters

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We have a strong and proven regulatory track record, including 1517 years of inspection history with no significant impact to our business. To date, we have been successfully audited and qualified by large and small and domestic and foreign biotechnology companies interested in the production of biologic material for clinical and commercial use. Additionally, we have been successfully audited by several regulatory agencies, including the FDA, the European Medicines Agency (“EMA”), the Brazilian Health Surveillance Agency (“ANVISA”), the Canadian Health Authority (“Health Canada”), the California Department of Health and the Australian Department of Health.

Manufacturing and Raw Materials

We manufacture cGMP pharmaceutical-grade products for our customers. The process for manufacturing generally uses commercially available raw materials from multiple suppliers, and in some instances, from a single source supplier. We currently do not have long-term supply contracts with these suppliers. If we experience difficulties acquiring sufficient quantities of required materials or products from our existing suppliers, or if our suppliers are found to be non-compliant with the FDA’s quality system regulation, cGMPs or other applicable laws or regulations, we would be required to find alternative suppliers. If our primary suppliers become unable or unwilling to perform, any resulting delays or interruptions in the supply of raw materials required to support our manufacturing of cGMP pharmaceutical-grade products would ultimately delay our manufacture of products for our customers, which could materially and adversely affect our operating results and financial condition. To date, however, we have not experienced any significant difficulty in obtaining these raw materials.

Regulatory Matters

 

We are required to comply with the regulatory requirements of various local, state, national and international regulatory bodies having jurisdiction in the countries or localities where we manufacture products or where our customers’ products are distributed. In particular, we are subject to laws and regulations concerning research and development, testing, manufacturing processes, equipment and facilities, including compliance with cGMPs,CGMPs, labeling and distribution, import and export, and product registration and listing. As a result, our facilities are subject to regulation by the FDA, as well as regulatory bodies of other jurisdictions such aswhere our customers have marketing approval for their products including, but not limited to, the EMA, ANVISA, Health Canada, and the Australian Department of Health, depending on the countries in which our customers market and sell the products we manufacture and/or package on their behalf.Health. We are also required to comply with environmental, health and safety laws and regulations, as discussed in “Environmental and Safety Matters"Matters” below. These regulatory requirements impact many aspects of our operations, including manufacturing, developing, labeling, packaging, storage, distribution, import and export and record keeping related to customers'customers’ products. Noncompliance with any applicable regulatory requirements can result in government refusal to approve facilities for manufacturing products or products for commercialization.

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Our customers’ products must undergo pre-clinical and clinical evaluations relating to product safety and efficacy before they are approved as commercial therapeutic products. The regulatory authorities having jurisdiction in the countries in which our customers intend to market their products may delay or put on hold clinical trials, delay approval of a product or determine that the product is not approvable. The FDA or other regulatory agencies can delay approval of a drug if our manufacturing facilities are not able to demonstrate compliance with cGMPs,CGMPs, pass other aspects of pre-approval inspections (i.e., compliance with filed submissions) or properly scale up to produce commercial supplies. The FDA and comparable government authorities having jurisdiction in the countries in which our customers intend to market their products have the authority to withdraw product approval or suspend manufacture if there are significant problems with raw materials or supplies, quality control and assurance or the product is deemed adulterated or misbranded. In addition, ifIf new legislation or regulations are enacted or existing legislation or regulations are amended or are interpreted or enforced differently, we may be required to obtain additional approvals or operate according to different manufacturing or operating standards or pay additional fees. This may require a change in our manufacturing techniques or additional capital investments in our facilities.

 

The costs associated with complying with the various applicable local, state, national and international regulations could be significant and the failure to comply with such legal requirements could have an adverse effect on our financial condition and results of operations and financial condition.operations. See “Risk Factors—Risks Related to Our Business—Business” for additional discussion of the costs associated with complying with the various regulations. Failure to comply with existing and future regulatory requirements could adversely affect our business, financial condition and results of operations and financial condition” for additional discussion of the costs associated with complying with the various regulations.operations.

 

Environmental and Safety Matters

 

Certain products manufactured by us involve the use, storage and transportation of toxic and hazardous materials. Our operations are subject to extensive laws and regulations relating to the storage, handling, emission, transportation and discharge of materials into the environment and the maintenance of safe working conditions. We maintain environmental and industrial safety and health compliance programs and training at our facilities.

 

Prevailing legislation tends to hold companies primarily responsible for the proper disposal of their waste even after transfer to third party waste disposal facilities. Other future developments, such as increasingly strict environmental, health and safety laws and regulations, and enforcement policies, could result in substantial costs and liabilities to us and could subject the handling, manufacture, use, reuse or disposal of substances or pollutants at our facilities to more rigorous scrutiny than at present.

 

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Intellectual Property

 

We do not currently own any patents and do not have any patent applications pending in the United States or any foreign countries. However, we have acquired and developed and continue to acquire and develop knowledge and expertise (“know-how”) and trade secrets in the provision of process development and manufacturing services. Our know-how and trade secrets may not be patentable, but they are valuable in that they enhance our ability to provide high-quality services to our customers. We typically place restrictions in our agreements with third-parties, which contractually restrict their right to use and disclose any of our proprietary technology with which they may be involved. In addition, we have internal non-disclosure safeguards, including confidentiality agreements, with our employees.

 

We also own trademarks to protect the names of our services. Trademark protection continues in some countries soas long as the trademark is used, and in other countries, soas long as the trademark is registered. Trademark registration is for fixed terms and can be renewed indefinitely.

 

Segment Information

 

Historically, ourOur business had beenis organized into twoone reportable operating segments: (i) our research and development segment, and (ii) our contract manufacturing services segment. However, due to the aforementioned changes in our organizational structure, which resulted in our research and development segment meeting all the conditions required in order to be classified as a discontinued operation (as described in Note 2 to the accompanying consolidated financial statements), management has determined that we now operate in oneoperating segment with one reporting segment. Accordingly, the accompanying consolidated financial statements for the fiscal years ended April 30, 2018, 2017 and 2016 reflect the operations and related assets and liabilities of our discontinued research and development segment as a discontinued operation. In addition, we had no foreign-based operations and no long-lived assets located in foreign countries as of and for the fiscal years ended April 30, 2018, 20172020, 2019 and 2016.2018.

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Customers

 

Contract manufacturing revenue hasRevenues have historically been derived from a small customer base. For the fiscal years ended April 30, 20182020, 2019 and 2017,2018, we derived approximately 98%63%, 64% and 86% of our contract manufacturing revenuerevenues from six customers andour top three customers, respectively, andrespectively. We continue to be dependent on a limited number of customers for the fiscal year ended April 30, 2016, we derived approximately 95%a substantial majority of our contract manufacturing revenue from two customers. While we have not entered into long-term commitments with our customers historically, we have begun to increase our effort to obtain longer-term commitments from our customers. As such,revenue. In addition, the duration of our fulfillment of customer contracts varies from a few months to more than 24 months, due to the nature and size of each customer’s requirements. Our future resultsThe loss of, operations could be adversely affected if revenueor a significant reduction of business from, any one of our primary customers is significantly reduced or eliminated.could have a material adverse effect on our business, financial condition and results of operations. Refer to Note 2, “Summary of Significant Accounting Policies” of the Notes to the accompanying consolidated financial statementsConsolidated Financial Statements for additional financial information regarding our customer concentration, including the name of significant customers, and geographic location of customers.

 

Backlog

 

Our backlog represents, as of a point in time, future contract manufacturing revenue from work not yet completed under signed contracts. As of April 30, 2018,2020, our backlog was approximately $57.8$65 million, as compared to approximately $57.7$46 million as of April 30, 2017.2019. While we anticipate the majority of our backlog will be recognized during fiscal year 2019,2021, our backlog is subject to a number of risks and uncertainties, including the risk that a customer timely cancels its commitments prior to our initiation of manufacturing services, in which case we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments; the risk that a customer may experience delays in its program (s)program(s) or otherwise, which could result in the postponement of anticipated manufacturing services; and the risk that we may not successfully execute on all customer projects, any of which could have a negative impact on our liquidity, reported backlog and future revenue.

 

Competition

 

Our competition in the CDMO market includes a number of full-service contract manufacturers and large pharmaceutical companies offering third-party manufacturing services to fill their excess capacity. Also, large pharmaceutical companies have been seeking to divest portions of their manufacturing capacity, and any such divested businesses may compete with us in the future. In addition, mostSome of our significantly larger and global competitors may have substantially greater financial, marketing, technical or other resources than we do. Moreover, additional competition may emerge and may, among other things, result in a decrease in the fees paid for our services,create downward pricing pressure, which would affect our financial condition and results of operations and financial condition.operations.

 

Employees

 

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Human Resources

As of April 30, 2018,2020, we employed 185222 full-time employees and one5 part-time employee.employees. None of our employees are covered by a collective bargaining agreement. We have not experienced employment-related work stoppages and consider our employee relations to be good.

 

Company Information

 

We were originally incorporated in the State of California in June 1981 and reincorporated in the State of Delaware on September 25, 1996. Our principal executive offices are located at 2642 Michelle Drive, Suite 200, Tustin, California, 92780 and our telephone number is (714) 508-6100. Our principal website address is www.avidbio.com.www.avidbio.com. The information on, or that can be accessed through, our website is not part of this Annual Report.

 

Available Information

 

This Annual Report, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, and our proxy statements, and all amendments to those reports filed with or furnished to the SEC are available, free of charge, through the SEC’s website at www.sec.gov and our website atwww.avidbio.com as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. The information on, or that can be accessed through, our website is not part of this Annual Report.

 

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Item 1A.Risk Factors

 

You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this report, including our consolidated financial statements and the related notes thereto, before making a decision to invest in our securities. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently believe are not material, also may become important factors that affect us and impair our business operations. The occurrence of any of the events or developments discussed in the risk factors below could have a material and adverse impact on our business, financial condition, results of operations financial condition and cash flows and, in such case, our future prospects would likely be materially and adversely affected.

 

Risks Related to Our Business

 

If we cannot secure additional business, we may have to raise additional capital or further restructure, or cease, our operations.

 

We have expended substantial funds on our contract manufacturing business and, historically, on theour research and development of pharmaceutical product candidates.business, which we discontinued in fiscal year 2018. As a result, we have historically experienced losses and negative cash flows from operations since our inception and although we have discontinued our research and development segment (as described in Note 1may continue to the accompanying consolidated financial statements), we expectexperience negative cash flows from operations to continue until we can generate sufficient revenue to generate positive cash flow from operations.

Our ability to fund our operations is dependent on the amount of cash on hand and our ability to generate sufficient revenuepositive cash flow to coversustain our current operations. At April 30, 2018,2020, we had $42,265,000$36.3 million in cash and cash equivalents. Although it is difficult to forecast all of our future liquidity requirements, we believe that our cash and cash equivalents on hand, combined with the remainingour projected cash receipts from manufacturing services to be rendered under our current backlog (as further discussed above under “Backlog”) and the remaining upfront payment we expect to receive from the sale of our PS-targeting program (as described in Note 9 to the accompanying consolidated financial statements) may notexisting customer contracts, will be sufficient to fund our operations beyond one year after the date our consolidated financial statements are issued without securing any new business, financingadditional manufacturing services projects, capital equipment financing, or raising additional capital in the equity markets.

In addition, in the event a customer timely cancels its commitments prior to our initiation of manufacturing services, we may be required to refund some or all of the amounts paidadvance payments made to us in advance under those canceled commitments, which would have a negative impact on our liquidity, reported backlog and future revenue.

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In Further, in the event we are unable to secure sufficient business to support our current operations, we may need to raise additional funding in the future. Additional funding may include the financing or leasing of capital equipment or raising capital in the equity markets.markets in order to fund our future operations. We may raise funds through the issuance of debt or through the public offering of securities. There can be no assurance that these financings will be available to us on acceptable terms, or at all. Our ability to raise additional capital in the equity and debt markets to fund our obligations in future periods dependsis 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, negativeour financial results and economic conditions, adverseand market conditions,conditions. Further, global financial crises and adverse financial results.economic downturns, including those caused by widespread public health crises such as the global novel coronavirus disease, may cause extreme volatility and disruptions in capital and credit markets, and may impact our ability to raise additional capital when needed on acceptable terms, if at all. If we are unable to either raise sufficient capital in the equity markets or generate additional revenue,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.

As a result, we have concluded that there is substantial doubt about Any of these actions could materially harm our ability to continue as a going concern within one year after the date that our accompanying consolidatedbusiness, financial statements are issued.condition, results of operations, and future prospects.

 

The audit report prepared by our independent registered public accounting firm, with respect to the audited consolidatedOur business, financial statements for the fiscal year ended April 30, 2018, contains an explanatory paragraph referencing our conclusion that substantial doubt exists as to our ability to continue as a going concern,condition, and absent securing sufficient additional business or raising additional capital, weresults of operations may be unable to remain a going concern.adversely affected by global health epidemics, including the COVID-19 pandemic.

 

In its report accompanyingMarch 2020, the World Health Organization declared the global novel coronavirus disease (“COVID-19”) outbreak a pandemic. COVID-19 has spread across the globe and is affecting worldwide economic activity. Any public health epidemic, including the COVID-19 pandemic, may affect our audited consolidatedoperations and those of third parties on which we rely, including our customers and suppliers. Our business, financial statementscondition, and results of operations may be affected by: disruptions in our customers’ abilities to fund, develop, or bring to market products as anticipated; delays in or disruptions to the conduct of clinical trials by our customers; cancellations of contracts or confirmed orders from our customers; and the inability, difficulty, or additional cost or delays in obtaining key raw materials, components, and other supplies from our existing supply chain; among other factors caused by the COVID-19 pandemic. Our operations could be disrupted if some of our employees become ill or are otherwise absent from work as a result of the COVID-19 pandemic. Additionally, governmental restrictions, including travel restrictions, quarantines, shelter-in-place orders, business closures, new safety requirements or regulations, or restrictions on the import or export of certain materials, or other operational issues related to the COVID-19 pandemic may have an adverse effect on our business and results of operations. We continue to monitor our operations and governmental recommendations and have made modifications for the fiscal year ended April 30, 2018, our independent registered public accounting firm included an explanatory paragraph referencing our experienced losses and negative cash flows from operations since inception and our conclusion that substantial doubt exists asindefinite period to our abilitynormal operations because of the COVID-19 pandemic, including requiring most non-production related employees to continue as a going concern. Our financial statements do not include any adjustments thatwork remotely which may be necessary in the event we are unable to continue as a going concern. We may need to further modify our operation plans in an effort to continue as a going concern. Absent securing sufficient additional businessincrease cyber security risks or raising additional capital, which we may be unable to raise on commercially reasonable terms or at all, we may be unable to remain a going concern.create data accessibility concerns.

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Our operating results will be adversely affected if we are unable to maximize our facility capacity utilization. 

 

We have recently experienced idle manufacturing capacity due primarily to unexpected declines in commitments from existing customers, and we may continue to experience such idle manufacturing capacity until we secure substantial new revenues from existing and/or new customers. Our operating results are significantly influenced by our capacity utilization and, as such, if we are unable to utilize our facilities to capacity, our margins could be adversely affected, and our financial condition and results of operations and financial condition will continue to be adversely affected. Further, whileWe have experienced idle manufacturing capacity and we may continue to expand ourexperience such idle manufacturing infrastructure, our revenue volume may be insufficient to ensure the economical operation of any such expanded capacity in which case our results of operations could be adversely affected.until we secure substantial additional revenues from existing and/or new customers.   

 

We have had significanta history of losses, anticipate future losses and may never achieve profitability. 

 

We have incurred net losses in most fiscal years since we began operations in 1981, including net losses of $21,813,000$10.5 million and $28,159,000$4.2 million for the fiscal years ended April 30, 20182020 and 2017,2019, respectively. As of April 30, 2018,2020, we had an accumulated deficit of $559,129,000. In addition, we expect$571.1 million. We may continue to experience negative cash flows from operations to continue until we can generate sufficient additional revenue from operations to achieve profitability. Further, ifprofitability and positive cash flows. If we fail to generate sufficient additional revenue, we may never achieve profitability.

 

Because a significant portion of our contract manufacturing revenue comes from a limited number of customers, any decrease in sales to these customers could harm our business, financial condition, and results of operations and financial condition.operations.

 

Contract manufacturing revenueRevenue has historically been derived from a small customer base. For the fiscal years ended April 30, 20182020, 2019 and 2017,2018, we derived approximately 98%63%, 64% and 86% of our contract manufacturing revenuerevenues from six customers andour top three customers, respectively, andrespectively. We continue to be dependent on a limited number of customers for the fiscal year ended April 30, 2016, we derived approximately 95%a substantial majority of our contract manufacturing revenue from two customers. In addition, typically we have not entered into long-term commitments with these third-party customers because their need for product supply depends on a variety of factors, including the product’s stage of development, the timing of regulatory filings and approvals, the product needs of their collaborators, if applicable, their financial resources and the market demand with respect to commercial products.revenue. The loss of, or a significant reduction of business from, any of our major customers could have a material adverse effect on our business, financial condition, and results of operations and financial condition.operations.

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Failure to comply with existing and future regulatory requirements could adversely affect our business, financial condition, and results of operations and financial condition.operations.

 

Our industry is highly regulated. We are required to comply with the regulatory requirements of various local, state, provincial, national and international regulatory bodies having jurisdiction in the countries or localities in which we manufacture products or in which our customers’ products are distributed. In particular, we are subject to laws and regulations concerning development, testing, manufacturing processes, equipment and facilities, including compliance with cGMPs,CGMPs, import and export, and product registration and listing, among other things. As a result, most of our facilities are subject to regulation by the FDA, as well as regulatory bodies of other jurisdictions such aswhere our customers have marketing approval for their products including, but not limited to, the EMA, ANVISA and/or Health Canada, depending on the countries in which our customers market and sell the products we manufacture on their behalf. As we expand our operations and geographic scope, we may be exposed to more complex and new regulatory and administrative requirements and legal risks, any of which may require expertise in which we have little or no experience. It is possible that compliance with new regulatory requirements could impose significant compliance costs on us. Such costs could have a material adverse effect on our business, financial condition and results of operations.

 

These regulatory requirements impact many aspects of our operations, including manufacturing, developing, storage, distribution, import and export and record keeping related to customers’ products. Noncompliance with any applicable regulatory requirements can result in government refusal to approveapprove: (i) facilities for testing or manufacturing products or (ii) products for commercialization. The FDA and other regulatory agencies can delay, limit or deny approval for many reasons, including:

 

·changes to the regulatory approval process, including new data requirements for product candidates in those jurisdictions, including the United States, in which our customers may be seeking approval;
·that a customer’s product candidate may not be deemed to be safe or effective;
·the ability of the regulatory agency to provide timely responses as a result of its resource constraints; and
·that the manufacturing processes or facilities may not meet the applicable requirements.

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In addition, if new legislation or regulations are enacted or existing legislation or regulations are amended or are interpreted or enforced differently, we may be required to obtain additional approvals or operate according to different manufacturing or operating standards. This may require a change in our development and manufacturing techniques or additional capital investments in our facilities. Any related costs may be significant. If we fail to comply with applicable regulatory requirements in the future, then we may be subject to warning letters and/or civil or criminal penalties and fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, restrictions on the import and export of our products, debarment, exclusion, disgorgement of profits, operating restrictions and criminal prosecution and the loss of contracts and resulting revenue losses. Inspections by regulatory authorities that identify any deficiencies could result in remedial actions, production stoppages or facility closure, which would disrupt the manufacturing process and supply of product to our customers. In addition, such failure to comply could expose us to contractual and product liability claims, including claims by customers for reimbursement for lost or damaged active pharmaceutical ingredients (“APIs”) or recall or other corrective actions, the cost of which could be significant.

 

In addition, certain products we manufacture must undergo pre-clinical and clinical evaluations relating to product safety and efficacy before they are approved as commercial therapeutic products. The regulatory authorities having jurisdiction in the countries in which we or our customers intend to market their products may delay or put on hold clinical trials or delay approval of a product or determine that the product is not approvable. The FDA or other regulatory agencies can delay approval of a drug if our manufacturing facility, including any newly commissioned facility, is not able to demonstrate compliance with cGMPs,CGMPs, pass other aspects of pre-approval inspections or properly scale up to produce commercial supplies. The FDA and comparable government authorities having jurisdiction in the countries in which we or our customers intend to market their products have the authority to withdraw product approval or suspend manufacture if there are significant problems with raw materials or supplies, quality control and assurance or the product we manufacture is adulterated or misbranded. If our manufacturing facilities and services are not in compliance with FDA and comparable government authorities, we may be unable to obtain or maintain the necessary approvals to continue manufacturing products for our customers, which would materially adversely affect our financial condition and results of operations and financial condition.operations.

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TheOur customer’s failure to receive or maintain regulatory approval for our or our customers’their product candidates could negatively impact our revenue and profitability.

 

Our contract manufacturing business materially depends upon the regulatory approval of the products we manufacture. As such, anyif our customers experience a delay in, or failure to receive, approval for any of our customers’their product candidates or the failurefail to maintain regulatory approval for our or our customers’of their products, could negatively impact our revenue and profitability. Ifprofitability could be adversely affected. Additionally, if the FDA or a comparable foreign regulatory authority does not approve of our facilities for the manufacture of a customer product or if it withdraws such approval in the future, our customers may choose to identify alternative manufacturing facilities and/or relationships, which could significantly impact our ability to expand our CDMO capacity and capabilities and achieve profitability.

Our manufacturing services are highly complex, and if we are unable to provide quality and timely services to our customers, our business could suffer.

 

The manufacturing services we offer are highly complex, due in part to strict regulatory requirements. A failure of our quality control systems in our facilities could cause problems to arise in connection with facility operations for a variety of reasons, including equipment malfunction, viral contamination, failure to follow specific manufacturing instructions, protocols and standard operating procedures, problems with raw materials or environmental factors. Such problems could affect production of a single manufacturing run or a series of runs, requiring the destruction of products, or could halt manufacturing operations altogether. In addition, our failure to meet required quality standards may result in our failure to timely deliver products to our customers which, in turn, could damage our reputation for quality and service. Any such incident could, among other things, lead to increased costs, lost revenue, reimbursement to customers for lost drug substance, damage to and possibly termination of existing customer relationships, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other manufacturing runs. With respect to our commercial manufacturing, if problems are not discovered before the product is released to the market, we may be subject to regulatory actions, including product recalls, product seizures, injunctions to halt manufacture and distribution, restrictions on our operations, civil sanctions, including monetary sanctions, and criminal actions. In addition, such issues could subject us to litigation, the cost of which could be significant.

 

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We depend on spending and demand from our customers for our contract manufacturing and development services and any reduction in spending or demand could have a material adverse effect on our business. 

 

The amount that our customers spend on the development and manufacturingmanufacture of their products or product candidates, particularly the amount our customers choose to spend on outsourcing these services to us, substantially impacts our revenue and profitability. The outcomes of our customers’ research, development and marketing also significantly influence the amount that our customers choose to spend on our services and offerings. Our customers determine the amounts that they will spend on our services based upon, among other things, the clinical and market success of their products, available resources, access to capital and their need to develop new products which, in turn, depend upon a number of other factors, including their competitors’ research, development and product initiatives and the anticipated market for any new products, as well as clinical and reimbursement scenarios for specific products and therapeutic areas. Further, increasing consolidation in the pharmaceutical industry may impact such spending, particularly in the event that any of our customers choose to develop or acquire integrated manufacturing operations. Any reduction in customer spending on biologics development and related services as a result of these and other factors could have a material adverse effect on our business, financial condition, and results of operations and financial condition.operations.  

 

The consumers of the products we manufacture for our customers may significantly influence our business, financial condition, and results of operations and financial condition.operations. 

 

We depend on, and have no control over, consumer demand for the products we manufacture for our customers. Consumer demand for our customers’ products could be adversely affected by, among other things, delays in health regulatory approval, the inability of our customers to demonstrate the efficacy and safety of their products, the loss of patent and other intellectual property rights protection, the emergence of competing or alternative products, including generic drugs, the degree to which private and government payment subsidies for a particular product offset the cost to consumers and changes in the marketing strategies for such products. If the products we manufacture for our customers do not gain market acceptance, our revenues and profitability may be adversely affected.

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We believe that continued changes to the healthcare industry, including ongoing healthcare reform, adverse changes in government or private funding of healthcare products and services, legislation or regulations governing the privacy of patient information or patient access to care, or the delivery, pricing or reimbursement of pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry participants to purchase fewer services from us or influence the price that others are willing to pay for our services. Changes in the healthcare industry’s pricing, selling, inventory, distribution or supply policies or practices could also significantly reduce our revenue and profitability.

 

If production volumes of key products that we manufacture for our customers continue to decline, our financial condition and results of operations and financial condition may continue to be adversely affected.

 

We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy. 

 

Earlier inDuring fiscal year 2018 we announcedcompleted our intent to transition to a dedicated CDMO and, in connection with suchthe transition, pursue strategic options to license or divestwe divested our research and development assets. As a result of this transition, during the fiscal quarter ended October 31, 2017, weassets and reduced our overall workforce as part of a series of strategic actions to reduce costs and better position us to achieve potential profitability. Now that we have completed our transitionWe intend to a dedicated CDMO, we intendcontinue to grow our business operations as demand for our services increases and increase the number of our employees to accommodate such potential growth, which may cause us to experience periods of rapid growth and expansion. This potential future growth could create a strain on our organizational, administrative and operational infrastructure, including manufacturing operations, quality control, technical support and other administrative functions. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls. 

 

As we expect our commercial operations and sales volume to grow, we will need to continue to increase our capacity for manufacturing, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. We may also need to purchase additional equipment, some of which can take several months or more to procure, set upinstall and validate, and increase our manufacturing, maintenance, software and computing capacity to meet increased demand. These increasesWe may not be able to successfully implement the increase in scale, expansion of personnel, purchase and validation of equipment or process enhancements, may not be successfully implemented.which could adversely affect our ability to increase revenues.  

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If we are unable to protect the confidentiality of our customers’ proprietary information, we may be subject to claims. 

 

Many of the formulations used and processes developed by us in manufacturingthe manufacture of our customers’ products are subject to trade secret protection, patents or other intellectual property protections owned or licensed by such customer. While we make significant efforts to protect our customers’ proprietary and confidential information, including requiring our employees to enter into agreements protecting such information, if any of our employees breaches the non-disclosure provisions in such agreements, or if our customers make claims that their proprietary information has been disclosed, our reputation may suffer damage and we may become subject to legal proceedings that could require us to incur significant expensesexpense and divert our management’s time, attention and resources.

 

Our services and our customers’ products may infringe on or misappropriate the intellectual property rights of third parties.

 

Any claims that our services infringe the rights of third parties, including claims arising from any of our customer engagements, regardless of their merit or resolution, could be costly and may divert the efforts and attention of our management and technical personnel. We may not prevail in such proceedings, given the complex technical issues and inherent uncertainties in intellectual property litigation. If such proceedings result in an adverse outcome, we could be required, among other things, to pay substantial damages, discontinue the use of the infringing technology, expend significant resources to develop non-infringing technology, license such technology from the third party claiming infringement (which license may not be available on commercially reasonable terms or at all) and/or cease the manufacture, use or sale of the infringing processes or offerings, any of which could have a material adverse effect on our business.

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In addition, our customers’ products may be subject to claims of intellectual property infringement and such claims could materially affect our business if their products cease to be manufactured and they have to discontinue the use of the infringing technology which we may provide. Any of the foregoing could affect our ability to compete or could have a material adverse effect on our business, financial condition and results of operations. 

If we do not enhance our existing or introduce new service offerings in a timely manner, our offerings may become obsolete or uncompetitivenoncompetitive over time, customers may not buy our offerings and our revenuerevenues and profitability may decline. 

 

Demand for our manufacturing services may change in ways that we may not anticipate due to evolving industry standards and customer needs that are increasingly sophisticated and varied, as well as the introduction by others of new offerings and technologies that provide alternatives to our offerings. In the event we are unable to offer or enhance our service offerings or expand our manufacturing infrastructure to accommodate requests from our customers and potential customers, our offerings may become obsolete or uncompetitivenoncompetitive over time, in which case our revenue and operating results would suffer. For example, if we are unable to respond to changes in the nature or extent of the technological or other needs of our customers through enhancing our offerings, our competition may develop offerings that are more competitive than ours and we could find it more difficult to renew or expand existing agreements or obtain new agreements. Potential innovations intended to facilitate enhanced or new offerings generally will require a substantial capital investment before we can determine their commercial viability, and we may not have financial resources sufficient to fund all desired innovations. Even if we succeed in creating enhanced or new offerings, however, they may still fail to result in commercially successful offerings or may not produce revenue in excess of our costs of development, and they may be rendered obsolete by changing customer preferences or the introduction by our competitors of offerings embodying new technologies or features. Finally, the marketplace may not accept our innovations due to, among other things, existing patterns of clinical practice, the need for regulatory clearance and/or uncertainty over market access or government or third-party reimbursement.

 

We operate in a highly competitive market and competition may adversely affect our business.

 

We operate in a market that is highly competitive. Our competition in the contract manufacturing market includes full-service contract manufacturers and large pharmaceutical companies offering third-party manufacturing services to fill their excess capacity. We may also compete with the internal operations of those pharmaceutical companies that choose to source their product offerings internally. Additionally, several large pharmaceutical companies have recently sought to divest portions of their manufacturing capacity, and any such divested businesses may compete with us in the future. In addition, most of our competitors may have substantially greater financial, marketing, technical or other resources than we do. Moreover, additional competition may emerge, particularly in lower-cost jurisdictions such as India and China, which could, among other things, result in a decrease in the fees paid for our services, which may adversely affect our financial condition and results of operations and financial condition.operations.  

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We rely on third parties to supply most of the necessary raw materials and supplies for the products we manufacture on behalf of our customers and our inability to obtain such raw materials or supplies may adversely impact our business, financial condition, and results of operations and financial condition.operations. 

Our operations require various raw materials, including proprietary media, resins, buffers, and filters, in addition to numerous additional raw materials supplied primarily by third parties. We or our customers specify the raw materials and other items required to manufacture their product and, in some cases, specify the suppliers from whom we must purchase these raw materials. In certain instances, the raw materials and other items can only be supplied by a limited number of suppliers and, in some cases, a single source, or in limited quantities. If third-party suppliers do not supply raw materials or other items on a timely basis, it may cause a manufacturing run to be delayed or canceled which would adversely impact our financial condition and results of operations and financial condition.operations.  Additionally, we do not have long-term supply contracts with any of our single source suppliers. If we experience difficulties acquiring sufficient quantities of required materials or products from our existing suppliers, or if our suppliers are found to be non-compliant with the FDA’s quality system regulation, cGMPsCGMPs or other applicable laws or regulations, we would be required to find alternative suppliers. If our primary suppliers become unable or unwilling to perform, any resulting delays or interruptions in the supply of raw materials required to support our manufacturing of cGMPCGMP pharmaceutical-grade products would ultimately delay our manufacture of products for our customers, which could materially and adversely affect our financial condition and operating results and financial condition.results.

 

Furthermore, third-party suppliers may fail to provide us with raw materials and other items that meet the qualifications and specifications required by us or our customers. If third-party suppliers are not able to provide us with raw materials that meet our or our customers’ specifications on a timely basis, we may be unable to manufacture their product or it could prevent us from delivering products to our customers within required timeframes. Any such delay in delivering our products may create liability for us to our customers for breach of contract or cause us to experience order cancellations and loss of customers. In the event that we manufacture products with inferior quality components and raw materials, we may become subject to product liability claims caused by defective raw materials or components from a third-party supplier or from a customer, or our customer may be required to recall its products from the market.

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If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.

 

Our contract manufacturing operations involve, and our prior activities with respect to our recently solddiscontinued research and development assetsactivities involved, the controlled use of hazardous materials and chemicals. We are subject to federal, state and local laws and regulations in the U.S. governing the use, manufacture, storage, handling and disposal of hazardous materials and chemicals. Although we believe that our procedures for using, handling, storing and disposing of these materials comply with legally prescribed standards, we may incur significant additional costs to comply with applicable laws in the future. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials or chemicals. As a result of any such contamination or injury, we may incur liability or local, city, state or federal authorities may curtail the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our contract manufacturing operations, which could materially harm our business, financial condition and results of operations.

 

Potential product liability claims, errors and omissions claims in connection with services we perform and potential liability under indemnification agreements between us and our officers and directors could adversely affect us.

 

We manufacture products intended for use by the public.in humans. These activities could expose us to risk of liability for personal injury or death to persons using such products. We seek to reduce our potential liability through measures such as contractual indemnification provisions with customers (the scope of which may vary by customer, and the performances of which are not secured) and insurance maintained by us and our customers. We could be materially adversely affected if we are required to pay damages or incur defense costs in connection with a claim that is outside the scope of the indemnification agreements, if the indemnity, although applicable, is not performed in accordance with its terms or if our liabilities exceed the amount of applicable insurance or indemnity. In addition, we could be held liable for errors and omissions in connection with the services we perform. We currently maintain product liability and errors and omissions insurance with respect to these risks. There can be no assurance, however, that our insurance coverage will be adequate or that insurance coverage will continue to be available on terms acceptable to us. 

 

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We also indemnify our officers and directors for certain events or occurrences while the officer or director is serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. Although we have a director and officer insurance policy that covers a portion of any potential exposure, we could be materially and adversely affected if we are required to pay damages or incur legal costs in connection with a claim above such insurance limits.

 

Any claims beyond our insurance coverage limits, or that are otherwise not covered by our insurance, may result in substantial costs and a reduction in our available capital resources.

 

We maintain property insurance, employer’s liability insurance, product liability insurance, general liability insurance, business interruption insurance, and directorsdirectors’ and officers’ liability insurance, among others. Although we maintain what we believe to be adequate insurance coverage, potential claims may exceed the amount of insurance coverage or may be excluded under the terms of the policy, which could cause an adverse effect on our business, financial condition and results from operations. Generally, we would be at risk for the loss of inventory that is not within customer specifications. These amounts could be significant. In addition, in the future we may not be able to obtain adequate insurance coverage or we may be required to pay higher premiums and accept higher deductibles in order to secure adequate insurance coverage.

 

We depend on key personnel and the loss of key personnel could harm our business and results of operations.

 

We depend on our ability to attract and retain qualified scientific and technical employees, as well as a number of key executives. These employees may voluntarily terminate their employment with us at any time. There can be no assurance that we will be able to retain key personnel, or to attract and retain additional qualified employees. We do not maintain key-man or similar policies covering any of our senior management or key personnel. Our inability to attract and retain key personnel would have a material adverse effect on our business.

 

14

We have federal and state net operating loss (“NOL”) carry forwards which, if we were to become profitable, could be used to offset/defer federal and state income taxes. Our ability to use such carry forwards to offset future taxable income may be subject to certain limitations related to changes in ownership of our stock.

 

As of April 30, 2018,2020, we had federal and state NOL carry forwards of approximately $434$427 million and $273$277 million, respectively, expiring from 20192021 to 2037.2038. These NOL carry forwards could potentially be used to offset certain future federal and state income tax liabilities. However, utilization of NOL carry forwards may be subject to a substantial annual limitation pursuant to Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), as well as similar state provisions due to ownership changes that have occurred previously or that could occur in the future. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. We performed a detailedA Section 382 analysis was completed as of our NOL carry forwardsthe fiscal year ended April 30, 2019 and we subsequently reviewed such activity through April 30, 2018 and it was2020, which we determined that no such change in ownership hadhas occurred. However, ownership changes occurring subsequent to April 30, 20182020 may impact the utilization of our NOL carry forwards and other tax attributes. Any limitation may result in expiration of a portion of the carry forwards before utilization. If we were not able to utilize our carry forwards, we would be required to use our cash resources to pay taxes that would otherwise have been offset, thereby reducing our liquidity.

 

U.S. federal income tax reform could adversely affect us.

 

OnIn December 22, 2017, the Tax Cuts and Jobs Act(theAct (the “Tax Act”) was signed into law, significantly reforming the Internal Revenue Code of 1986, as amended (the “Code”).Code. The Tax Act, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of interest, allows for the expensing of capital expenditures, effectuates the migration from a “worldwide” system of taxation to a territorial system and modifies or repeals many business deductions and credits. We continue to examine the impact the Tax Act may have on our business. WhileAs the overall impact of the Tax Act is evolving, we continue to evaluate the effect of the Tax Act on our business, including our projection of minimal cash taxes and our net operating losses, the impact of such tax reform could have a negative impact on our financial results and the market price of our common stock.   

13

 

Business disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses.

 

Our operations could be subject to earthquakes, power shortages and surges, telecommunications failures, water shortages, floods, fires, extreme weather conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we have limited insurance or are predominantly self-insured. The occurrence of any of these business disruptions could seriously harm our manufacturing operations and financial condition and increase our costs and expenses. Our ability to obtain raw materials, components and supplies for the manufacture, as well as the services of outside testing laboratories, of our third party customers’ products, for which we act as a contract manufacturer, could be disrupted, if the operations of these suppliers and/or labs is affected by a man-made or natural disaster or other business interruption. Our corporate headquarters and manufacturing facility isfacilities are located in California near major earthquake faults. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults and being consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake or other natural disaster.

 

We may face additional liabilities associated with our prior research and development activities.

 

We recentlyIn 2018, we sold the majority of our research and development assets, including our development-stage immunotherapy product, bavituximab.bavituximab (as described in Note 11 of the Notes to Consolidated Financial Statements). As a result, we are no longer pursuing our prior research and development activities, including the clinical development associated therewith. We may still face unknown liabilities associated with these prior activities. For example, in the course of our prior development of our product candidate, bavituximab, we contracted with third parties to conduct a series of clinical trials and, although we maintain product liability insurance for clinical studies in the amount of $10,000,000$10 million per occurrence or $10,000,000$10 million in the aggregate on a claims-made basis, as well as country-specific coverage where required for clinical sites located in foreign countries, our coverage may not be adequate in the event we face a product liability claim due to an adverse effect resulting from any of such trials. Any liabilities arising from our prior research and development activities that are not covered by our insurance coverage could negatively impact our financial positioncondition and results of operations.

15

 

We may be subject to various litigation claims and legal proceedings.

 

We, as well as certain of our directors and officers, may be subject to claims or lawsuits during the ordinary course of business. Regardless of the outcome, these lawsuits may result in significant legal fees and expenses and could divert management’s time and other resources. If the claims contained in these lawsuits are successfully asserted against us, we could be liable for damages and be required to alter or cease certain of our business practices. Any of these outcomes could cause our business, financial performance and cash position to be negatively impacted.

 

We have become increasingly dependent on information technology and any breakdown, interruption or breach of our information technology systems could subject us to liability or interrupt the operation of our business, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.operations and cash flows.

 

We are increasingly dependent upon sophisticated information technology systems and infrastructure in connection with the conduct of our business. We must constantly update our information technology infrastructure and our various current information technology systems throughout the organization may not continue to meet our current and future business needs. Furthermore, modification, upgrade or replacement of such systems may be costly. In addition, due to the size and complexity of these systems, any breakdown, interruption, corruption or unauthorized access to or cyber-attack on these systems could create system disruptions, shutdowns or unauthorized disclosure of confidential information. While we attempt to take appropriate security and cyber-security measures to protect our data and information technology systems and to prevent such breakdowns and unauthorized breaches and cyber-attacks, these measures may not be successful and these breakdowns and breaches in, or attacks on, our systems and data may not be prevented. Such breakdowns, breaches or attacks may cause business interruption and could have a material adverse effect on our business, financial condition, cash flows and results of operations and cash flows and could cause the market value of our common shares to decline, and we may suffer financial damage or other loss, including fines or criminal penalties because of lost or misappropriated information.

 

Our governance documents and state law provide certain anti-takeover measures which will discourage a third party from seeking to acquire us unless approved by the Board of Directors.

We have a rights plan that is designed to protect stockholders against unsolicited attempts to acquire control of us that do not offer a fair price to our stockholders as determined by our board of directors. Under the plan, the acquisition of 15% or more of our outstanding common stock by any person or group, unless approved by our board of directors, will trigger the right of our stockholders (other than the acquirer of 15% or more of our common stock) to acquire additional shares of our common stock, and, in certain cases, the stock of the potential acquirer, at a 50% discount to market price, thus significantly increasing the acquisition cost to a potential acquirer. In addition, our certificate of incorporation and by-laws contain certain additional anti-takeover protective devices. For example,

·no stockholder action may be taken without a meeting, without prior notice and without a vote; solicitations by consent are thus prohibited;
·special meetings of stockholders may be called only by our board of directors; and
·our board of directors has the authority, without further action by the stockholders, to fix the rights and preferences, and issue shares, of preferred stock. An issuance of preferred stock with dividend and liquidation rights senior to the common stock and convertible into a large number of shares of common stock could prevent a potential acquirer from gaining effective economic or voting control.

Further, we are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, restricts certain transactions and business combinations between a corporation and a stockholder owning 15% or more of the corporation’s outstanding voting stock for a period of three years from the date the stockholder becomes a 15% stockholder.

 

 

 1614 

 

Although we believe these provisions and our rights plan collectively provide for an opportunity to receive higher bids by requiring potential acquirers to negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management.

 

Our bylaws, as amended, provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.


Our bylaws, as amended, provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of a fiduciary duty owed by any of our directors, officers, or other employees to us, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws, any action to interpret, apply, enforce, or determine the validity of our certificate of incorporation or bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees.

 

Risks Related to the Ownership of Our Common Stock

 

A significant number of shares of our common stock are issuable pursuant to outstanding options, restricted stock units and convertible securities, and we may issue additional shares of common stock in the future. Sales or conversions of these shares will dilute the interests of other security holders and may depress the price of our common stock.

As of April 30, 2018, 5,316,5262020, an aggregate of 6,941,049 shares of common stock were reserved for issuance under outstanding option grantsstock options and restricted stock units, or available for future issuance under our stock incentive plans and we had outstanding warrants to purchase up to 39,040 shares of common stock.plans. Additionally, as of April 30, 2018,2020, there were 1,271,4091,148,735 shares of common stock reserved for and available for issuance under our Employee Stock Purchase Plan (the “ESPP”) and up to 6,826,435 shares of common stock issuable upon conversion of our outstanding 10.50% Series E Convertible Preferred Stock.Stock (the “Series E Preferred Stock”). The issuance of additional shares of common stock upon the exercise, release or conversion, as applicable, of any of the foregoing securities, or the perception that such issuances may occur, would have a dilutive impact on other stockholders and could have a material negative effect on the market price of our common stock.

 

Our highly volatile stock price may adversely affect the liquidity of our common stock.

 

The market price of our common stock has generally been highly volatile and is likely to continue to be highly volatile. For instance, the market price of our common stock has ranged from $1.97$2.24 to $10.50$8.44 per share over the last three fiscal years ended April 30, 20182020 (as adjusted to reflect the 1-for-7 reverse stock split of our issued and outstanding common stock that took effect on July 10, 2017).  

 

17

In addition, the market price of our common stock may be significantly impacted by many factors including, but not limited to:

 

 ·our loss of a significant customer;
·uncertainties about our ability to continue to fund our operations beyond the next twelve months;
 ·significant changes in our financial results or that of our competitors, including our ability to continue as a going concern;
 ·our ability to meet our revenue projections;guidance;
 ·the offering and sale of shares of our common stock, either sold at market prices or at a discount under an equity transaction;
 ·significant changes in our capital structure;
 ·published reports by securities analysts;
 ·announcements of partnering transactions, licensing agreements, joint ventures, strategic alliances, and any other transaction that involves the development, sale or use of our technologies or competitive technologies;
 ·regulatory developments, including possible delays and product safety concerns;in the regulatory approval of our customers’ products which we manufacture;
 ·outcomes of significant litigation, disputes and other legal or regulatory proceedings;
 ·general stock trends in the biotechnology and pharmaceutical industry sectors;
 ·public concerns as to the safety and effectiveness of the products we manufacture;
 ·economic trends and other external factors including, but not limited to, interest rate fluctuations, economic recession, inflation, foreign market trends, national crisis, and disasters; and
 ·healthcare reimbursement reform and cost-containment measures implemented by government agencies.

15

 

These and other external factors have caused and may continue to cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock, and may otherwise negatively affect the liquidity of our common stock.

 

We do not intend to pay dividends on our common stock, so any returns will be limited to the value of our stock.

 

We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings, if any, for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will therefore be limited to the appreciation of their stock.

 

If securities or industry analysts do not publish research reports about us, or if they issue adverse opinions about our business, our stock price and trading volume could decline.

 

The research and reports that industry or securities analysts publish about us or our business will influence the market for our common stock. If one or more analysts who cover us issues an adverse opinion about us, our stock price would likely decline. If one or more of these analysts ceases research coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets which, in turn, could cause our stock price or trading volume to decline. Further, if we fail to meet the market expectations of analysts who follow our stock, our stock price likely would decline.

18

 

Additional Risks Related to the Ownership of our Series E Preferred Stock

 

We may not be able to pay dividends on the Series E Preferred Stock.

 

We are incorporated in Delaware and governed by the Delaware General Corporation Law. Delaware law allows a corporation to pay dividends only out of surplus, as determined under Delaware law, or if there is no surplus, out of net profits for the fiscal year in which the dividend was declared and for the preceding fiscal year. Under Delaware law, however, we cannot pay dividends out of net profits if, after we pay the dividend, our capital would be less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets. In addition, payment of our dividends depends upon our financial condition and other factors as our board of directors may deem relevant from time to time. Our business may not generate sufficient cash flow from operations or future borrowings may not be available to us in an amount sufficient to enable us to make distributions on our Series E Preferred Stock.

 

The market price of the Series E Preferred Stock could be substantially affected by various factors.

 

The market price of the Series E Preferred Stock will depend on many factors, which may change from time to time, including:

 

·prevailing interest rates, increases in which may have an adverse effect on the market price of the Series E Preferred Stock;
·trading prices of common and preferred equity securities issued by other biopharmaceutical companies;
·the annual yield from distributions on the Series E Preferred Stock, as compared to yields on other financial instruments;
·announcements of technological innovations or new commercial products by us or our competitors;
·publicity regarding actual or potential company-sponsored clinical trial and investigator-sponsored clinical trial results relating to products under development by us or our competitors;
·announcements of licensing agreements, joint ventures, strategic alliances, and any other transaction that involves the development, sale or use of our technologies;
·regulatory developments and product safety concerns;
·general economic and financial market conditions;
·government action or regulation;
·significant changes in the financial condition, performance and prospects of us and our competitors;
·changes in financial estimates or recommendations by securities analysts with respect to us, and our competitors in our industry;
·our issuance of additional preferred equity or debt securities; and
·actual or anticipated variations in quarterly operating results of us and our competitors.

16

 

As a result of these and other factors, holders of our Series E Preferred Stock may experience a decrease, which could be substantial and rapid, in the market price of the Series E Preferred Stock, including decreases unrelated to our operating performance or prospects.

 

Item 1B.Unresolved Staff Comments

 

Not applicable.

 

19

Item 2.Properties

 

Our corporate offices and manufacturing facilities are all located in close proximity in Tustin, California. We currently lease an aggregate of approximately 183,000158,000 square feet of office, warehousemanufacturing, laboratory and manufacturingwarehouse space in fivefour buildings under fourthree separate lease agreements, as summarized in the following table:agreements.

 

Lease

#

Original Lease

Execution Date

Approximate

Square Footage

Leased

# of Buildings Occupied

Initial

Lease Term

Expiration Date

# of Options

to Extend

Lease

Extended Lease Term Expiration Date(1)
1December 199848,000212/31/27212/31/37
2July 201484,00011/31/2721/31/37
3April 201626,00018/31/2328/31/35
4April 201625,00018/31/2328/31/35

______________We lease approximately 26,000 square feet for our corporate headquarters under a non-cancellable operating lease agreement that began April 2016 and terminates August 2023. The lease contains two separate option periods that could extend the lease term to August 2035.

(1)Extended lease term expiration date assumes we execute all available option(s) to extend lease in accordance with the terms of the lease agreement.

We lease approximately 48,000 square feet of office, manufacturing and laboratory space under a non-cancellable operating lease agreement that began December 1998 and terminates December 2027. The lease contains two separate option periods that could extend the lease term to December 2037.

We lease approximately 84,000 square feet of manufacturing and laboratory space under a non-cancellable operating lease agreement that began July 2014 and terminates January 2027. The lease contains two separate option periods that could extend the lease term to January 2037.

 

We believe that the space we lease is adequate to meet our current needs and that, if necessary, additional space would be available to accommodate any future growth.

 

Item 3.Legal Proceedings

 

In the ordinary course of business, we are at times subject to various legal proceedings and disputes. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions, 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 financial condition or results of operations or financial position.operations.

 

Item 4.Mine Safety Disclosures

 

Not applicable.

 

 

 

 

 2017 

 

PART II

 

Item 5.Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities

 

Market Information

 

Our common stock is listed on The NASDAQ Capital Market under the trading symbol “CDMO.” The following table sets forth the high and low sales prices per share of our common stock for each quarter during the two years ended April 30, 2018, as adjusted to reflect the 1-for-7 reverse stock split of our issued and outstanding common stock, which took effect on July 10, 2017:

  

Common Stock

Sales Price

  High Low
Fiscal Year 2018    
Quarter Ended April 30, 2018 $4.00 $2.24
Quarter Ended January 31, 2018 $5.48 $3.35
Quarter Ended October 31, 2017 $5.00 $2.85
Quarter Ended July 31, 2017 $5.78 $3.50
Fiscal Year 2017    
Quarter Ended April 30, 2017 $5.42 $2.07
Quarter Ended January 31, 2017 $2.85 $1.97
Quarter Ended October 31, 2016 $3.64 $2.19
Quarter Ended July 31, 2016 $4.69 $2.05

 

Holders of Common Stock

 

As of June 29, 2018,19, 2020, we had 317329 stockholders of record of our common stock. This number does not include beneficial owners whose shares are held in street name.

 

Dividends

No dividends on our common stock have been declared or paid by us. We intend to employ all available funds for the development of our business and, accordingly, do not intend to pay any cash dividends in the foreseeable future. In addition, the Certificate of Designations governing the Series E Preferred Stock restricts us from declaring and paying any dividends on our common stock unless full cumulative dividends on the Series E Preferred Stock have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof is set apart for payment for all past dividend periods. Any future determinations related to dividend policy will be made at the discretion of our board of directors.

Securities Authorized for Issuance under Equity Compensation

The information included under Item 12 of Part III of this Annual Report is hereby incorporated by reference into this Item 5 of Part II of this Annual Report.

Recent Sales of Unregistered Securities

 

None.

 

Dividend Policy

 

Common Stock

We have never declared or paid cash dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements, general business conditions, and other factors that our Board of Directors may deem relevant. In addition, our ability to pay dividends is currently restricted by the terms of the Certificate of Designations of Rights and Preferences (the “Certificate of Designations”) with respect to our 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”).

Series E Preferred Stock

Our Series E Preferred Stock ranks senior to our common stock with respect to dividend rights. Holders of our Series E Preferred Stock are entitled to receive, when and as declared by our Board of Directors out of funds legally available for the payment of distributions, cumulative preferential cash dividends, payable in cash, at a rate of 10.50%per annum on the stated value of $25.00 per share, or $2.625 per shareper annum (in each case, as adjusted for any stock split, stock dividend, recapitalization, reclassification or any similar transaction).

The dividend rate on our Series E Preferred Stock will increase to a penalty rate of 12.50%per annum in the event we: (i) fail to pay dividends for any four consecutive or nonconsecutive quarterly dividend periods; or (ii) fail, for period of 180 consecutive days or more, to maintain the listing or quotation, as applicable, of our Series E Preferred Stock on the New York Stock Exchange, the NYSE MKT LLC, The NASDAQ Global Market, The NASDAQ Global Select Market or The NASDAQ Capital Market, or any successor to such national securities exchange.

Dividends on our Series E Preferred Stock accrue and accumulate on each issued and outstanding share of our Series E Preferred Stock on a daily basis from, and including, the original date of issuance of such share. Dividends on our Series E Preferred Stock are payable quarterly in arrears on or about the first day of each January, April, July, and October, as set forth in the Certificates of Designation. For each of the fiscal years ended April 30, 2020, 2019, and 2018, we paid aggregate cash dividends of approximately $4.3 million to the holders of issued and outstanding shares of our Series E Preferred Stock.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

None.

 2118 

 

Performance Graph

 

Notwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the following information relating to the price performance of our common stock shall not be deemed to be “filed” with the SEC or to be “soliciting material” under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and it shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.

 

The following chart shows the performance from April 30, 20132015 through April 30, 20182020 of Avid Bioservices, Inc. common stock, compared with an investment in the stocks represented in the NASDAQ ICB: 4577 Pharmaceuticals Index and the NASDAQ U.S. Benchmark TR Index assuming the investment of $100 at the beginning of the period and the reinvestment of dividends, if any. The total return data for the comparative indexes were prepared by NASDAQ OMX Global Indexes.

 

COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
VALUE OF INVESTMENT OF $100 ON APRIL 30, 20132015

 

 

 

The underlying data for the foregoingpreceding graph is as follows:

 

April 30, 2013April 30, 2014April 30, 2015

April 30,

2016

April 30,

2017

April 30,

2018

 April 30,
2015
 April 30,
2016
 April 30,
2017
  

April 30,

2018

 

April 30,

2019

 

April 30,

2020

 
Avid Bioservices, Inc.$    100.00$ 125.18$   94.24$   25.47$    44.29$   37.72 $100.00  $27.03  $46.99  $40.02  $52.24  $66.52 
NASDAQ ICB: 4577 Pharmaceuticals (subsector)$    100.00$ 123.47$ 145.21$ 143.24$ 154.84$ 167.09 $100.00  $98.65  $106.64  $115.07  $131.35  $145.31 
NASDAQ U.S. Benchmark TR Index$    100.00$ 120.71$ 135.94$ 135.80$ 161.30$ 182.61 $100.00  $99.90  $118.66  $134.34  $151.38  $150.21 

 

 

 

 2219 

 

Item 6.Selected Financial Data

 

The selected consolidated financial data set forth below as of April 30, 20182020 and 2017,2019, and for the fiscal years ended April 30, 2018, 20172020, 2019 and 2016,2018, are derived from our audited consolidated financial statements included elsewhere in this Annual Report. This information should be read in conjunction with those consolidated financial statements, the notes thereto, and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The selected consolidated financial data set forth below as of April 30, 2016, 20152018, 2017 and 2014,2016, and for the fiscal years ended April 30, 20152017 and 2014,2016, are derived from our audited consolidated financial statements that are contained in Annual Reports previously filed with the SEC, not included herein.

 

  2020(a)  2019(b)  2018  2017  2016 
  (in thousands, except for per share amounts) 
                
Revenues $59,702  $53,603  $53,621  $57,630  $44,357 
                     
(Loss) income from continuing operations $(10,466) $(5,056) $(20,563) $1,393  $3,597 
                     
Income (loss) from discontinued operations, net of tax(c) (d) $  $841  $(1,250) $(29,552) $(59,249)
                     
Net loss $(10,466) $(4,215) $(21,813) $(28,159) $(55,652)
                     
Net loss attributable to common stockholders(e) $(15,152) $(8,901) $(26,499) $(32,799) $(60,136)
                     
Basic and diluted net (loss) income per common share attributable to common stockholders:                    
                     
Continuing operations $(0.27) $(0.17) $(0.53) $(0.09) $(0.03)
                     
Discontinued operations $  $0.01  $(0.03) $(0.79) $(1.92)
                     
Net loss per share attributable to common stockholders $(0.27) $(0.16) $(0.56) $(0.88) $(1.95)
                     
Cash and cash equivalents $36,262  $32,351  $42,265  $46,799  $61,412 
Working capital $15,283  $28,156  $29,964  $26,943  $24,234 
Total assets $107,620  $78,395  $95,760  $118,112  $109,043 
Operating lease liabilities, less current portion $21,244  $  $  $  $ 
Other long-term liabilities $  $93  $  $  $ 

  Fiscal Year Ended April 30, 
  2018  2017  2016  2015  2014 
Statement of Operations Data:               
                
Contract manufacturing revenue $53,621,000  $57,630,000  $44,357,000  $26,744,000  $22,294,000 
                     
Income (loss) from continuing operations $(20,563,000) $1,393,000  $3,597,000  $(6,799,000) $(7,157,000)
                     
Loss from discontinued operations(a) (b) $(1,250,000) $(29,552,000) $(59,249,000) $(43,559,000) $(28,205,000)
                     
Net loss $(21,813,000) $(28,159,000) $(55,652,000) $(50,358,000) $(35,362,000)
                     
Series E preferred stock accumulated dividends $(4,686,000) $(4,640,000) $(4,484,000) $(3,696,000) $(401,000)
                     
Net loss attributable to common stockholders(c) $(26,499,000) $(32,799,000) $(60,136,000) $(54,054,000) $(35,763,000)
                     
Basic and diluted net loss per common share attributable to common stockholders:(d)                    
                     
   Continuing operations $(0.53) $(0.09) $(0.03) $(0.40) $(0.33)
                     
   Discontinued operations $(0.03) $(0.79) $(1.92) $(1.67) $(1.22)
                     
Net loss per share attributable to common stockholders $(0.56) $(0.88) $(1.95) $(2.07) $(1.55)
                     
Basic and diluted weighted average common shares outstanding(d)  47,063,020   37,109,493   30,895,089   26,079,762   23,082,807 
                     
Balance Sheet Data (at end of period):                    
Cash and cash equivalents $42,265,000  $46,799,000  $61,412,000  $68,001,000  $77,490,000 
Working capital $29,964,000  $26,943,000  $24,234,000  $43,192,000  $63,564,000 
Total assets $95,760,000  $118,112,000  $109,043,000  $97,464,000  $90,545,000 
Accumulated deficit $(559,129,000) $(537,435,000) $(509,276,000) $(453,624,000) $(403,266,000)
Stockholders' equity $55,738,000  $53,582,000  $50,074,000  $59,035,000  $67,699,000 

_________________

 

_____________

(a)As of January 31, 2018, our researchOn May 1, 2019, we adopted ASC 842,Leases, which requires lessees to recognize right-of-use assets and development segment met all the conditions required in order to be classified aslease liabilities for operating leases with a discontinued operationlease term greater than one year (as described in Note 2 of the Notes to Consolidated Financial Statements). We adopted ASC 842 using the accompanying consolidated financial statements)modified retrospective method. Accordingly, results for reporting periods beginning after May 1, 2019 are presented in accordance with ASC 842, while prior period amounts are not adjusted and continue to be reported under the accounting standards that were in effect prior to May 1, 2019.
(b)On May 1, 2018, we adopted ASC 606,Revenue from Contracts with Customers, using the modified retrospective method to all contracts not completed as of May 1, 2018 (as described in Note 2 of the Notes to Consolidated Financial Statements). Accordingly,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.
(c)For all periods presented, the operating results of our former research and development segment are reported as lossincome (loss) from discontinued operations, for all periods presented.net of tax (as described in Note 1 of the Notes to Consolidated Financial Statements).
(b)(d)LossIncome (loss) from discontinued operations, net of tax for fiscal yearyears 2019 and 2018 includesinclude a gain on sale of research and development assets before tax of $8,000,000$1.0 million and $8.0 million, respectively (as described in Note 911 of the Notes to the accompanying consolidated financial statements)Consolidated Financial Statements).
(c)(e)Net loss attributable to common stockholders represents our net loss plus Series E Preferred Stockpreferred stock accumulated dividends.
(d)All share and per share amounts of our common stock presented have been retroactively adjusted to reflect the one-for-seven reverse stock split of our issued and outstanding common stock, which took effect on July 10, 2017 (as described in Note 1 to the accompanying consolidated financial statements).

 

 

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Item 7.Management’s Discussion And Analysis Of Financial Condition And Results Of Operations

The following discussion is includedand analysis should be read in conjunction with “Item 6—Selected Financial Data” and our audited Consolidated Financial Statements and the related notes thereto set forth in “Item 8—Financial Statements and Supplementary Data”. In addition to describehistorical information, this discussion and analysis contains forward-looking statements, including statements regarding the anticipated impact of the ongoing COVID-19 global pandemic on our business operations that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those set forth under “Item 1A—Risk Factors” and elsewhere in this Annual Report.

For discussion related to changes in financial positioncondition and our results of operations for eachfiscal year 2019 compared to fiscal year 2018, refer to “Part II, Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the three fiscal years in the periodyear ended April 30, 2018. The audited consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction2019, which was filed with this discussion.the SEC on June 27, 2019.

 

Overview

 

We are a dedicated contract development and manufacturing organization (“CDMO”) that provides a comprehensive range of services from process development to currentCurrent Good Manufacturing Practices (“cGMP”CGMP”) clinical and commercial manufacturing, focused on biopharmaceutical productsdrug substances derived from mammalian cell culture. With 2527 years of experience producing monoclonal antibodies and recombinant proteins, in batch, fed-batch and perfusion modes, our services include cGMPCGMP clinical and commercial product manufacturing, purification, bulk packaging, release and stability testing and regulatory submissions and support. We also provide a variety of process development services, including cell lineupstream and downstream development and optimization, cell culture and feed optimization, analytical methods development, testing and product characterization.

We have experience in performing process All our services are available as either stand-alone or bundled for full development and manufacturing of biologics since 1993 in our Franklin biomanufacturing facility (“Franklin Facility”), located at our headquarters in Tustin, California. In March 2016, we expanded our manufacturing capacity through the commissioning of our Myford biomanufacturing facility (“Myford Facility”), which more than doubled our manufacturing capacity. The 42,000 square foot facility, which is our second biomanufacturing facility, includes multiple single-use bioreactors up to the 2,000-liter manufacturing scale. The Myford Facility was designed to accommodate a fully disposable biomanufacturing process for products in clinical development to commercial. The Myford Facility is located adjacent to our Franklin Facility.programs. 

 

Business TransitionStrategic Objectives

 

In the fall of 2017, we announcedThe following are our intent to cease our research and development activities and to transition our business to a dedicated CDMO, which we completed during the fourth quarter of fiscal year 2018. As part of our transition efforts, we completed the following initiatives:near-term strategic objectives:

 

·In August 2017, we instituted a number of strategic actions, includingInvest in additional manufacturing capacity and resources required for us to achieve our long-term growth strategy and meet the reductiongrowth-demand of our research andcustomers’ programs, moving from development workforce, designedthrough to reduce costs and better position ourselves as a dedicated CDMO;commercial manufacturing;
·In September 2017, we named Roger J. Lias, Ph.D., who has more than 20 years of management experience in the biologics CDMO industry, as the president ofBroaden our contract manufacturing subsidiary. Subsequently, in December 2017, we appointed Dr. Lias as our President and Chief Executive Officer as we transitioned tomarket awareness through a dedicated CDMO;diversified yet flexible marketing strategy;
·In OctoberContinue to expand our customer base and November 2017, we appointed a total of six new independent members to our board of directors, each of whom has relevant CDMO industry experience;
·In November 2017, we named Tracy Kinjerski as our Vice President of Business Operations, who will focus on executing new businessprograms with existing customers for both process development initiatives with the objective of growing our commercial customer base;
·On January 5, 2018, we amended our Certificate of Incorporation to change our corporate name to Avid Bioservices, Inc. and we adopted the new ticker symbol “CDMO” on The NASDAQ Capital Market to align with the new end-market focus and strategic positioning of our business;
·By January 31, 2018, we classified our R84 technology as held for sale and abandoned our remaining research and development assets (including our intent to return the exosome technology back to the original licensor);
·On February 12, 2018, we sold our phosphatidylserine (PS)-targeting program pursuant to an Asset Assignment and Purchase Agreement (as described in Note 9 to the accompanying consolidated financial statements);manufacturing service offerings; and
·On February20, 2018 we closed an underwritten public offering ofIncrease our common stock pursuantoperating profit margin to which we sold 10,294,445 shares of our common stock at an offering price of $2.25 per share for aggregate gross proceeds of $23,163,000 before deducting underwriting discounts, commissions and other offering related expenses of $1,669,000 (as describedbest in Note 4 to the accompanying consolidated financial statements).class industry standards.

Fiscal Year 2020 Highlights

Reported revenues of $59.7 million for fiscal 2020, an increase of 11%, or $6.1 million, from fiscal 2019, representing an all-time high for us.

Increased our customer base and expanded the scope of work with multiple existing customers to increase the number of manufacturing batches and/or scale of production, including entering into a new contract manufacturing agreement with one of the world’s leading pharmaceutical companies to provide process transfer and clinical manufacturing services to the support the development of a novel therapeutic candidate.

 

 

 

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Strategic ObjectivesPersonnel

 

DuringAdded key members to our transition, we establishedexecutive leadership team with the appointments of Timothy Compton as our Chief Commercial Officer and began executingRichard Richieri as our Chief Operations Officer. Mr. Compton is focused on driving the following near-termcontinued growth of our CDMO business, including the ongoing expansion of our commercial and clinical customer base. Mr. Richieri oversees our process development, clinical and commercial manufacturing, technical support and facilities functions, and focuses on streamlining operations, building internal efficiencies and strategic objectives:planning for future growth.

 

Appointed Catherine Mackey, Ph.D. to our board of directors as an independent member.

Facilities

Initiated the pre-engineering, design and permitting work required that will allow us to break ground on a facility expansion when we determine it is appropriate. We expect that such expansion could take 12 to 18 months to complete. While a specific kick-off date has not yet been established for this expansion, we believe that customer demand will require additional capacity in the next 12 to 24 months and we expect to be prepared to accommodate that demand.

Advanced the construction stages of the installation of a pharmaceutical-grade water system within our Myford Facility. We expect the installation and validation of the pharmaceutical grade water system to take place in late calendar year 2020.

Completed the expansion of our total available process development laboratory space, upgraded the infrastructure and equipment within our existing process development laboratories, and implemented new state-of-the-art technologies and equipment designed to facilitate efficient, high-throughput development of innovative upstream and downstream manufacturing processes.

Impact of COVID-19 Pandemic

In March 2020, the World Health Organization declared the global novel coronavirus disease (“COVID-19”) outbreak a pandemic. To date, the COVID-19 pandemic has not had a significant impact on our operations, as we have been able to continue to operate our manufacturing facilities and provide essential services to our customers. Additionally, in an effort to protect the health and safety of our employees and in compliance with state regulations, we have instituted a work-from-home policy for employees who can perform their job functions offsite, implemented social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our manufacturing facilities, and suspended all non-essential employee travel.

The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. We will continue to assess the potential impact of the COVID-19 pandemic on our business, financial condition, and results of operations. For a further discussion of potential risks to our business from the COVID-19 pandemic, see“Part I, Item 1A—Risk Factors” of this Annual Report.

Performance and Financial Measures

In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenues, gross profit, selling, general and administrative expenses and operating income. 

·22Expand and diversify our customer base by securing additional customers to support our future potential revenue growth beyond fiscal year 2018;
·Continue to invest in manufacturing facilities and infrastructure to maximize our facility utilization and support our customers’ clinical and commercial development and manufacturing requirements; and
·Broaden our sales force by hiring sales representatives to execute our business development initiatives in key markets.

We intend for this discussion to provide the reader with information that will assist in understanding our consolidated financial statements, the changes in certain key items in those consolidated financial statements from period to period and the primary factors that accounted for those changes.

Revenues

Revenues are derived from services provided under our customer contracts and are disaggregated into manufacturing and process development revenue streams. The manufacturing revenue stream generally represents revenue from the manufacturing of customer products derived from mammalian cell culture covering clinical through commercial manufacturing runs. The process development revenue stream generally represents revenue from services associated with the custom development of a manufacturing process and analytical methods for a customer’s product.

Gross Profit

Gross profit is equal to revenues less cost of revenues. Cost of revenues reflects the direct cost of labor, overhead and material costs. Direct labor costs include personnel costs within the manufacturing, process and analytical development, quality assurance, quality control, validation, supply chain and facilities functions. Overhead costs include the rent, common area maintenance, utilities, property taxes, security, materials and supplies, software, small equipment and deprecation costs of all manufacturing and laboratory locations. 

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses are composed of corporate-level expenses, including personnel and support costs of corporate functions such as executive management, finance and accounting, business development, legal, human resources, information technology, project management, and other centralized services. SG&A expenses include corporate legal fees, audit and accounting fees, investor relation expenses, non-employee director fees, corporate facility related expenses, and other expenses relating to our general management, administration, project management, and business development activities. SG&A expenses are generally not directly proportional to revenues, but we expect such expenses to increase over time to support the needs of our growing company.

 

Results of Operations

 

The following table compares the operating results from our continuing operations for the fiscal years ended April 30, 2020, 2019 and 2018 2017 and 2016, which are further discussed below.(in thousands):

 

  Fiscal Years Ended April 30,  Fiscal Years Ended April 30, 
  2018  2017  $ Change  2017  2016  $ Change 
       
Contract manufacturing revenue $53,621,000  $57,630,000  $(4,009,000) $57,630,000  $44,357,000  $13,273,000 
Cost of contract manufacturing  56,545,000   38,259,000   18,286,000   38,259,000   22,966,000   15,293,000 
                         
Gross profit (loss)  (2,924,000)  19,371,000   (22,295,000)  19,371,000   21,391,000   (2,020,000)
                         
Operating expenses:                        
Selling, general and administrative  16,456,000   18,079,000   (1,623,000)  18,079,000   17,904,000   175,000 
Restructuring charges  1,258,000      1,258,000          
                         
Total operating expenses  17,714,000   18,079,000   (365,000)  18,079,000   17,904,000   175,000 
                         
Operating income (loss)  (20,638,000)  1,292,000   (21,930,000)  1,292,000   3,487,000   (2,195,000)
                         
Other income (expense):                        
Interest and other income  102,000   108,000   (6,000)  108,000   124,000   (16,000)
Interest and other expense  (27,000)  (7,000)  (20,000)  (7,000)  (14,000)  7,000 
                         
Income (loss) from continuing operations $(20,563,000) $1,393,000  $(21,956,000) $1,393,000  $3,597,000  $(2,204,000)

Contract Manufacturing Revenue

Fiscal Year 2018 Compared to Fiscal Year 2017:

The decrease in contract manufacturing revenue of $4,009,000 (7%) during fiscal year 2018 was primarily due to fewer manufacturing runs completed and shipped compared to the prior year, which can primarily be attributed to a decrease in manufacturing demand from our two largest customers. As we seek to expand and diversify our customer base, we have secured several new customers since January 2017. However, these new customers are predominately in an earlier stage of development, and therefore, the contract manufacturing revenue from these newer customers during fiscal year 2018 only partially offset the decrease in revenue from our two largest customers.

  Fiscal Year Ended April 30, 
  2020  2019  2018 
Revenues $59,702  $53,603  $53,621 
Cost of revenues  55,770   46,379   56,545 
Gross profit (loss)  3,932   7,224   (2,924)
             
Operating expenses:            
Selling, general and administrative  14,517   12,846   16,456 
Loss on lease termination  355       
Restructuring charges        1,258 
Total operating expenses  14,872   12,846   17,714 
Operating loss  (10,940)  (5,622)  (20,638)
Interest and other income, net  474   282   75 
Loss from continuing operations before income taxes  (10,466)  (5,340)  (20,563)
Income tax benefit     284    
Loss from continuing operations, net of tax $(10,466) $(5,056) $(20,563)

 

 

 

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Fiscal Year 20172020 Compared to Fiscal Year 2016:2019

 

Revenues

Revenues were $59.7 million in fiscal 2020, compared to $53.6 million in fiscal 2019, an increase of approximately $6.1 million, or 11%. The increase in contractrevenues can be attributed to a $8.6 million increase in manufacturing revenue of $13,273,000 (30%) during fiscal year 2017 was primarily due to manufacturing services provided to support the process validation of three separate customer productsan increase in the amountnumber of $15,444,000, allmanufacturing runs in-process and/or completed in fiscal 2020 compared to fiscal 2019, partially offset by a decrease in process development revenue. The increase in revenues was attributed to the following components of our revenue streams:

  $ millions 
Net increase in manufacturing revenues $8.6 
Net decrease in process development revenues  (2.5)
Total increase in revenues $6.1 

Additionally, growth in manufacturing revenue during fiscal 2020 was impacted by a production interruption related to a problem with a specific piece of equipment, which were manufacturedresulted in our Myford Facility, which we commissionedthe termination of certain in-process manufacturing runs and the postponement of other manufacturing runs scheduled to commence during fiscal 2020. During the fourth quarter of fiscal year 2016.2020, we implemented what we believe was the necessary remediation for the specific piece of equipment that resulted in the production interruption. We are currently progressing through the confirmation stage of this remediation during which we are running multiple revenue-generating production campaigns to confirm the successful remediation of the equipment issue. We expect the confirmation stage of this remediation to be completed in the coming months.

 

Gross Profit (Loss)

 

Fiscal Year 2018 ComparedGross profit was $3.9 million in fiscal 2020, compared to Fiscal Year 2017:

During$7.2 million in fiscal year 2018,2019, a decrease of approximately $3.3 million, and gross margins declined to a negative 5%for fiscal 2020 and fiscal 2019 were 7% and 13%, whichrespectively. The $3.3 million decrease in gross profit for fiscal 2020 was primarily driven by idle capacityattributed to higher facility and equipment related costs in fiscal year 2018, comparedprimarily related to gross margins of 34% for fiscal year 2017, during which we incurred no idle capacity costs. Included within cost of contract manufacturing are idle capacity costs of $13,966,000 which negatively impacted gross margin by 26 percentage points for fiscal year 2018. The fiscal year 2018 decline was further impacted by higher manufacturingthe production interruption noted above, planned growth costs associated with lower facility utilization in addition to the variability of manufacturing costs from product to product.

Fiscal Year 2017 Compared to Fiscal Year 2016:

During fiscal year 2017, gross margins were 34% compared to 48% for fiscal year 2016. The decline in gross margin was primarily driven by higher manufacturing costs associated the utilization of our Myford Facility to support the process validation of three separate customer products in fiscal year 2017 (the Myford Facility was commissioned during the fourth quarter of fiscal year 2016). The fiscal year 2017 decline was further impacted by the write-off of unusable work-in process inventory of $2,063,000, which is included within cost of contract manufacturing.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consist primarily of payroll and related expenses and share-based compensation expense (non-cash), for personnel in executive, finance, accounting, business development, legal, human resources, information technology, and other internal support functions. In addition, SG&A expenses include corporate legal fees, audit and accounting fees, investor relation expenses, non-employee director fees, facility related expenses, and other expenses relating to our general management, administration, and business development activities.

Fiscal Year 2018 Compared to Fiscal Year 2017:

The decrease in SG&A expenses of $1,623,000 (9%) during fiscal year 2018 compared to fiscal year 2017 was primarily due to current period decreases in payroll and related costs, and non-employee director fees. The decrease in payroll and related costs can primarily be attributed to a decrease in headcount and other personnel costs related to our efforts to align our cost structure to matchincreased depreciation expense from the needsacquisition of our current CDMO operations combined with a decrease in share-based compensation expense (non-cash). The decrease in non-employee director fees is attributed to the settlement terms of a derivative and class action complaint approved by the Court of Chancery of the State of Delaware on July 27, 2017, pursuant tonew equipment, which our former non-employee directors agreed to pay or cause to be paid $1,500,000 to us (as described in Note 3 to the accompanying consolidated financial statements), which non-recurring amount was applied against non-employee director fees during the fiscal quarter ended July 31, 2017. These fiscal year 2018 decreases in SG&A expenses were partially offset by non-recurring costs relatedan increase in revenues.

Selling, General and Administrative Expenses

SG&A expenses were $14.5 million in fiscal 2020, compared to $12.8 million in fiscal 2019, an increase of approximately $1.7 million, or 13%. As a percentage of revenue, SG&A expenses for the fiscal years 2020 and 2019 were both 24%. The net increase in SG&A expenses was attributed to the write-off of a long-term equipment deposit, severance and other certain non-recurring costs associated with the transition of our business to a dedicated CDMO.following components:

 

As discussed above, now that we have completed the transition of our business to a dedicated CDMO, we expect our SG&A expenses in the fiscal year 2019 to decrease in comparison to fiscal year 2018.

  $ millions 
Increase in separation related expenses $0.8 
Increase in payroll and benefit costs  0.6 
Increase in stock-based compensation expense  0.5 
Decrease in accrued bonus expense  (0.5)
Net increase in all other SG&A expenses  0.3 
Total increase in SG&A expenses $1.7 

 

 

 

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Fiscal Year 2017 Compared to Fiscal Year 2016:Loss on Lease Termination

 

SG&A expensesIn the second quarter of fiscal 2020, we terminated an operating lease for one of our non-manufacturing facilities that was primarily utilized for warehouse space. The lease termination was primarily driven by our efforts to reduce costs by leveraging available warehouse space in our other facilities, which we expect will save us approximately $1.3 million in the aggregate over a period of four years. In connection with the termination of this lease, we removed the corresponding operating lease right-of-use asset and liability balances from our consolidated balance sheet and recognized a loss of $0.4 million. Additionally, the lease termination released $0.3 million of restricted cash that was pledged as collateral under a letter of credit required by the terminated lease.


Operating Loss

Operating loss was $10.9 million for fiscal year 2017 remained consistent2020, compared to an operating loss of $5.6 million for fiscal 2019. Of this $5.3 million increase in operating loss for fiscal 2020, approximately $3.3 million was attributable to a decrease in gross profit, combined with fiscal year 2016, but increased slightly by $175,000 (1%). The fiscal year 2017an increase in SG&A expenses was primarily due to increasesof approximately $1.7 million and a $0.4 million loss recognized in payroll and related expenses, facility-related expenses and other general corporate expenses, offset by a decrease in share-based compensation expense (non-cash).connection with the termination of the operating lease discussed above.

 

Restructuring ChargesIncome Tax Benefit

 

DuringIn fiscal year 2018,2019, we incurred restructuring charges of $1,588,000 directly related torecognized a restructuring plan we implemented$1.0 million gain in August 2017, pursuant to which we reduced our overall workforce by 57 employees in order to reduce operating costs and improve cost efficiencies while we pursueddiscontinued operations, before taxes, for the license or sale of our research and development assets and focus our efforts on growing our CDMO businessr84 technology (as described in Note 811 of the Notes to Consolidated Financial Statements). In accordance with the accompanying consolidated financial statements). The costs incurred“Intraperiod Tax Allocation” rules under this restructuring plan,ASC 740,Income Taxes, which was completedrequires the allocation of an entity’s total annual income tax provision among continuing operations and, in October 2017, consisted of one-time termination benefits, including severance, and other employee-related costs. Of the total restructuring charges incurred, $1,258,000 was related to our contract manufacturing services segment and $330,000 was related to our discontinued research and development segment. The restructuring costs associated with our discontinued research and development segment are included in loss fromcase, discontinued operations for fiscal 2019, we recorded a tax benefit in the accompanying consolidated financial statements for the fiscal year ended April 30, 2018. We did not incur any restructuring charges during the fiscal years ended April 30, 2017 and 2016.continuing operations, with an offsetting tax expense of $0.3 million recorded in discontinued operations.

 

Discontinued Operations

 

As a result of the aforementioned business transition, which resulted in (i) the sale of our PS-targeting program, (ii)and r84 technologies in fiscal 2018 and fiscal 2019, respectively (as described in Note 11 of the held for sale classification of our R84 technology, (iii)Notes to Consolidated Financial Statements), the abandonment of our remaining research and development assets, and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business, the operating results of our former research and development segment have been excluded from continuing operations and reported as lossincome (loss) from discontinued operations, net of tax, in the accompanying consolidated financial statements for all periods presented (as described in Note 1 to the accompanying consolidated financial statements). In addition, the related gainpresented. The gains of $8$1.0 million and $8.0 million that waswere recorded in connection with the saleaforementioned sales of our PS-targeting program isand r84 technologies, respectively, are included in lossincome (loss) from discontinued operations, net of tax, in the accompanying consolidated statementsConsolidated Statements of Operations and Comprehensive Loss for the fiscal years ended April 30, 2019 and 2018, respectively. There were no operating results from discontinued operations and comprehensive loss forduring the fiscal year ended April 30, 2018 (as described in Note 9 to the accompanying consolidated financial statements).2020.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our consolidated financial positioncondition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We review our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. While our significant accounting policies are more fully described in Note 2 of the Notes to the accompanying consolidated financial statements,Consolidated Financial Statements, we believe the following accounting policies to be critical to the assumptions and estimates used in the preparation of our consolidated financial statements.

 

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Revenue Recognition

On May 1, 2018, we adopted Accounting Standards Update No. 2014-09,Revenue from Contracts with Customers (Topic 606), and its subsequent updates (codified as ASC 606), using the modified retrospective method. Accordingly, results for reporting periods 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 prior to our adoption of ASC 606.

Under ASC 606, we recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (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) we satisfy a performance obligation.

Revenue recognized from services provided under our customer contracts are disaggregated into manufacturing and process development revenue streams.

Manufacturing revenue

Manufacturing revenue generally represents revenue from the manufacturing of customer products 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 is 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 products are manufactured exclusively for a specific customer and have no alternative use. The customer retains control of its product during the entire manufacturing process and can make changes to the process or specifications at its request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin.

Process development revenue

Process development revenue generally represents revenue from 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 its 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 its product as the product is being created or enhanced by our services and can make changes to its process or specifications upon request.

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 receivables on the consolidated 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.

The transaction price for services provided under our customer contracts reflect our best estimates of the amount of consideration to which we are entitled in exchange for providing goods and services to our customers. In determining the transaction price, we considered the different sources of variable consideration including, but not limited to, discounts, credits, refunds, price concessions or other similar items. We have included in the transaction price some or all of an amount of variable consideration, utilizing the most likely method, only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The actual amount of consideration ultimately received may differ.

Management may be required to exercise judgement in estimating revenue to be recognized. Judgement is required in identifying performance obligations, estimating the transaction price, estimating the stand-alone selling prices of identified performance obligations, and estimating the progress towards the satisfaction of performance obligations. If actual results in the future vary from our estimates, the estimates will be adjusted, which will affect revenues in the period that such variances become known.

 

We derive revenue from contract manufacturing services providedapply 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. As of April 30, 2020, we do not have any unsatisfied performance obligations for contracts greater than one year.

26

Prior to our third-party customers. For the three years ended April 30,adoption of ASC 606 on May 1, 2018, we haverevenue was generally recognized revenue in accordance with the authoritative guidance for revenue recognition when all of the following criteria arewere met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. We also comply with the authoritative guidance for revenue recognition regarding arrangements with multiple elements.

 

27

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units, which may require the use of significant judgement. Deliverables are considered separate units of accounting if (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

Arrangement consideration is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (“VSOE”) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, we use our best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under any agreement.

On occasion, we receive requests from customers to hold product that we have manufactured on a “bill-and-hold” basis. Revenue is recognized for these “bill-and-hold” arrangements in accordance with the authoritative guidance, which requires, among other things, the existence of a valid business purpose for the arrangement; the “bill-and-hold” arrangement is at the request of the customer; title and risk of ownership must pass to the customer; the product is complete and ready for shipment; a fixeddelivery date that is reasonable and consistent with the customer’s business practices; the product has been separated from our inventory; and no further performance obligations by us exist.

In addition, we also follow the authoritative guidance when reporting revenue as gross when we act as a principal versus reporting revenue as net when we act as an agent. For transactions in which we act as a principal, have discretion to choose suppliers, bear credit and inventory risk and perform a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.

Any amounts received prior to satisfying our revenue recognition criteria are recorded as deferred revenue or customer deposits in the accompanying consolidated financial statements. We also record a provision for estimated contract losses, if any, in the period in which they are determined.

Share-basedStock-based Compensation

 

We account for stock options, restricted stock units and other share-basedstock-based awards granted under our equity compensation plans in accordance with the authoritative guidance for share-basedstock-based compensation. The estimated fair value of share-based paymentsstock 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.periods, which is generally the vesting period. The fair value of modifications to share-based awards, if any,restricted stock units is generally estimated usingmeasured 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 Black-Scholes option valuation model, unless a lattice model is required.straight-line basis over the period of vesting. Forfeitures are recognized as a reduction of share-basedstock-based compensation expense as they occur. As of April 30, 2018,2020, there were no outstanding share-basedstock-based awards with market or performance conditions.

 

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 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.

 

28

If factors change and we employ different assumptions in the determination of fair value in future periods, the share-based compensation expense that we record may differ significantly from what we have recorded in the current period. There are a number of factors that affect the amount of share-based compensation expense, including the number of employee options granted during subsequent fiscal years, the price of our common stock on the date of grant, the volatility of our stock price, the estimate of the expected life of options granted and the risk-free interest rates.

Discontinued Operations

As of January 31, 2018, our research and development segment met all the conditions to be classified as a discontinued operation (as described in Note 1 to the accompanying consolidated financial statements). Accordingly, the operating results of our research and development segment are reported as a loss from discontinued operations in the accompanying consolidated financial statements for all periods presented. In addition, the assets and liabilities related to our research and development segment are reported as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets at April 30, 2018 and 2017. For additional information, refer to Note 9, “Sale of Research and Development Assets” to the accompanying consolidated financial statements.

Liquidity and Capital Resources

 

We have expended substantial funds onOur principal sources of liquidity are our contract manufacturing businessexisting cash and historically, oncash equivalents. As of April 30, 2020, we had cash and cash equivalents of $36.3 million. Excluding the researchcash loan proceeds of $4.4 million received in April 2020 under a promissory note pursuant to the Paycheck Protection Program (the “PPP”) established pursuant to the Coronavirus Aid, Relief, and developmentEconomic Security Act of pharmaceutical product candidates. As a result, we have experienced losses and negative cash flows from operations since our inception.

During fiscal year 2018, we refocused our corporate strategy, whereby we transitioned our business2020 (the “CARES Act”) administered by the U.S. Small Business Administration (“SBA”), which proceeds were subsequently repaid in full to operate solely as a dedicated CDMO and discontinued our research and development segmentthe lender in May 2020 (as described in Note 13 of the Notes to the accompanying consolidated financial statements). AsConsolidated Financial Statements), we commence our first full fiscal yearwould have had cash and equivalents of $31.9 million as a dedicated CDMO, ourof April 30, 2020. Our ability to continue as a going concernfund our operations is dependent on the amount of cash on hand and our ability to generate positive cash flows from operations, primarily through securing new customers and diversifyingflow to sustain our customer base, and thereby reducing our reliance on a small customer base, increasing revenues, improving gross margins and managing our operating expenses.current operations.

 

At April 30, 2018 we had $42,265,000 inWe currently anticipate that our cash and cash equivalents. In addition,equivalents as of April 30, 2018 (as further discussed above under2020, excluding the “Backlog” section includedaforementioned $4.4 million in Item 1 of Part I of this Annual Report), our current backlog was approximately $57.8 million. While we anticipateloan proceeds that were returned to the majority of our backlog will be recognized as revenue during fiscal year 2019, our backlog is subject to a number of risks and uncertainties, including, the risk that a customer timely cancels its commitments prior to our initiation of manufacturing services,lender thereof in which case we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments; the risk that a customer may experience delays in its program(s) or otherwise, which could result in the postponement of anticipated manufacturing services; and the risk that we may not successfully execute on all customer projects, any of which could have a negative impact on our liquidity, reported backlog and future revenue. As a result of these risks and uncertainties, our cash on hand as of April 30, 2018, togetherMay 2020, combined with our projected cash receipts from services to be rendered under our current backlog and the remaining upfront payment due from our sale of our PS-targeting program (as described in Note 9 to the accompanying consolidated financial statements) may notexisting customer contracts, will be sufficient to fund our operations beyond one year afterfor at least the next 12 months from the date our financial statements are issued.of this Annual Report.

 

In the event we are unable to securegenerate sufficient businesscash flow to support our current operations, we may need to raise additional capital in the future. Additional fundingequity markets in order to fund our future operations. We may includeraise funds through the financingissuance of debt or leasingthrough the public offering of capital equipmentsecurities. There can be no assurance that these financings will be available on acceptable terms, or raising capital in the equity markets.at all. Our ability to raise additional capital in the equity and debt markets to fund our obligations in future periods dependsis 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, negativeour financial results and economic conditions, adverseand market conditions,conditions. Further, global financial crises and adverse financial results.economic downturns, including those caused by widespread public health crises such as the COVID-19 pandemic, may cause extreme volatility and disruptions in capital and credit markets, and may impact our ability to raise additional capital when needed on acceptable terms, if at all. If we are unable to either raise sufficient capital in the equity markets or generate additional revenue,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, financial condition, results of operations, and future prospects.

 

 

 

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As a result of the foregoing, we have concluded that there is substantial doubt aboutThe following table presents our ability to continue as a going concern within one year after the date that our financial statements are issued. Our independent registered public accounting firm included an explanatory paragraph highlighting this uncertainty in its “Report of Independent Registered Public Accounting Firm” dated July 16, 2018, which report is included in Item 15 of Part IV of this Annual Report.

Significant components of the changes in cash flows from operating, investing and financing activities for the fiscal years ended April 30, 2020, 2019 and 2018 2017 and 2016 are as follows:(in thousands):

  Fiscal Year Ended April 30, 
  2020  2019  2018 
Cash, cash equivalents and restricted cash(1) $36,612  $33,501  $43,415 
Net cash provided by (used in) operating activities  5,827   (11,595)  (25,992)
Net cash (used in) provided by investing activities  (3,812)  4,544   (793)
Net cash provided by (used in) financing activities  1,096   (2,863)  22,251 

___________

(1)As of April 30, 2020, 2019 and 2018, cash, cash equivalents and restricted cash included $0.4 million, $1.2 million and $1.2 million, respectively, that was restricted from general use, related to cash that was pledged as collateral under letters of credit under the terms of certain facility lease agreements.

Net Cash Provided by (Used in) Operating Activities

 

Cash Used In Operating Activities. NetDuring fiscal 2020, net cash used inprovided by operating activities represents our (i) net loss, as reported, (ii) less non-cash operating expenses, and (iii) net changes in the timingincreased by $17.4 million to $5.8 million from $11.6 million of cash flows as reflected by the changes in operating assets and liabilities, as described in the below table:

  Fiscal Year Ended April 30, 
  2018  2017  2016 
Net loss, as reported $(21,813,000) $(28,159,000) $(55,652,000)
Less non-cash operating expenses:            
Share-based compensation  1,538,000   3,363,000   4,898,000 
Depreciation and amortization  2,562,000   2,463,000   1,535,000 
Loss on disposal of property and equipment and other assets  1,692,000   1,000   14,000 
Gain on sale of research and development assets  (8,000,000)      
Net cash used in operating activities before changes in operating assets and liabilities $(24,021,000) $(22,332,000) $(49,205,000)
Net change in operating assets and liabilities $(2,745,000) $(17,454,000) $9,614,000 
Net cash used in operating activities $(26,766,000) $(39,786,000) $(39,591,000)

Net cash used in operating activities decreased $13,020,000 to $26,766,000 for fiscal year 2018 compared to net cash used in operating activities of $39,786,000 forduring fiscal year 2017. This decrease in net2019.

Net cash used inprovided by operating activities during fiscal 2020 was duea result of an $10.5 million net loss, as increased to aaccount for non-cash adjustments to net loss of $5.6 million primarily related to depreciation and amortization and stock-based compensation, and cash flows from the net change in operating assets and liabilities of $14,709,000 primarily due to the timing of cash receipts and expenditures associated with customer deposits, deferred revenue, accrued liabilities of discontinued operations, inventories, and trade and other receivables, offset by an increase of $1,689,000 in net loss reported for fiscal year 2018 after deducting non-cash operating expenses as described in the above table.$10.7 million.

 

Net cash used in operating activities increased $195,000 to $39,786,000 forduring fiscal year 2017 compared2019 was a result of a $4.2 million net loss and a $1.0 million gain on the sale of certain research and development assets, offset by other non-cash adjustments to net cash usedloss of $4.5 million primarily related to depreciation and amortization and stock-based compensation, a $4.6 million net change in operating activitiesthe assets and liabilities of $39,591,000 for fiscal year 2016. This increase in net cash used in operating activities was due todiscontinued operations, and a net change inof certain other operating assets and liabilities of $27,068,000 due to the timing of cash receipts and expenditures primarily associated with customer deposits, deferred revenue, accrued liabilities of discontinued operations, inventories, and trade and other receivables, offset by a decrease of $26,873,000 in net loss reported for fiscal year 2017 after deducting non-cash operating expenses as described in the above table.$6.3 million.

 

Net Cash Used In(Used in) Provided by Investing Activities.Activities

During fiscal 2020, net cash used in investing activities increased by $8.4 million to $3.8 million from $4.5 million of net cash provided by investing activities during fiscal 2019.

Net cash used in investing activities for theduring fiscal years ended April 30, 2018, 2017,2020 consisted of $3.8 million used to acquire property and 2016, was $19,000, $2,992,000,equipment primarily related to our manufacturing and $8,791,000, respectively.development operations.

 

Cash used inNet cash provided by investing activities during fiscal year 20182019 consisted primarily of property and equipment acquisitions of $3,019,000 related to our manufacturing operations, offset by proceeds of $3,000,000$6.0 million related to the sale of certain research and development assets associated with our discontinued research and development segment, (as describedoffset by cash used to acquire property and equipment of $1.5 million.

Net Cash Provided by (Used in) Financing Activities

During fiscal 2020, net cash provided by financing activities increased by $4.0 million to $1.1 million from $2.9 million of net cash used in Note 9 to the accompanying consolidated financial statements).financing activities during fiscal 2019.

 

 

 

 3028 

 

Cash used in investing activities during fiscal year 2017 consisted of property and equipment acquisitions of $3,560,000 related to our manufacturing operations combined with a decrease in other assets of $568,000 primarily related to a tenant improvement allowance provided to us under a facility operating lease.

Cash used in investing activities during fiscal year 2016 consisted of property and equipment acquisitions of $8,878,000 offset by a decrease in other assets of $87,000. Property and equipment acquisitions during fiscal year 2016 primarily related to costs associated with the construction of our Myford Facility. The construction of the Myford Facility was completed and placed into service during fiscal year 2016.

Cash Provided By Financing Activities. Net cash provided by financing activities for the fiscal years ended April 30, 2018, 2017, and 2016, was $22,251,000, $28,165,000 and $41,793,000, respectively.

 

Net cash provided by financing activities during fiscal year 20182020 consisted primarily of (i) $21,494,000$4.4 million of loan proceeds received in net proceeds in connection with an underwritten public offering of our common stock at a public offering price of $2.25 per share, (ii) $4,193,000 in net proceedsApril 2020 from the salePPP (which loan was subsequently repaid in full in May 2020, as described in Note 3 of shares of our common stock under an At Market Issuance Sales Agreement, (iii) $317,000 in net proceedsthe Notes to Consolidated Financial Statements), $0.9 million attributable from the purchaseexercise of sharesstock options, and $0.2 million attributable from the issuance of our common stock under our Employee Stock Purchase Plan (the “ESPP”), and (iv) $752,000 in net proceeds fromemployee stock option exercises, which amounts werepurchase plan, offset by $4.3 million of cash used to pay preferred dividends paid onto holders of our issued and outstanding Series E Preferred Stock of $4,325,000 and principal payments on a capital lease of $180,000.Stock.

 

Net cash provided byused in financing activities during fiscal year 20172019 consisted primarily of (i) $17,759,000 in net proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement, (ii) $12,691,000 in net proceeds from the sale of shares of our common stock under an Equity Distribution Agreement, (iii) $1,576,000 in net proceeds from the sale of sharescash used to pay preferred dividends to holders of our Series E Preferred Stock under a separate At Market Issuance Sales Agreement, (iv) $526,000 in netof $4.3 million, partially offset by proceeds from the purchaseexercise of sharesstock options of our$1.3 million and proceeds from the issuance of common stock under our ESPP, and (v) $31,000 in net proceeds fromemployee stock option exercises, which amounts were offset by dividends paid on our issued and outstanding Series E Preferred Stockpurchase plan of $4,279,000 and principal payments on a capital lease of $139,000.$0.3 million.

 

Net cash provided by financing activitiesCapital Expenditures

Our capital expenditures were $3.8 million during fiscal year 2016 consisted of (i) $19,999,000 in net proceeds from the sale of shares of2020, which included laboratory and manufacturing equipment, software and enhancements, and enhancements to our common stock under a Common Stock Purchase Agreement, (ii) $18,402,000 in net proceeds from the sale of shares of our common stock under two separate At Market Issuance Sales Agreements, (iii) $6,794,000 in net proceeds from the sale of shares of our common stock under an Equity Distribution Agreement, (iv) $540,000 in net proceeds from the purchase of shares of our common stock under our ESPP, (v) $138,000 in net proceeds from stock option exercises,laboratory and (vi) $59,000 in net proceeds from the sale of shares of our Series E Preferred Stock under a separate At Market Issuance Sales Agreement, which amounts were offset by dividends paid on our issued and outstanding Series E Preferred Stock of $4,139,000.manufacturing facilities.

 

Contractual Obligations

 

Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contractual liabilities already recorded on our consolidated balance sheet as current liabilities and contingent liabilities for which we cannot reasonably predict future payments. The following chart representstable summarizes our contractual obligations as of April 30, 2018, aggregated by type:2020 (in thousands):

 

  Payments Due by Period 
  

 

Total

  Less than 1 year  

 

1-3 years

  

 

3-5 years

  More than 5 years 
Operating leases(1) $34,001  $2,972  $6,005  $6,257  $18,767 
Finance lease(2)  103   103          
Note payable(3)  4,379   4,379          
Total contractual obligations $38,483  $7,454  $6,005  $6,257  $18,767 

  Payments Due by Period 
  Total  < 1 year  1-3 years  4-5 years  After 5 years 
                
Operating leases (1) $23,309,000  $3,006,000  $6,152,000  $5,519,000  $8,632,000 
Purchase obligations (2)  3,745,000   2,340,000   1,405,000       
                     
Total contractual obligations $27,054,000  $5,346,000  $7,557,000  $5,519,000  $8,632,000 

______________

________________________

(1)RepresentsPrimarily represents future minimum lease payments under all non-cancelable operating leases including our facility operating leaseslease agreements as further described in Note 34 of the Notes to the accompanying audited consolidated financial statements.Consolidated Financial Statements.
(2)Represents non-cancellable purchase orders forour obligations under a capital lease agreement to finance certain consumables associated withsoftware.
(3)Represents our single-use bioreactorsobligations under a promissory note entered into in our Myford Facility.April 2020, evidencing an unsecured loan of $4.4 million (the “PPP Loan”) from the PPP pursuant to the CARES Act. As further described in Note 3 of the Notes to Consolidated Financial Statements, we elected to repay the PPP Loan in full in May 2020.

Off-Balance Sheet Arrangements.

As of April 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303 of Regulation S-K, that have or are reasonably likely to have a current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

 

 

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Off Balance Sheet Arrangements.

We do not have any off balance sheet arrangements, as defined in Item 303 of Regulation S-K.

 

Recently Issued Accounting Pronouncements

 

SeeFor a discussion of recent accounting pronouncements applicable to us, please see Note 2,Summary of Significant Accounting Policies—Pending AdoptionPolicies, of Recent Accounting Pronouncements, in the accompanying Notes to Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on our consolidated financial statements.Statements.

 

Item 7A.Quantitative And Qualitative Disclosures About Market Risk

 

Our cash and cash equivalents are primarily invested in money market funds with one major commercial bank with the primary objective to preserve our principal balance. Our deposits held with this bank exceed the amount of government insurance limits provided on our deposits and, therefore, we are exposed to credit risk in the event of default by the major commercial bank holding our cash balances. However, these deposits may be redeemed upon demand and, therefore, bear minimal risk. In addition, while changes in U.S. interest rates would affect the interest earned on our cash balances at April 30, 2018,2020, such changes would not have a material adverse effect on our financial positioncondition or results of operations, based on historical movements in interest rates.

 

Item 8.Financial Statements And Supplementary Data

 

The information required by this Item is incorporated by referenceIndex to the financial statements set forth in Item 15 of Part IV of this Annual Report, “Exhibits andConsolidated Financial Statement Schedules.”

Item 9.Changes In And Disagreements With Accountants On Accounting And Financial Disclosures

None.

Item 9A.Controls And Procedures

(a) Evaluation of Disclosure Controls and Procedures. The term “disclosure controls and procedures” (defined in Rule 13a-15(e) under the Exchange Act refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of April 30, 2018. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of April 30, 2018 to ensure the timely disclosure of required information in our SEC filings.

(b) Management’s Report on Internal Control Over Financial Reporting. Management’s Report on Internal Control Over Financial Reporting and the report of our independent registered public accounting firm on our internal control over financial reporting, which appear on the following pages, are incorporated herein by this reference.

(c) Changes in Internal Control over Financial Reporting.There have been no significant changes in our internal control over financial reporting during the fourth quarter of the fiscal year ended April 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B.Other Information

None.

32

AVID BIOSERVICES, INC.

MANAGEMENT’S REPORT ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is a process designed, as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.

The Company’s internal control over financial reporting is supported by written policies and procedures that:

·pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets;

·provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and

·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In connection with the preparation of the Company’s annual consolidated financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of the Company’s internal control over financial reporting.

Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of April 30, 2018.

Ernst & Young LLP, the independent registered public accounting firm that audited the company’s consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting which appears on the following page.Statements

 

 Page
By:/s/ Roger J. Lias, Ph.D.By:/s/ Stephen Hedberg
Roger J. Lias, Ph.D.Stephen Hedberg

President and Chief Executive Officer

(Principal Executive Officer)

Principal Financial Officer

July 16, 2018

33

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Avid Bioservices, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Avid Bioservices, Inc.’s (formerly Peregrine Pharmaceuticals, Inc.) internal control over financial reporting as of April 30, 2018, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Avid Bioservices, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of April 30, 2018, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of April 30, 2018 and 2017, the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended April 30, 2018, and the related notes and our report dated July 16, 2018 expressed an unqualified opinion thereon that included an explanatory paragraph regarding the Company’s ability to continue as a going concern.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Irvine, California

July 16, 2018

34

PART III

Item 10.Directors, Executive Officers And Corporate Governance

The information required by this Item regarding our directors, executive officers and committees of our board of directors is incorporated by reference to the information set forth under the captions “Election of Directors,” “Executive Compensation” and “Corporate Governance” in our 2018 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2018 (the “2018 Definitive Proxy Statement”).

Information required by this Item regarding Section 16(a) reporting compliance is incorporated by reference to the information set forth under the caption “Section 16(a) Beneficial Ownership Reporting Compliance” in our 2018 Definitive Proxy Statement.

Information required by this Item regarding our code of ethics is incorporated by reference to the information set forth under the caption “Corporate Governance” in our 2018 Definitive Proxy Statement.

Item 11.Executive Compensation

The information required by this Item is incorporated by reference to the information set forth under the captions “Director Compensation,” “Compensation Discussion and Analysis” and “Executive Compensation” in our 2018 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2018.

Item 12.Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters

Other than as set forth below, the information required by this Item is incorporated by reference to the information set forth under the caption “Security Ownership of Certain Beneficial Owners, Directors and Management” in our 2018 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2018.

Equity Compensation Plan Information

We currently maintain six equity compensation plans: the 2002 Stock Incentive Plan (the “2002 Plan”), the 2003 Stock Incentive Plan (the “2003 Plan”), the 2005 Stock Incentive Plan (the “2005 Plan”), the 2009 Stock Incentive Plan (the “2009 Plan”), the 2010 Stock Incentive Plan (the “2010 Plan”) and the 2011 Stock Incentive Plan, as amended on October 15, 2015 (the “2011 Plan”), in addition to which we maintain our Employee Stock Purchase Plan. The 2003 Plan, 2005 Plan, 2009 Plan, 2010 Plan and 2011 Plan, as well as the Employee Stock Purchase Plan, were approved by our stockholders, while we did not submit the 2002 Plan for stockholder approval.

The 2002 Plan, which expired in June 2012, was a broad-based non-qualified stock option plan for the issuance of up to 85,714 options. The 2002 Plan provided for the granting of options to purchase shares of our common stock at prices not less than the fair market value of our common stock at the date of grant and generally expired ten years after the date of grant. No additional options can be granted under the expired 2002 Plan, however, the terms of the 2002 Plan remain in effect with respect to outstanding options granted under the 2002 Plan until they are exercised, canceled or expired.

35

The following table sets forth certain information as of April 30, 2018 concerning our common stock that may be issued upon the exercise of options or pursuant to purchases of stock under all of our equity compensation plans approved by stockholders and equity compensation plans not approved by stockholders in effect as of April 30, 2018:

Plan Category

 

(a)

Number of Securities to be Issued Upon the Exercise of Outstanding Options, Warrants and Rights

 

(b)

Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights ($/share)

 

(c)

Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))

Equity compensation plans approved by stockholders 

3,577,703

 

8.71

 

1,718,788

Equity compensation plans not approved by stockholders 

20,035

 

15.05

 

Employee Stock Purchase Plan approved by stockholders 

 

 

1,271,409

Total 3,597,738(1) 8.74(2) 2,990,197

__________________________

(1)Represents shares to be issued upon the exercise of outstanding options. There were no shares of common stock subject to restricted stock awards as of April 30, 2018.
(2)Represents the weighted-average exercise price of outstanding options.

Item 13.Certain Relationships And Related Transactions, And Director Independence

The information required by this Item is incorporated by reference to the information set forth under the captions “Certain Relationships and Related Transactions,” “Director Independence” and “Compensation Committee Interlocks and Insider Participation” in our 2018 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2018.

Item 14.Principal Accounting Fees and Services

The information required by this Item is incorporated by reference to the information set forth under the caption “Independent Registered Public Accounting Firm Fees” in our 2018 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2018.

36

PART IV

Item 15.Exhibits And Financial Statement Schedules

Page
(a)(1)Consolidated Financial Statements
Index to consolidated financial statements filed as part of this Form 10-K:
Report of Independent Registered Public Accounting FirmF-131
Consolidated Balance Sheets as of April 30, 20182020 and 20172019F-232
Consolidated Statements of Operations and Comprehensive Loss for each of the three years in the period ended April 30, 20182020F-433
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended April 30, 20182020F-534
Consolidated Statements of Cash Flows for each of the three years in the period ended April 30, 20182020F-635
Notes to Consolidated Financial StatementsF-7
(2)Financial Statement Schedules
All schedules are omitted as the required information is inapplicable, or the information is presented in the consolidated financial statements or related notes.

37

(3)Exhibits

Exhibit
Number

Description

3.1Certificate of Incorporation of Avid Bioservices, Inc., a Delaware corporation, as amended through January 5, 2018 (Incorporated by reference to Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q as filed with the Commission on March 12, 2018).
3.2Amended and Restated Bylaws of Avid Bioservices, Inc., a Delaware corporation (Incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K as filed with the Commission on November 14, 2014).
3.3Amendment No. 1 to Amended and Restated Bylaws of Avid Bioservices, Inc., a Delaware corporation (Incorporated by reference to Exhibit 3.2 to Registrant’s Current Report on Form 8-K as filed with the Commission on March 13, 2018).
4.1Form of Certificate for Common Stock (Incorporated by reference to Exhibit 4.1 to Registrant’s Annual Report on Form 10-K for the year end April 30, 1988).
4.2Avid Bioservices, Inc. 2002 Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit 4.17 to Registrant’s Registration Statement on Form S-8 (File No. 333-106385)). *
4.3Form of 2002 Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit 4.18 to Registrant’s Registration Statement on Form S-8 (File No. 333-106385)). *
4.4Amended and Restated Rights Agreement, dated March 16, 2016, between Avid Bioservices, Inc. and Broadridge Corporate Issuer Solutions, Inc., as Rights Agent (Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K as filed with the Commission on March 17, 2016).
4.52003 Stock Incentive Plan Non-qualified Stock Option Agreement (Incorporated by reference to Exhibit 10.95 to Registrant’s Registration Statement on Form S-8 (File No. 333-121334)). *
4.62003 Stock Incentive Plan Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.96 to Registrant’s Registration Statement on Form S-8 (File No. 333-121334)). *
4.7Form of Incentive Stock Option Agreement for 2005 Stock Incentive Plan (Incorporated by reference to Exhibit 10.98 to Registrant’s Current Report on Form 8-K as filed with the Commission on October 28, 2005). *
4.8Form of Non-Qualified Stock Option Agreement for 2005 Stock Incentive Plan (Incorporated by reference to Exhibit 10.99 to Registrant’s Current Report on Form 8-K as filed with the Commission on October 28, 2005). *
4.9Avid Bioservices, Inc., 2005 Stock Incentive Plan (Incorporated by reference to Exhibit B to Registrant’s Definitive Proxy Statement filed with the Commission on August 29, 2005). *
4.10Form of Incentive Stock Option Agreement for 2009 Stock Incentive Plan (Incorporated by reference to Exhibit 4.14 to Registrant’s Current Report on Form 8-K as filed with the Commission on October 27, 2009). *
4.11Form of Non-Qualified Stock Option Agreement for 2009 Stock Incentive Plan (Incorporated by reference to Exhibit 4.15 to Registrant’s Current Report on Form 8-K as filed with the Commission on October 27, 2009). *
4.122010 Stock Incentive Plan (Incorporated by reference to Exhibit A to Registrant’s Definitive Proxy Statement filed with the Commission on August 27, 2010). *
4.13Form of Stock Option Award Agreement under 2010 Stock Incentive Plan (Incorporated by reference to Exhibit 4.17 to Registrant’s Registration Statement on Form S-8 (File No. 333-171067)). *
4.142010 Employee Stock Purchase Plan (Incorporated by reference to Exhibit B to Registrant’s Definitive Proxy Statement filed with the Commission on August 27, 2010). *
4.15Amendment to the 2010 Employee Stock Purchase Plan (Incorporated by reference to Exhibit B to Registrant’s Definitive Proxy Statement filed with the Commission on August 26, 2016). *
4.162011 Stock Incentive Plan (Incorporated by reference to Exhibit A to Registrant’s Definitive Proxy Statement filed with the Commission on August 26, 2011). *
4.17Form of Stock Option Award Agreement under 2011 Stock Incentive Plan (Incorporated by reference to Exhibit 4.20 to Registrant’s Registration Statement on Form S-8 (File No. 333-178452)). *
4.18First Amendment to the Avid Bioservices, Inc., 2011 Stock Incentive Plan (Incorporated by reference to Exhibit A to Registrant’s Definitive Proxy Statement filed with the Commission on August 27, 2012). *

38
Exhibit
Number

Description

4.19Second Amendment to the Avid Bioservices, Inc. 2011 Stock Incentive Plan (Incorporated by reference to Exhibit A to Registrant’s Definitive Proxy Statement filed with the Commission on August 26, 2013). *
4.20First Amendment to the Avid Bioservices, Inc., 2005 Stock Incentive Plan dated April 24, 2015 (Incorporated by reference to Exhibit 4.22 to Registrant’s Annual Report on Form 10-K for the year end April 30, 2015). *
4.21First Amendment to the Avid Bioservices, Inc. 2009 Stock Incentive Plan dated April 24, 2015 (Incorporated by reference to Exhibit 4.23 to Registrant’s Annual Report on Form 10-K for the year end April 30, 2015) (Incorporated by reference to Exhibit 4.24 to Registrant’s Annual Report on Form 10-K for the year end April 30, 2015). *
4.22Third Amendment to the Avid Bioservices, Inc. 2011 Stock Incentive Plan dated April 24, 2015 (Incorporated by reference to Exhibit 4.24 to Registrant’s Annual Report on Form 10-K for the year end April 30, 2015).*
4.23Form of Amendment to Non-Qualified Stock Option Agreement Under the Avid Bioservices, Inc., 2005 Stock Incentive Plan related to Non-Employee Director stock option awards (Incorporated by reference to Exhibit 4.25 to Registrant’s Annual Report on Form 10-K for the year end April 30, 2015). *
4.24Form of Amendment to Non-Qualified Stock Option Agreement Under the Avid Bioservices, Inc., 2009 Stock Incentive Plan related to Non-Employee Director stock option awards (Incorporated by reference to Exhibit 4.26 to Registrant’s Annual Report on Form 10-K for the year end April 30, 2015).*
4.25Form of Amendment to Stock Option Award Agreement Under the Avid Bioservices, Inc., 2011 Stock Incentive Plan related to Non-Employee Director stock option awards (Incorporated by reference to Exhibit 4.27 to Registrant’s Annual Report on Form 10-K for the year end April 30, 2015).*
4.26Form of Indenture (Incorporated by reference to Exhibit 4.4 to Registrant’s Registration Statement on Form S-3 filed with the Commission on January 12, 2018).
10.1Lease and Agreement of Lease between TNCA, LLC, as Landlord, and Avid Bioservices, Inc., as Tenant, dated as of December 24, 1998 (Incorporated by reference to Exhibit 10.48 to Registrant’s Quarterly Report on Form 10-Q as filed with the Commission on March 12, 1999).
10.2First Amendment to Lease and Agreement of Lease between TNCA, LLC, as Landlord, and Avid Bioservices, Inc., as Tenant, dated December 22, 2005 (Incorporated by reference to Exhibit 99.1 and 99.2 to Registrant’s Current Report on Form 8-K as filed with the Commission on December 23, 2005).
10.3Annual Bonus Plan for Executive Officers adopted July 12, 2011(Incorporated by reference to Exhibit 10.29 to Registrant’s Annual Report on Form 10-K as filed with the Commission on July 14, 2011). *
10.4Warrant to Purchase Stock issued to Oxford Finance LLC, dated August 30, 2012 (Incorporated by reference to Exhibit 10.29 to Registrant’s Quarterly Report on Form 10-Q as filed with the Commission on December 10, 2012).
10.5Warrant to Purchase Stock issued to Midcap Financial SBIC LP, dated August 30, 2012 (Incorporated by reference to Exhibit 10.30 to Registrant’s Quarterly Report on Form 10-Q as filed with the Commission on December 10, 2012).
10.6Warrant to Purchase Stock issued to Silicon Valley Bank, dated August 30, 2012 (Incorporated by reference to Exhibit 10.31 to Registrant’s Quarterly Report on Form 10-Q as filed with the Commission on December 10, 2012).
10.7Amended and Restated Employment Agreement by and between Avid Bioservices, Inc. and Mark R. Ziebell, effective December 27, 2012 (Incorporated by reference to Exhibit 10.38 to Registrant’s Quarterly Report on Form 10-Q as filed with the Commission on March 12, 2013). *
10.8At Market Issuance Sales Agreement, dated August 7, 2015, by and between Avid Bioservices, Inc. and MLV & Co. LLC (Incorporated by reference to Exhibit 10.26 to Registrant’s Current Report on Form 8-K as filed with the Commission on August 7, 2015).
10.9Settlement Agreement, dated November 27, 2017, by and among Avid Bioservices, Inc., Ronin Trading, LLC, Ronin Capital, LLC, SWIM Partners LP, SW Investment Management LLC, John S. Stafford, III, Stephen White and Roger Farley (Incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on November 28, 2017).
10.10Severance Agreement and Mutual Release of all Claims between Steven W. King and Avid Bioservices, Inc. dated December 22, 2017 (Incorporated by reference to Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on March 12, 2018).
10.11Asset Assignment and Purchase Agreement by and between Avid Bioservices, Inc. and Oncologie, Inc., dated February 12, 2018. (**) (***)36

 

 

 

 

39

 

Exhibit
Number

Description

21Subsidiaries of Registrant. ***
23.1Consent of Independent Registered Public Accounting Firm. ***
24Power of Attorney (included on signature page of Annual Report). ***
31.1Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended. ***
31.2Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended. ***
32Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350. ***
101.INSXBRL Taxonomy Extension Instance Document. ***
101.SCHXBRL Taxonomy Extension Schema Document. ***
101.CALXBRL Taxonomy Extension Calculation Linkbase Document. ***
101.DEFXBRL Taxonomy Extension Definition Linkbase Document. ***
101.LABXBRL Taxonomy Extension Label Linkbase Document. ***
101.PREXBRL Presentation Extension Linkbase Document. ***
_______________________________

*

**

***

This Exhibit is a management contract or a compensation plan or arrangement.

Portions omitted pursuant to a request of confidentiality filed separately with the SEC.

Filed herewith.

 

 

 

 

 

 

 

 

 

 

 

 4030 

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

AVID BIOSERVICES, INC.
Dated: July 16, 2018By: /s/ Roger J. Lias, Ph.D.
Roger J. Lias, Ph.D.,
President and Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Roger J. Lias, President and Chief Executive Officer, and Stephen Hedberg, Principal Financial Officer, and each of them, his true and lawful attorneys-in-fact and agents, with the full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

SignatureCapacityDate
/s/ Roger J. Lias, Ph.D. President and Chief ExecutiveJuly 16, 2018
Roger J. Lias, Ph. D.Officer (Principal Executive
Officer), and Director
/s/ Stephen HedbergPrincipal Financial andJuly 16, 2018
Stephen HedbergPrincipal Accounting Officer
/s/ Joseph Carleone, Ph. D.Chairman of the Board of DirectorsJuly 16, 2018
Joseph Carleone, Ph.D.
/s/ Mark R. BamforthDirectorJuly 16, 2018
Mark R. Bamforth
/s/ Richard B. HancockDirectorJuly 16, 2018
Richard B. Hancock
/s/ Joel McCombDirectorJuly 16, 2018
Joel McComb
/s/ Gregory P. SargenDirectorJuly 16, 2018
Gregory P. Sargen
/s/ Patrick D. WalshDirectorJuly 16, 2018
Patrick D. Walsh

41

Report of Independent Registered Public Accounting Firm

 

To the Stockholders and the Board of Directors of Avid Bioservices, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Avid Bioservices, Inc. (formerly Peregrine Pharmaceuticals, Inc.) (the Company) as of April 30, 2018 and 2017, the related consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended April 30, 2018, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2018, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of April 30, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated July 16, 2018 expressed an unqualified opinion thereon.

The Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has experienced losses and negative cash flows from operations since inception and has stated that substantial doubt exists about the Company’s ability to continue as a going concern. Management's evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
To the Stockholders and the Board of Directors of Avid Bioservices, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Avid Bioservices, Inc. (the Company) as of April 30, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended April 30, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at April 30, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of April 30, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated June 30, 2020 expressed an unqualified opinion thereon.

Adoption of ASU No. 2014-09

As discussed in Note 2 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of Accounting Standards Update (ASU) No. 2014-09,Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08, 2016-10 and 2016-02 effective May 1, 2018.

Adoption of ASU No. 2016-02

As discussed in Note 2 to the consolidated financial statements, the Company changed its method for accounting for leases effective May 1, 2019 due to the adoption of Accounting Standards Update (ASU) No. 2016-02,Leases (Topic 842), and the related amendments.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

/s/ Ernst & Young LLP

 

We have served as the Company’s auditor since 1999.

 

Irvine, California

July 16, 2018June 30, 2020

 

 

 F-131 

 

 

AVID BIOSERVICES, INC.

CONSOLIDATED BALANCE SHEETS

AS OF APRIL 30, 2018 AND 2017

(in thousands, except par value)

 

  2018  2017 
ASSETS        
         
CURRENT ASSETS:        
Cash and cash equivalents $42,265,000  $46,799,000 
Trade and other receivables  3,754,000   7,742,000 
Inventories  16,129,000   33,099,000 
Prepaid expenses  679,000   808,000 
Assets of discontinued operations  5,000,000   1,426,000 
         
Total current assets  67,827,000   89,874,000 
         
PROPERTY AND EQUIPMENT:        
Leasehold improvements  20,686,000   20,098,000 
Laboratory equipment  10,258,000   10,229,000 
Furniture, fixtures, office equipment and software  4,597,000   4,385,000 
Construction-in-progress  3,310,000   2,841,000 
         
   38,851,000   37,553,000 
Less accumulated depreciation and amortization  (12,372,000)  (11,508,000)
         
Property and equipment, net  26,479,000   26,045,000 
         
Restricted cash  1,150,000   1,150,000 
Other assets  304,000   1,043,000 
         
TOTAL ASSETS $95,760,000  $118,112,000 
  April 30, 
  2020  2019 
ASSETS      
Current assets:        
Cash and cash equivalents $36,262  $32,351 
Accounts receivable  8,606   7,374 
Contract assets  3,300   4,327 
Inventory  10,883   6,557 
Prepaid expenses  712   709 
Total current assets  59,763   51,318 
Property and equipment, net  27,105   25,625 
Operating lease right-of-use assets  20,100    
Restricted cash  350   1,150 
Other assets  302   302 
Total assets $107,620  $78,395 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Accounts payable $5,926  $4,352 
Accrued payroll and related costs  3,019   3,540 
Note payable  4,379    
Contract liabilities  29,120   14,651 
Operating lease liabilities  1,228    
Other current liabilities  808   619 
Total current liabilities  44,480   23,162 
Operating lease liabilities, less current portion  21,244    
Deferred rent, less current portion     2,072 
Other long-term liabilities     93 
Total liabilities  65,724   25,327 
         
Commitments and contingencies (Note 9)        
         
Stockholders’ equity:        
Preferred stock, $0.001 par value; 5,000 shares authorized; 1,648 shares issued and outstanding at respective dates  2   2 
Common stock, $0.001 par value; 150,000 shares authorized; 56,483 and 56,135 shares issued and outstanding at respective dates  56   56 
Additional paid-in capital  612,909   613,615 
Accumulated deficit  (571,071)  (560,605)
Total stockholders’ equity  41,896   53,068 
Total liabilities and stockholders’ equity $107,620  $78,395 

 

See accompanying notes to consolidated financial statements.

 

 

 

 F-232 

 

AVID BIOSERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

CONSOLIDATED BALANCE SHEETS

AS OF APRIL 30, 2018 AND 2017 (continued)

in thousands, except per share information)

 

  2018  2017 
LIABILITIES AND STOCKHOLDERS' EQUITY        
         
CURRENT LIABILITIES:        
Accounts payable $1,909,000  $3,000,000 
Accrued payroll and related costs  2,564,000   5,055,000 
Deferred revenue  10,922,000   28,500,000 
Customer deposits  17,013,000   17,017,000 
Other current liabilities  905,000   636,000 
Liabilities of discontinued operations  4,550,000   8,723,000 
         
Total current liabilities  37,863,000   62,931,000 
         
Deferred rent, less current portion  2,159,000   1,599,000 
         
Commitments and contingencies (Note 3)        
         
STOCKHOLDERS' EQUITY:        
Preferred stock - $.001 par value; authorized 5,000,000 shares; 1,647,760 shares issued and outstanding at April 30, 2018 and 2017, respectively  2,000   2,000 
Common stock - $.001 par value; authorized 500,000,000 shares; 55,689,222 and 44,014,040 shares issued and outstanding at April 30, 2018 and 2017, respectively  55,000   44,000 
Additional paid-in-capital  614,810,000   590,971,000 
Accumulated deficit  (559,129,000)  (537,435,000)
         
Total stockholders' equity  55,738,000   53,582,000 
         
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $95,760,000  $118,112,000 
  Year Ended April 30, 
  2020  2019  2018 
          
Revenues $59,702  $53,603  $53,621 
Cost of revenues  55,770   46,379   56,545 
Gross profit (loss)  3,932   7,224   (2,924)
Operating expenses:            
Selling, general and administrative  14,517   12,846   16,456 
Loss on lease termination  355       
Restructuring charges        1,258 
Total operating expenses  14,872   12,846   17,714 
             
Operating loss  (10,940)  (5,622)  (20,638)
Interest and other income, net  474   282   75 
Loss from continuing operations before income taxes $(10,466) $(5,340) $(20,563)
Income tax benefit     284    
Loss from continuing operations, net of tax  (10,466)  (5,056)  (20,563)
Income (loss) from discontinued operations, net of tax     841   (1,250)
Net loss $(10,466) $(4,215) $(21,813)
             
Comprehensive loss $(10,466) $(4,215) $(21,813)
             
Series E preferred stock accumulated dividends  (4,686)  (4,686)  (4,686)
             
Net loss attributable to common stockholders $(15,152) $(8,901) $(26,499)
             
Basic and diluted net (loss) income per common share attributable to common stockholders:            
Continuing operations $(0.27) $(0.17) $(0.53)
Discontinued operations $  $0.01  $(0.03)
Net loss per share attributable to common stockholders $(0.27) $(0.16) $(0.56)
             
Weighted average basic and diluted shares outstanding  56,326   55,981   47,063 

 

See accompanying notes to consolidated financial statements.

 

 

 

 F-333 

 

AVID BIOSERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSSTOCKHOLDERS’ EQUITY

FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2018

(in thousands, except per share information)

 

  Preferred Stock  Common Stock  Additional Paid-In  Accumulated  Total Stockholders' 
  Shares  Amount  Shares  Amount  Capital  Deficit  Equity 
Balances at April 30, 2017  1,648  $2   44,014  $44  $590,971  $(537,435) $53,582 
Series E preferred stock dividends paid
($2.625 per share)
              (4,325)     (4,325)
Cumulative-effect adjustment to accumulated deficit pursuant to adoption of ASU 2016-09              (119)  119    
Common stock issued, net of issuance costs of $111        1,051   1   4,192      4,193 
Common stock issued, net of issuance costs of $1,669        10,295   10   21,484      21,494 
Common stock issued under Employee Stock Purchase Plan        88      317      317 
Fractional shares issued pursuant to reverse stock split        19              
Exercise of stock options        222      752      752 
Stock-based compensation expense              1,538      1,538 
Net loss                 (21,813)  (21,813)
Balances at April 30, 2018  1,648   2   55,689   55   614,810   (559,129)  55,738 
Series E preferred stock dividends paid
($2.625 per share)
              (4,325)     (4,325)
Cumulative-effect adjustment to accumulated deficit pursuant to adoption of ASC 606                 2,739   2,739 
Common stock issued under Employee Stock Purchase Plan        75      258      258 
Exercise of stock options        371   1   1,277      1,278 
Stock-based compensation expense              1,595      1,595 
Net loss                 (4,215)  (4,215)
Balances at April 30, 2019  1,648   2   56,135   56   613,615   (560,605)  53,068 
Series E preferred stock dividends paid
($2.625 per share)
              (4,325)     (4,325)
Common stock issued under Employee Stock Purchase Plan        48      187      187 
Exercise of stock options        251      933      933 
Vesting of restricted stock units        49             
Stock-based compensation expense              2,499      2,499 
Net loss                 (10,466)  (10,466)
Balances at April 30, 2020  1,648  $2   56,483  $56  $612,909  $(571,071) $41,896 

  2018  2017  2016 
          
Contract manufacturing revenue $53,621,000  $57,630,000  $44,357,000 
Cost of contract manufacturing  56,545,000   38,259,000   22,966,000 
Gross profit (loss)  (2,924,000)  19,371,000   21,391,000 
             
Operating expenses:            
Selling, general and administrative  16,456,000   18,079,000   17,904,000 
Restructuring charges  1,258,000       
             
Total operating expenses  17,714,000   18,079,000   17,904,000 
             
Operating income (loss)  (20,638,000)  1,292,000   3,487,000 
             
Other income (expense):            
Interest and other income  102,000   108,000   124,000 
Interest and other expense  (27,000)  (7,000)  (14,000)
             
Income (loss) from continuing operations $(20,563,000) $1,393,000  $3,597,000 
Loss from discontinued operations  (1,250,000)  (29,552,000)  (59,249,000)
Net Loss $(21,813,000) $(28,159,000) $(55,652,000)
             
Comprehensive loss $(21,813,000) $(28,159,000) $(55,652,000)
             
Series E preferred stock accumulated dividends  (4,686,000)  (4,640,000)  (4,484,000)
             
Net loss attributable to common stockholders $(26,499,000) $(32,799,000) $(60,136,000)
             
Basic and diluted weighted average common shares outstanding  47,063,020   37,109,493   30,895,089 
             
Basic and diluted net loss per common share attributable to common stockholders:            
Continuing operations $(0.53) $(0.09) $(0.03)
Discontinued operations $(0.03) $(0.79) $(1.92)
Net loss per share attributable to common stockholders $(0.56) $(0.88) $(1.95)

 

See accompanying notes to consolidated financial statements.

 

 

 

 F-434 

 

AVID BIOSERVICES, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCASH FLOWS

FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2018

(in thousands)

 

 Preferred Stock  Common Stock  Additional  Accumulated  Stockholders’ 
 Shares  Amount  Shares  Amount  Paid-In Capital  Deficit  Equity 
BALANCES, April 30, 2015  1,574,764  $2,000   27,620,947  $28,000  $512,629,000  $(453,624,000) $59,035,000 
Series E preferred stock issued for cash under June 13, 2014 Financing, net of issuance costs of $1,000   2,676            59,000      59,000 
Series E preferred stock dividends              (4,139,000)     (4,139,000)
Common stock issued for cash under June 13, 2014 Financing, net of issuance costs of $311,000        1,232,821   1,000   11,144,000      11,145,000 
Common stock issued for cash under August 7, 2015 Financing, net of issuance costs of $190,000        964,523   1,000   7,256,000      7,257,000 
Common stock issued for cash under August 7, 2015 Financing, net of issuance costs of $175,000        1,210,328   1,000   6,793,000      6,794,000 
Common stock issued for cash under October 30, 2015 Financing, net of issuance costs of $1,000        2,645,503   3,000   19,996,000      19,999,000 
Common stock issued under Employee Stock Purchase Plan        147,769      540,000      540,000 
Common stock issued upon exercise of options        25,322      138,000      138,000 
Share-based compensation              4,898,000      4,898,000 
Net loss                 (55,652,000)  (55,652,000)
BALANCES, April 30, 2016  1,577,440   2,000   33,847,213   34,000   559,314,000   (509,276,000)  50,074,000 
Series E preferred stock issued for cash under June 13, 2014 Financing, net of issuance costs of $58,000  70,320            1,576,000      1,576,000 
Series E preferred stock dividends              (4,279,000)     (4,279,000)
Common stock issued for cash under August 7, 2015 Financing, net of issuance costs of $487,000        6,137,403   6,000   17,753,000      17,759,000 
Common stock issued for cash under August 7, 2015 Financing, net of issuance costs of $340,000        3,750,323   4,000   12,687,000      12,691,000 
Common stock issued under Employee Stock Purchase Plan        270,075      526,000      526,000 
Common stock issued upon exercise of options        9,026      31,000      31,000 
Share-based compensation              3,363,000      3,363,000 
Net loss                 (28,159,000)  (28,159,000)
BALANCES, April 30, 2017  1,647,760   2,000   44,014,040   44,000   590,971,000   (537,435,000)  53,582,000 
Series E preferred stock dividends              (4,325,000)     (4,325,000)
Cumulative-effect adjustment to accumulated deficit pursuant to adoption of ASU 2016-09              (119,000)  119,000    
Common stock issued for cash under August 7, 2015 Financing, net of issuance costs of $111,000        1,051,259   1,000   4,192,000      4,193,000 
Common stock issued for cash under February 14, 2018 Public Offering, net of issuance costs of $1,669,000        10,294,445   10,000   21,484,000      21,494,000 
Common stock issued under Employee Stock Purchase Plan        88,327      317,000      317,000 
Common stock issued upon exercise of options        222,255      752,000      752,000 
Fractional shares issued pursuant to reverse stock split        18,896             
Share-based compensation              1,538,000      1,538,000 
Net loss                 (21,813,000)  (21,813,000)
BALANCES, April 30, 2018  1,647,760  $2,000   55,689,222  $55,000  $614,810,000  $(559,129,000) $55,738,000 

  Year Ended April 30, 
  2020  2019  2018 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss $(10,466) $(4,215) $(21,813)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:            
Depreciation and amortization  3,091   2,746   2,562 
Stock-based compensation  2,499   1,595   1,538 
Loss on disposal of assets  13   127   1,692 
Gain on sale of research and development assets     (1,000)  (8,000)
Changes in operating assets and liabilities:            
Accounts receivable  (1,232)  (3,620)  3,988 
Contract assets  1,027   (1,439)   
Inventory  (4,326)  1,701   16,970 
Prepaid expenses and other assets  (3)  (28)  153 
Accounts payable  802   2,125   (1,271)
Accrued payroll and related costs  (521)  976   (2,491)
Contract liabilities  14,469   (5,371)  (17,582)
Other accrued expenses and other liabilities  474   (642)  1,009 
Assets and liabilities of discontinued operations     (4,550)  (2,747)
Net cash provided by (used in) operating activities  5,827   (11,595)  (25,992)
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
Purchase of property and equipment  (3,812)  (1,502)  (3,793)
Proceeds from sale of property and equipment     46    
Proceeds from sale of research and development assets     6,000   3,000 
Net cash (used in) provided by investing activities  (3,812)  4,544   (793)
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
Proceeds from issuance of common stock, net of issuance costs        25,687 
Proceeds from exercise of stock options  933   1,278   752 
Proceeds from issuance of common stock under employee stock purchase plan  187   258   317 
Proceeds from note payable  4,379       
Dividends paid on preferred stock  (4,325)  (4,325)  (4,325)
Principal payments on finance lease  (78)  (74)  (180)
Net cash provided by (used in) financing activities  1,096   (2,863)  22,251 
             
Net increase (decrease) in cash, cash equivalents and restricted cash $3,111  $(9,914) $(4,534)
Cash, cash equivalents and restricted cash, beginning of period  33,501   43,415   47,949 
Cash, cash equivalents and restricted cash, end of period $36,612  $33,501  $43,415 
             
Supplemental disclosures of cash flow information:            
Interest paid $8  $11  $4 
             
Supplemental disclosure of non-cash activities:            
Decapitalization of right-of-use assets upon lease termination and/or modification $1,469  $  $ 
Unpaid purchases of property and equipment $772  $318  $180 
Property and equipment acquired under finance lease $  $245  $ 
Receivable related to the sale of research and development assets $  $  $5,000 

 

See accompanying notes to consolidated financial statements.

 

 

 

 F-535 

AVID BIOSERVICES, INC.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED APRIL 30, 2018

  2018  2017  2016 
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net loss $(21,813,000) $(28,159,000) $(55,652,000)
Adjustments to reconcile net loss to net cash used in operating activities:            
Share-based compensation  1,538,000   3,363,000   4,898,000 
Depreciation and amortization  2,562,000   2,463,000   1,535,000 
Loss on disposal of property and equipment and other assets  1,692,000   1,000   14,000 
Gain on sale of research and development assets  (8,000,000)      
Changes in operating assets and liabilities:            
Trade and other receivables  3,988,000   (4,883,000)  954,000 
Inventories  16,970,000   (16,913,000)  (8,832,000)
Prepaid expenses  781,000   (109,000)  4,000 
Restricted cash     (550,000)  (600,000)
Other non-current assets  24,000   278,000   (325,000)
Accounts payable  (4,018,000)  (3,308,000)  (3,521,000)
Accrued clinical trial and related fees  (945,000)  (3,036,000)  3,684,000 
Accrued payroll and related costs  (2,906,000)  263,000   1,215,000 
Deferred revenue  (17,578,000)  18,470,000   3,400,000 
Customer deposits  (4,000)  (7,195,000)  12,849,000 
Other accrued expenses and current liabilities  383,000   (675,000)  1,051,000 
Deferred rent, less current portion  560,000   204,000   (265,000)
Net cash used in operating activities  (26,766,000)  (39,786,000)  (39,591,000)
             
CASH FLOWS FROM INVESTING ACTIVITIES:            
Property and equipment acquisitions  (3,019,000)  (3,560,000)  (8,878,000)
Decrease in other assets     568,000   87,000 
Proceeds from sale of research and development assets  3,000,000       
Net cash used in investing activities  (19,000)  (2,992,000)  (8,791,000)
             
CASH FLOWS FROM FINANCING ACTIVITIES:            
Proceeds from issuance of common stock, net of  issuance costs of $1,780,000, $827,000, and $677,000, respectively  25,687,000   30,450,000   45,195,000 
Proceeds from issuance of Series E preferred stock, net of issuance costs of nil, $58,000, and $1,000, respectively     1,576,000   59,000 
Proceeds from issuance of common stock under Employee Stock Purchase Plan  317,000   526,000   540,000 
Proceeds from exercise of stock options  752,000   31,000   138,000 
Dividends paid on preferred stock  (4,325,000)  (4,279,000)  (4,139,000)
Principal payments on capital lease  (180,000)  (139,000)   
Net cash provided by financing activities  22,251,000   28,165,000   41,793,000 
             
NET DECREASE IN CASH AND CASH EQUIVALENTS $(4,534,000) $(14,613,000) $(6,589,000)
             
CASH AND CASH EQUIVALENTS, beginning of period  46,799,000   61,412,000   68,001,000 
             
CASH AND CASH EQUIVALENTS, end of period $42,265,000  $46,799,000  $61,412,000 
             
SUPPLEMENTAL INFORMATION:            
Cash paid for interest $4,000  $6,000  $ 
             
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:            
Accounts payable and other liabilities for purchase of property and equipment and other assets $180,000  $658,000  $1,565,000 
Other receivables related to the sale of research and development assets $5,000,000  $  $ 
Property and equipment acquired under capital lease $  $319,000  $ 
Lease incentives $  $  $562,000 

See accompanying notes to consolidated financial statements.

F-6

 

avid bioservices, inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 1 – Description of Company and Basis of Presentation

1.ORGANIZATION AND BUSINESS DESCRIPTION

 

We are a dedicated contract development and manufacturing organization (“CDMO”) that provides a comprehensive range of services from process development to currentCurrent Good Manufacturing Practices (“cGMP”CGMP”) clinical and commercial manufacturing, focused on biopharmaceutical productsdrug substances derived from mammalian cell culture for biotechnology and pharmaceutical companies.

 

Corporate Name ChangeEffective January 5, 2018, we changed our name to Avid Bioservices, Inc. from Peregrine Pharmaceuticals, Inc. to Avid Bioservices, Inc. in connection with our decisiontransition to ceasea dedicated CDMO and the discontinuation of our research and development activitiesactivities. For the fiscal 2019 and transition2018 periods presented, the operating results of our business to a dedicated CDMO. Except where specifically noted orformer research and development segment have been excluded from continuing operations and reported as income (loss) from discontinued operations, net of tax, in the context otherwise requires, references to “Avid,” “the Company,” “we,” “us,”Consolidated Statements of Operations and “our,” in this Annual ReportComprehensive Loss. For additional information on the discontinuation of our research and development segment, refer to Avid Bioservices, Inc. and its consolidated subsidiaries.

Note 11,Sale of Research and Development Assets– On February 12, 2018, we entered into an Asset Assignment. Except where specifically noted or the context otherwise requires, references to “Avid,” the “Company,” “we,” “us,” and Purchase Agreement (“Purchase Agreement”) with Oncologie,“our,” in this Annual Report refer to Avid Bioservices, Inc. pursuant to which we sold the majority of our research and development assets to Oncologie, Inc., which included the assignment of certain exclusive licenses related to our former phosphatidylserine (PS)-targeting program (Note 9). As a result of (i) the sale of our PS-targeting program, (ii) the held for sale classification of our R84 technology, (iii) the abandonment of our remaining research and development assets (including our intent to return the exosome technology back to the original licensor), and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business, the operating results and related assets and liabilities from our research and development segment are reported as a loss from discontinued operations in the accompanying consolidated statements of operations and comprehensive loss for all periods presented. In addition, assets and liabilities related to that segment are reported as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets at April 30, 2018 and 2017 (Note 2).its subsidiaries.

 

Reverse Stock Split– On July 7, 2017, we effected a reverse stock split of our outstanding shares of common stock at a ratio of one-for-seven pursuant to our filed Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware. The reverse stock split took effect with the opening of trading on July 10, 2017. The primary purpose of the reverse stock split, which was approved by our stockholders at our 2016 Annual Meeting on October 13, 2016, was to enable us to regain compliance with the $1.00 minimum bid price requirement for continued listing on The NASDAQ Capital Market. Pursuant to the reverse stock split, every seven shares of our issued and outstanding shares of common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par value per share of our common stock. All share and per share amounts of our common stock included in the accompanying consolidated financial statements have been retrospectively adjusted to give effect to the reverse stock split for all periods presented, including reclassifying an amount equal to the reduction in par value to additional paid-in capital. No fractional shares were issued in connection with the reverse stock split. Any fractional share of common stock created by the reverse stock split was rounded up to the nearest whole share. The number of authorized shares of our common stock remained unchanged. The reverse stock split affected all issued and outstanding shares of our common stock, as well as the shares of common stock underlying our stock options, employee stock purchase plan, warrants and the general conversion right with respect to our 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”).

2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation 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 itsour subsidiaries. All intercompany balancesaccounts and transactions among the consolidated entities have been eliminated.

Use of Estimates –eliminated in the consolidated financial statements. The preparation of our consolidated 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. ActualManagement’s estimates are based on historical information available as of the date of the consolidated financial statements and on various other assumptions that are believed to be reasonable under the circumstances. Accounting estimates and judgements are inherently uncertain and actual results could differ materially from these estimates.

 

Discontinued Operations – As of January 31, 2018, our research and development segment met all the conditions required in order to be classified as a discontinued operation (Note 1). Accordingly, the operating results of our research and development segment are reported as a loss from discontinued operations in the accompanying consolidated financial statements for all periods presented. In addition, the assets and liabilities related to our research and development segment are reported as assets and liabilities of discontinued operations in the accompanying consolidated balance sheets at April 30, 2018 and 2017. For additional information, see Note 9, “Sale of Research and Development Assets”.Segment Reporting

 

F-7

avid bioservices, inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Segment Reporting – Historically, ourOur business had been organized into two reportable operating segments: (i) our research and development segment, and (ii) our contract manufacturing services segment. However, due to changes in our organizational structure associated with the aforementioned classification of our research and development segment as a discontinued operation,management has determined that the Company now operates in one operating segment withsegment. Accordingly, we reported our financial results for one reporting segment.reportable segmentThe accounting policies. All of our one reportable segmentidentifiable assets are in the same as those described in this Note 2.United States.

 

Going ConcernNote 2The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization Summary 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.Significant Accounting Policies

 

At April 30, 2018, we had $42,265,000 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 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 (Note 1), 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 secure sufficient business to support our operations, we may need to raise additional capital in the future. Our ability to raise additional capital in the equity markets to fund our obligations in future periods is dependent on a number of factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties, including but not limited to, negative economic conditions, adverse market conditions, and adverse financial results. If we are unable to either raise sufficient capital in the equity markets or generate additional revenue, we may need to further restructure, or cease, our operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.

As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that our financial statements are issued.

Reclassification – Certain prior year amounts related to construction-in-progress included in other assets have been reclassified to property and equipment in our accompanying consolidated balance sheet for the fiscal year ended April 30, 2017 and in our accompanying consolidated statement of cash flows for the fiscal years ended April 30, 2017 and 2016 to conform to the current period presentation. This reclassification had no effect on previously reported net loss.

In addition, certain amounts related to corporate overhead costs that were allocated to the research and development segment have been reclassified from research and development expense to selling, general and administrative expense in our accompanying consolidated statements of operations and comprehensive loss for all periods presented (Note 9). This reclassification had no effect on previously reported net loss.

Restructuring – Restructuring charges consist of one-time termination benefits, including severance and other employee-related costs related to a workforce reduction pursuant to a restructuring plan we implemented in August 2017 (Note 8). One-time termination benefits are expensed at the date we notified the employee, unless the employee was required to provide future service, in which case the benefits are expensed ratably over the future service period.

Cash and Cash Equivalents

We consider all short-term investments readily convertible to cash, without notice or penalty, with an initial maturity of three months90 days or less to be cash equivalents.

 

Restricted Cash

 

F-8

avid bioservices, inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Restricted CashUnder the terms of three separate operating leases related to our facilities (Note 4), we are required to maintain,pledged, as collateral, letters of credit duringcredit. During the terms of such leases (Note 3). Atfiscal year ended April 30, 2018 and 2017,2020, an aggregate amount of $0.8 million of restricted cash of $1,150,000that was pledged as collateral under thesetwo such letters of credit was released back to us. Accordingly, at April 30, 2020 and 2019, restricted cash of $0.4 million and $1.2 million, respectively, was pledged as collateral under letters of credit.

 

Trade

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avid bioservices, inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table provides a reconciliation of cash, cash equivalents and Other Receivablesrestricted cash reported within the Consolidated Balance Sheets that sum to the total of the same amounts shown in the Consolidated Statements of Cash Flows (in thousands):

  As of April 30, 
  2020  2019  2018 
Cash and cash equivalents $36,262  $32,351  $42,265 
Restricted cash  350   1,150   1,150 
Total cash, cash equivalents and restricted cash $36,612  $33,501  $43,415 

Revenue Recognition

On May 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09,Revenue from Contracts with Customers – Trade receivables(Topic 606), and its subsequent updates (codified as “ASC 606”), to all contracts that had not been completed as of May 1, 2018 using the modified retrospective method. Accordingly, results for reporting periods 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 prior to our adoption of ASC 606. The cumulative effect of adopting ASC 606 resulted in a one-time adjustment of $2.7 million to the opening balance of accumulated deficit as of May 1, 2018 which is reflected in the Consolidated Statements of Stockholders’ Equity for the fiscal year ended April 30, 2019.

Under ASC 606, we recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers, we perform the following five steps: (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) we satisfy a performance obligation.

Revenue recognized from services provided under our customer contracts are disaggregated into manufacturing and process development revenue streams.

Manufacturing revenue

Manufacturing revenue generally represents revenue from the manufacturing of customer products 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 is 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 products are manufactured exclusively for a specific customer and have no alternative use. The customer retains control of its product during the entire manufacturing process and can make changes to the process or specifications at its request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin.

37

avid bioservices, inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Process development revenue

Process development revenue generally represents revenue from 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 its 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 its product as the product is being created or enhanced by our services and can make changes to its process or specifications upon request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin.

The following table summarizes our manufacturing and process development revenue for the fiscal years ended April 30, 2020, 2019 and 2018 (in thousands). Revenue for the fiscal year ended April 30, 2018 has not been adjusted in accordance with our modified retrospective adoption of ASC 606 and continues to be reported under the accounting standards that were in effect prior to our adoption of ASC 606:

  Fiscal Year Ended April 30, 
  2020  2019  2018 
Manufacturing revenues $52,046  $43,432  $47,437 
Process development revenues  7,656   10,171   6,184 
  Total Revenues $59,702  $53,603  $53,621 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, 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 consolidated 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 fiscal years ended April 30, 2020 and 2019, we recognized revenue of $13.6 million and $14.3 million, respectively, for which the contract liability was recorded in a prior period.

The transaction price for services provided under our customer contracts reflect our best estimates of the amount of consideration to which we are entitled in exchange for providing goods and services to our customers. In determining the transaction price, we considered the different sources of variable consideration including, but not limited to, discounts, credits, refunds, price concessions or other similar items. We have included in the transaction price some or all of an amount of variable consideration, utilizing the most likely method, only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The actual amount of consideration ultimately received may differ.

Management may be required to exercise judgement in estimating revenue to be recognized. Judgement is required in identifying performance obligations, estimating the transaction price, estimating the stand-alone selling prices of identified performance obligations, and estimating the progress towards the satisfaction of performance obligations. If actual results in the future vary from our estimates, the estimates will be adjusted, which will affect revenues in the period that such variances become known.

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. As of April 30, 2020, we do not have any unsatisfied performance obligations for contracts greater than one year.

Prior to the adoption of ASC 606 on May 1, 2018, revenue was generally recognized when all of the following criteria were met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured.

38

avid bioservices, inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Accounts Receivable

Accounts receivable generally represent amounts billed for contract manufacturing and process development services provided under our customer contracts 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 at April 30,:

  2018  2017 
Trade receivables $3,539,000  $7,274,000 
Other receivables  215,000   468,000 
Trade and other receivables $3,754,000  $7,742,000 

Allowance for Doubtful Accounts– 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,our receivables, historical experience, and the financial condition of our customers. Based on our analysis of our receivablesaccounts receivable balances as of April 30, 20182020 and 2017,2019, we determined no allowance for doubtful accounts was necessary.

 

Inventories – Inventories are recorded at the lower of cost or market (net realizable value) and primarily include raw materials, work-in-process (comprised of raw materials, direct labor and overhead costs associated with in-process manufacturing services), and finished goods (representing manufacturing services completed and ready for shipment) associated with contract manufacturing services. Overhead costs allocated to work-in-process inventory are based on the normal capacity of our production facilities and do not include costs from abnormally low production or idle capacity, which are expensed directly to cost of contract manufacturing in the period incurred. During the fiscal year ended April 30, 2018, we expensed $13,966,000 in idle capacity costs directly to cost of contract manufacturing in the accompanying consolidated financial statements. No idle capacity costs were incurred during the fiscal years ended April 30, 2017 and 2016. Cost is determined by the first-in, first-out method. Inventories consist of the following at April 30,:

  2018  2017 
Raw materials $8,165,000  $11,304,000 
Work-in-process  7,964,000   13,755,000 
Finished goods     8,040,000 
Total inventories $16,129,000  $33,099,000 

Property and Equipment, net – 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 April 30, 2018 and 2017. In addition, all of our property and equipment are located in the U.S.

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 cashaccounts receivable and trade receivables.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.Consolidated Balance Sheets exceed the amount of government insurance limits provided on our deposits.

 

Our trade receivablesaccounts receivable from amounts billed for contract manufacturing and process development services have historically beenare 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, 20182020 and 2017,2019, approximately 93%98% and 95%, respectively, of our trade receivablesaccounts receivable were due from six or fewer customers.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Our contract assets are reclassified to accounts receivable when our rights to consideration become unconditional. At April 30, 2020 and 2019, approximately 96% and 87% of our contract assets were attributable to six customers and eight customers, respectively.

 

Our contract manufacturing revenue has historically beenrevenues are 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 percentagestable below represent revenue derived fromidentifies each customer (and geographical location) as a percentage of our customers that accounted for 10% or more of our total contract manufacturing revenuerevenues during any of the fiscal years ended April 30, 2018, 20172020, 2019 and 2016:2018:

 

 Geographic      
Customer Location 2018  2017 2016  

Geographc

Location

  2020  2019  2018 
         
Halozyme Therapeutics, Inc. U.S.  55%   58%   69%   U.S.       28%      30%      55% 
Gilead Sciences, Inc.  U.S.   24       
Acumen Pharmaceuticals, Inc.  U.S.   11   *    
IGM Biosciences, Inc.  U.S.   11   *    
Coherus BioSciences, Inc. U.S.  22      26      26      U.S.   10   13   22 
Other customers U.S./non-U.S.  23      16      5    
Total    100%   100%   100% 
ADC Therapeutics America Inc.  U.S.   *   21   * 

______________

*         Represents a percentage less than 10% of our total revenues.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

We attribute contract manufacturing revenue to the individual countries where the customer is headquartered. For fiscal year ended April 30, 2018, contract manufacturing revenueRevenues derived from U.S. based customers waswere 99% of total contract manufacturing revenue. For, 95% and 99% for the fiscal years ended April 30, 20172020, 2019 and 2016, contract2018, respectively.

Inventory

Inventory consists of raw materials inventory and is valued at the lower of cost, determined by the first-in, first-out method, or net realizable value. 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, which are generally as follows:

DescriptionEstimated Useful Life
Leasehold improvementsShorter of estimated useful life or lease term
Laboratory and manufacturing equipment5 – 10 years
Furniture, fixtures and office equipment5 – 10 years
Computer equipment and software3 – 5 years

Construction-in-progress, which represents direct costs related to the construction of various equipment and leasehold improvements primarily associated with our manufacturing revenuefacilities, is not depreciated until the asset is completed and placed into service. No interest was derived solely fromincurred or capitalized as construction-in-progress as of April 30, 2020 and 2019. All of our property and equipment are located in the U.S. based customers.Property and equipment consist of the following (in thousands):

  April 30, 
  2020  2019 
Leasehold improvements $21,130  $20,574 
Laboratory and manufacturing equipment  15,033   12,858 
Computer equipment and software  5,334   4,644 
Furniture, fixtures and office equipment  685   528 
Construction-in-progress  2,564   1,590 
Total property and equipment, gross  44,746   40,194 
Less: accumulated depreciation and amortization  (17,641)  (14,569)
Total property and equipment, net $27,105  $25,625 

Comprehensive Loss– Comprehensive loss isDepreciation and amortization expense for the change in equity during a period from transactionsyears ended April 30, 2020, 2019 and other events2018 was $3.1 million, $2.7 million and circumstances from non-owner sources. Comprehensive loss is equal to our net loss for all periods presented.$2.6 million, respectively.

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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.sell if impairment indicators exist. For the fiscal years ended April 30, 20182020 and 2017,2019, there were no indicators of impairment of the value of our long-lived assets.assets and no cumulative impairment losses recognized as of April 30, 2020.

 

Fair Value of Financial Instruments

The carrying amounts in the accompanying consolidated balance sheetConsolidated Balance Sheets for cash and cash equivalents, restricted cash, trade and other receivables,accounts receivable, accounts payable, and accrued liabilities and note payable 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, 20182020 and 2017,2019, 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)inputs). In addition, there were no transfers between any Levels of the fair value hierarchy during the fiscal years ended April 30, 2020 and 2019.

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 and 2017.(Note 10). 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.

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

Customer Deposits– Customer deposits primarily represents advance billings and/or payments received for services or raw materials from our customers prior to the initiation of contract manufacturing services.Stock-Based Compensation

 

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).

Revenue Recognition– We derive revenue from contract manufacturing services provided to our third-party customers. For the three years ended April 30, 2018, we have recognized revenue in accordance with the authoritative guidance for revenue recognition when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. We also comply with the authoritative guidance for revenue recognition regarding arrangements with multiple elements.

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units, which may require the use of significant judgement. Deliverables are considered separate units of accounting if (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

Arrangement consideration is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (“VSOE”) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, we use our best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under any agreement.

On occasion, we receive requests from customers to hold product that we have manufactured on a “bill-and-hold” basis. Revenue is recognized for these “bill-and-hold” arrangements in accordance with the authoritative guidance, which requires, among other things, the existence of a valid business purpose for the arrangement; the “bill-and-hold” arrangement is at the request of the customer; title and risk of ownership must pass to the customer; the product is complete and ready for shipment; a fixeddelivery date that is reasonable and consistent with the customer’s business practices; the product has been separated from our inventory; and no further performance obligations by us exist.

In addition, we also follow the authoritative guidance when reporting revenue as gross when we act as a principal versus reporting revenue as net when we act as an agent. For transactions in which we act as a principal, have discretion to choose suppliers, bear credit and inventory risk and perform a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.

Any amounts received prior to satisfying our revenue recognition criteria are recorded as deferred revenue or customer deposits in the accompanying consolidated financial statements. We also record a provision for estimated contract losses, if any, in the period in which they are determined.

Share-based CompensationWe account for stock options, restricted stock units and other share-basedstock-based awards granted under our equity compensation plans in accordance with the authoritative guidance for share-basedstock-based compensation. The estimated fair value of share-based paymentsstock 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 modifications to share-based awards, if any,restricted stock units is generally estimated usingmeasured 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 Black-Scholes option valuation model, unless a lattice model is required.straight-line basis over the period of vesting. Forfeitures are recognized as a reduction of share-basedstock-based compensation expense as they occur. As of April 30, 2018,2020 and 2019, there were no outstanding share-basedstock-based awards with market or performance conditions.

 

Income Taxes

 

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Income TaxesWe utilize the liability method of accounting for income taxes in accordance with authoritative guidance for accounting for income taxes.Accounting Standards Codification (“ASC”) 740:Income Taxes (“ASC 740”). Under the liability method, deferred taxes are determined based on the differences between the consolidated financial statementsreporting and tax basisbases of assets and liabilities and are measured using enacted tax rates.rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided when it is more likely than not that some portion orfor the entireamount of deferred tax asset willassets that, based on available evidence, are not expected to be realized (Note 7). 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 also required to file federal state and foreignstate 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.

 

Basic and Dilutive Net Loss Per Common Share – Basic net loss per common share is computed by dividing our net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period excluding the dilutive effects of stock options, shares of common stock expected to be issued under our Employee Stock Purchase Plan (the “ESPP”), warrants, and Series E Preferred Stock outstanding during the period. Diluted net loss per common share is computed by dividing our net loss attributable to common stockholders by the sum of the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effects of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Net loss attributable to common stockholders represents our net loss plus Series E Preferred Stock accumulated dividends. Series E Preferred Stock accumulated dividends include dividends declared for the period (regardless of whether or not the dividends have been paid) and dividends accumulated for the period (regardless of whether or not the dividends have been declared).

The potential dilutive effect of stock options, shares of common stock expected to be issued under our ESPP, and warrants outstanding during the period are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive effect of our Series E Preferred Stock outstanding during the period is calculated using the if-converted method assuming the conversion of our Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but are excluded if their effect is anti-dilutive. However, because the impact of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per common share amounts for the three years ended April 30, 2018.

The calculation of weighted average diluted shares outstanding excludes the dilutive effect of the following weighted average outstanding stock options and shares of common stock expected to be issued under our ESPP since their impact are anti-dilutive during periods of net loss:

  2018  2017  2016 
Stock options  53,978      252,098 
ESPP  1,972   45,767   37,862 
Total  55,950   45,767   289,960 

The calculation of weighted average diluted shares outstanding also 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:

  2018  2017  2016 
Stock options  3,636,699   4,156,421   2,740,922 
Warrants  39,040   39,040   39,040 
Series E Preferred Stock  1,978,783   1,955,588   1,893,122 
Total  5,654,522   6,151,049   4,673,084 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recently Adopted Accounting Pronouncements

Effective May 1, 2017, we adopted Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330):Simplifying the Measurement of Inventory. ASU 2015-11 requires that inventory should be measured at the lower of cost and net realizable value for entities that measure inventory using the first-in, first-out method. ASU 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  The adoption of ASU 2015-11 did not have a material impact on our consolidated financial statements.

Effective May 1, 2017, we adopted ASU 2015-17, Income Taxes (Topic 740):Balance Sheet Classification of Deferred Taxes. Under existing standards, deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net long-term asset or liability. To simplify presentation, the new guidance will require that all deferred tax assets and liabilities, along with related valuation allowances, be classified as long-term on the balance sheet. As a result, each tax-paying jurisdiction will now only have one net long-term deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. Due to the full valuation allowance on our U.S. deferred tax assets, the adoption of ASU 2015-17 did not have a material impact on our consolidated financial statements. No prior year periods were retrospectively adjusted.

Effective May 1, 2017, we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 changes certain aspects of accounting for share-based payments to employees and involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Specifically, ASU 2016-09 requires that all income tax effects of share-based awards bebenefit recognized as income tax expense or benefit in the reporting period in which they occur. Additionally, ASU 2016-09 amends existing guidance to allow forfeitures of share-based awards to be recognized as they occur. Previous guidance required that share-based compensation expense include an estimate of forfeitures. Upon adoption of ASU 2016-09, we made a policy election to recognize forfeitures as they occur. The adoption of ASU 2016-09 did not have a material impact and the cumulative effect of adoption is reflected in the accompanying consolidated statementsConsolidated Statements of stockholders’ equityOperations and Comprehensive Loss for the fiscal year ended April 30, 2018.2019 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 11).

 

Pending Adoption of RecentComprehensive 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.

Recently Adopted Accounting PronouncementsStandards

 

In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with CustomersNo. 2016-02 and its related amendments which introducedLeases (Topic 606):Revenue from Contracts with Customers842) (“ASC 842”), which, along with subsequent amendments issued in 2015 and 2016, will replace substantially all current U.S. GAAP revenue recognition guidance. ASU 2014-09, as amended, is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services utilizing a new five-step revenue recognition model.comprehensive lease accounting model that superseded the lease guidance underLeases (Topic 840). The new guidance alsoaccounting standard requires additional disclosure about the nature, amount, timinglessees to recognize right-of-use assets and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09, as amended, is effective for our annual reporting period beginning May 1, 2018, including interim periods within that reporting period. The new guidance permits adoption either by using (i) a full retrospective approachcorresponding lease liabilities for all leases with lease terms of greater than 12 months. It also changed the definition of a lease and expanded the disclosure requirements of lease arrangements. In July 2018, the FASB added a transition option for implementation that allowed companies to continue to use the legacy guidance in ASC 840,Leases, including its disclosure requirements, in the comparative periods presented in the period of adoption or (ii) a modified retrospective approach where the new standard is applied in the financial statements starting with the year of adoption. Under both approaches, cumulative impact of the adoption is reflected as an adjustment to retained earnings (accumulated deficit) as of the earliest date presented in accordance with the new standard.

 

 

 

 F-1342 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

On May 1, 2018,2019, we adopted ASU 2014-09, as amended, for all contracts not completed as of the adoption dateASC 842 using the modified retrospective method.approach. Accordingly, prior period financial information and disclosures have not been adjusted and continue to be reported in accordance with our historical accounting under the previous lease standard. In assessingaddition, we elected the impact,package of practical expedients available for existing contracts, which allowed us to carry forward our historical assessments of lease identification, lease classification, and initial direct costs. As a result of adopting ASC 842, we have identifiedrecognized right-of-use assets and implemented appropriate changeslease liabilities of $23.3 million and $25.5 million, respectively, on May 1, 2019, which are primarily related to our business policies, processes,facility operating leases (Note 4). The difference between the right-of-use assets and controls to support the adoption, recognition and disclosures under the new standard. We have reviewed the related critical terms and conditions of our existing contracts with customers and assessed the differences in accounting for such contracts under the new standard compared with current standards including the identification of performance obligations related to revenue generating activities, and determined the appropriate timing and measurement of revenue relatedlease liabilities is primarily attributed to the performance obligations. Additionally, we have identified our significant revenue streams; manufacturing revenue and process development revenue. Based on our analysis, we have concluded that the new standard will have a significant impact on our revenue streams as it relates to the timingelimination of the recognition of contract manufacturing revenue associated with goods or services provided to customers withdeferred rent. There was no alternative use, that were previously recognized upon completion, as such revenue will now be 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 these customer agreements 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. Contract manufacturing revenue of approximately $9,000,000 to $12,000,000, which would have otherwise been reflected in the consolidated statements of operations for the fiscal year ended April 30, 2019, will be recorded in equity as part of a cumulative effect adjustment as of May 1, 2018. The cumulative impact of adopting the new standard and recognizing revenue and related cost over time will result in a one-time adjustment to the opening balance of accumulated deficit as a result of approximately $2,000,000the 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 Consolidated Balance Sheet at April 30, 2020. Right-of-use assets represent our right to $4,000,000 asuse 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 May 1, 2018. Additionally,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 include expanded disclosures inexercise a renewal option. Operating lease expense is recognized on a straight-line basis over the notes to financial statements, including the disaggregation of revenue, significant judgments made with regard to revenue recognition, and the reconciliation of contract balances, among other disclosures.expected lease term.

 

The estimated impactWe 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 adopting ASU 2014-09, as amended, 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 2019.ASC 842 for short-term leases.

Recently Issued Accounting Standards Not Yet Adopted

 

In FebruaryJune 2016, the FASB issued ASU 2016-02, LeasesNo. 2016-13, Financial Instruments – Credit Losses (Topic 842)326):Measurement of Credit Losses of Financial Instruments(“ASU 2016-13”). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. As a smaller reporting company, ASU 2016-2 requires an entity2016-13 and its subsequent updates are effective for fiscal years beginning after December 15, 2022, which will be our fiscal year 2024 beginning May 1, 2023; however, early adoption is permitted. We are currently evaluating the impact this standard will have on our consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820):Disclosure Framework—Changes to recognize right-of-use assetsthe Disclosure Requirements for Fair Value Measurement(“ASU 2018-13”), which eliminates, adds and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors aremodifies certain disclosure requirements of fair value measurements. Entities will no longer be required to disclose qualitativethe amount of and quantitative information about leasing arrangements to enable a userreasons for transfers between Level 1 and Level 2 of the financial statementsfair value hierarchy, but public companies will be required to assessdisclose the amount, timingrange and uncertainty of cash flows arising from leases.weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2016-022018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018,2019, which will be our fiscal year 20202021 beginning May 1, 2019. Early adoption is permitted.2020. We are currently indo not expect the process of evaluating the impact of adoption of ASU 2016-02this standard to have a material impact on our consolidated financial statements and related disclosures.statements.

 

In November 2016,December 2019, the FASB issued ASU 2016-18, Statement of Cash FlowsNo. 2019-12, Income Taxes (Topic 230)740):Restricted CashSimplifying the Accounting for Income Taxes (“ASU 2019-12”), which addresses diversitysimplifies the accounting for income taxes by removing certain exceptions and improving consistent application in practice related to the classification and presentationcertain areas of changes in restricted cash on the statement of cash flows.Topic 740. 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 2016-182019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017,2020, which will be our fiscal year 20192022 beginning May 1, 2018. Based on our restricted cash balance2021. Early adoption is permitted. We are currently evaluating the timing and impact of $1,150,000 at April 30, 2018 and 2017, we do not expect the adoption ofadopting ASU 2016-18 to have on material impact on our consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718):Scope of Modification Accounting,which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, which will be our fiscal year 2019 beginning May 1, 2018. We do not expect the adoption of ASU 2016-09 to have a material impact2019-12 on our consolidated financial statements and related disclosures.

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3.COMMITMENTS AND CONTINGENCIES

Note 3 – Note Payable

On April 17, 2020, we entered into a promissory note (the “Note”) with City National Bank, the lender, evidencing an unsecured loan pursuant to the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) of approximately $4.4 million (the “PPP Loan”). We applied for and received the PPP Loan pursuant to the then published PPP qualification and certification requirements.

On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created uncertainty regarding the qualification requirements for a PPP Loan (the “New Guidance”). In light of the New Guidance, we determined it appropriate to pay off the entire amount of the PPP Loan. Accordingly, on May 12, 2020, we paid off in full the principal and interest on the PPP Loan, resulting in the termination of the Note. The PPP Loan was scheduled to mature on April 21, 2022 and had a fixed interest rate of 1.00% per annum.

Note 4 – Leases

Operating Leases– Our corporate offices

We currently lease office, manufacturing, laboratory and manufacturingwarehouse space in four buildings under three separate non-cancellable operating lease agreements. All of our leased facilities are all located in close proximity in Tustin, California. We currently lease office, warehouse and manufacturing space in five buildings under four separate lease agreements, as summarized in the following table:

 

 

Lease

#

Original Lease

Execution Date

# of Buildings Occupied

Initial

Lease Term

Expiration Date

# of Options

to Extend

Lease

Extended
Lease Term
Expiration Date(1)
1December 1998212/31/27212/31/37
2July 201411/31/2721/31/37
3April 201618/31/2328/31/35
4April 201618/31/2328/31/35

______________

(1)Extended lease term expiration date assumes we execute all available option(s) to extend lease in accordance with the terms of the lease agreement.

The following represents additional information for each of the lease agreements included in the above table:

In December 1998, we entered into our first lease agreement (the “First Lease”) with anCalifornia, have original lease term ofterms ranging from 7 to 12 years, withcontain two 5-yearmulti-year renewal options, and includes scheduled rental increases of approximately 3% every two years. In December 2005, we entered into an amendment to the First Lease that extended the original lease term for seven additional years to expire on December 31, 2017. In November 2016, we entered into a second amendment to the First Lease that extends the lease term through December 31, 2027, while also maintaining our two 5-year renewal options that could extend the lease term to December 31, 2037.

In July 2014, we entered into a second lease agreement (the “Second Lease”) to expand our manufacturing capacity (the “Myford Facility”). The Second Lease includes an option to extend the lease term in two 5-year periods to extend the lease to July 31, 2031 and includes scheduled annual rent increases of approximately 3%. on either an annual or biennial basis. With respect to multi-year renewal options, a multi-year renewal option was included 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, the Second Lease providedtwo of our leases provide for 12.5 monthsperiods of free rent, lessor improvements of $250,000 and a tenant improvement allowanceallowances, of $365,000. Upon completion of the Myford Facility build-out during fiscal year 2016,which certain of these improvements werehave 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 Second Lease, as amended.lease. The operating lease right-of-use assets and liabilities on our Consolidated Balance Sheet for the fiscal year ended April 30, 2020 primarily relate to these facility leases.

 

In February 2017,September 2019, we entered into aterminated an operating lease amendment to the Second Lease (the “Second Lease Amendment”), pursuant to which we secured additional vacant warehouse space (the “Expansion Space”) within the same building as our existing Myford Facility. The purpose of the Expansion Space was to expand our biomanufacturing capacity, which we believe could support the growthfor one of our contract manufacturing business. The Second Lease Amendment extendsnon-manufacturing facilities that was primarily utilized for warehouse space. In connection with the initialtermination of this lease, term to January 31, 2027we removed the corresponding operating lease right-of-use asset and maintainsliability balances from our two 5-year renewal options that could extendConsolidated Balance Sheet and recognized a loss of $0.4 million, which is included in loss on lease termination in the Consolidated Statements of Operations and Comprehensive Loss for the fiscal year ended April 30, 2020. Additionally, the lease term to January 31, 2037. Our scheduled annual rent increasestermination released $0.3 million of approximately 3% are also maintained under the Second Lease Amendment. In addition, with respect to the Expansion Space, the Second Lease Amendment provided for eight (8) months of free rent and a tenant improvement allowance of $1,269,000, which is subject to certain performance contingencies, as defined in the Second Lease Amendment. As a result, the tenant improvement allowance, is accounted for as contingent rent and will be recorded when the tenant improvement allowance is received. Additionally, under the terms of the Second Lease Amendment, we are required to maintain,restricted cash that was pledged as collateral for the lease,under a letter of credit required by the terminated lease.

Lease Costs

Certain of our facility leases require us to pay property taxes, insurance and common area maintenance. While these payments are not included as part of our lease liabilities, they are recognized as variable lease cost in the amount of $550,000 during the entire term of the Second Lease, as amended, which amount is included in restricted cash in the accompanying consolidated balance sheets as of April 30, 2018 and 2017.period they are incurred.

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

In April 2016, we entered into a thirdThe components of lease agreement (the “Third Lease”) to lease additional office space. The Third Lease includes two separate option periods to extend the lease term to August 31, 2035 and includes annual scheduled rent increases of approximately 3%. In addition, the Third Lease provided for four months of free rent and a tenant improvement allowance of $562,000. The tenant improvements classified as leasehold improvements are being amortized over the shorter of the estimated useful life of the improvements or the remaining life of the Third Lease Additionally, under the terms of the Third Lease, we are required to maintain, as collateral for the lease, a letter of credit in the amount of $350,000 during the entire term of the Third Lease, which amount is included in restricted cash in the accompanying consolidated balance sheets as of April 30, 2018 and 2017.

In April 2016, we entered into a fourth lease agreement (the “Fourth Lease”) to support our manufacturing operations. The Fourth Lease includes two separate option periods to extend the lease term to August 31, 2035 and includes annual scheduled rent increases of approximately 3%. In addition, under the terms of the Fourth Lease, we are required to maintain, as collateral for the lease, a letter of credit in the amount of $250,000 during the entire term of the Fourth Lease, which amount is included in restricted cash in the accompanying consolidated balance sheets as of April 30, 2018 and 2017.

Under each of the aforementioned facility operating leases, 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 $2,935,000, $2,180,000, and $1,265,000 for the fiscal years ended April 30, 2018, 2017, and 2016, respectively.

At April 30, 2018, future minimum lease payments under all non-cancelable operating leases are as follows:

Year ending April 30,: Minimum Lease Payments 
2019 $3,006,000 
2020  3,036,000 
2021  3,116,000 
2022  2,789,000 
2023  2,730,000 
Thereafter  8,632,000 
  $23,309,000 

Legal Proceedings - In the ordinary course of business, we are at times subject to various legal proceedings and disputes. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  Such provisions, 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.

On October 10, 2013, a derivative and class action complaint, captionedMichaeli v. Steven W. King, et al., C.A. No. 8994-VCL, was filed in the Court of Chancery of the State of Delaware (the “Court”), purportedly on behalf of the Company, which was named a nominal defendant, against certain of our current and former executive officers and our three former non-employee directors (collectively, the “Defendants”). On December 1, 2015, the plaintiffs filed an amended and supplemental derivative and class action complaint (the “Amended Complaint”). The Amended Complaint alleged that the Defendants breached their respective fiduciary duties in connection with certain purportedly improper compensation decisions made by our former board of directors during the past four fiscal years ended April 30, 2015 and that our former board of directors breached their fiduciary duty of candor by filing and seeking stockholder action on the basis of an allegedly materially false and misleading proxy statement for our 2013 annual meeting of stockholders. On May 15, 2017, the parties filed with the Court a Stipulation and Agreement of Compromise, Settlement and Release (the “Settlement”) setting forth the terms of the proposed settlement of the claims in the Amended Complaint. At a hearing on July 27, 2017, the Court issued an order approving the Settlement, which provided, among other things, that the three former non-employee directors agreed to pay or cause to be paid $1,500,000 to us, which amount is included as a reduction to selling, general and administrative expense in the accompanying consolidated financial statementscost for the fiscal year ended April 30, 2020, were as follows (in thousands):

  April 30, 2020 
Operating lease cost $3,339 
Variable lease cost  603 
Short-term lease cost  171 
Total lease cost $4,113 

Operating lease expense under the prior lease standard was $2.9 million for each of the fiscal years ended April 30, 2019 and 2018. We received such payment

Supplemental Information

Supplemental consolidated balance sheet and other information related to our operating leases as of April 30, 2020 were as follows (in thousands, expect weighted average data):

  April 30, 2020 
Assets    
   Operating lease right-of-use assets $20,100 
Liabilities    
   Operating lease liabilities $1,228 
   Operating lease liabilities, less current portion  21,244 
Total operating lease liabilities $22,472 
Weighted average remaining lease term  10.5 years 
Weighted average discount rate  8.0% 

Cash paid for amounts included in fullthe measurement of lease liabilities for the fiscal year ended April 30, 2020 was $3.1 million and is included in August 2017.net cash used in operating activities in our Consolidated Statements of Cash Flows.

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Undiscounted Cash Flows

4.STOCKHOLDERS’ EQUITY

 

StockholderAs of April 30, 2020, the maturities of our operating lease liabilities, which includes those derived from lease renewal options that we considered it reasonably certain that we would exercise, were as follows (in thousands):

Fiscal Year  Total 
2021  $2,972 
2022   2,995 
2023   3,010 
2024   3,086 
2025   3,171 
Thereafter   18,767 
Total lease payments   34,001 
Less: imputed interest   (11,529)
Total operating lease liabilities  $22,472 

Note 5 – Stockholders’ Equity

Termination of Rights Agreement (Series D Preferred Stock)

 

On March 16, 2006, our Board of Directors adoptedwe entered into a Stockholder Rights Agreement with Rights Agent named therein, which agreement was subsequently amended and restated on March 16, 2016 (the(as amended, the “Rights Agreement”), that is. The Rights Agreement was designed to strengthen the ability of theour Board of Directors to protect the interests of our stockholders against potential abusive or coercive takeover tactics and to enable all stockholders to receive 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.

us. Under the Rights Agreement, theour Board of Directors declared a dividend of one preferred share purchase right (a(the “Right”) for each share of our common stock held by our stockholders of record as of the close of business on March 27, 2006. Each2006, each of which Right entitles holders of each share of our common stockentitled the holder thereof to buy seven one thousandths (7/1,000th)purchase a fraction of a share of Avid’sour Series D Participating Preferred Stock, par value $0.001 per share, at an exercisethe price of $77.00 per share, subject to adjustment.specified in the Rights Agreement. The Rights are neitherwere only 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 acquiresacquired 15% or more of our outstanding common stock without prior approval from our Board of Directors, or announcesannounced a tender offer or exchange offer thatwhich, if consummated, would resulthave resulted in thatownership by a person or group owningof 15% or more of our commonoutstanding 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.

Sales of Common Stock

During the three fiscal years ended April 30, 2018, we issued shares of our common stock under various financing transactions, as summarized in the following table:

 

 

Description of Financing Transaction

 

Shares of

Common Stock

Issued

  Gross
Proceeds
Raised
 
Fiscal Year 2016        
At Market Issuance Sales Agreement dated June 13, 2014  1,232,821  $11,456,000 
At Market Issuance Sales Agreement dated August 7, 2015  964,523  $7,447,000 
Equity Distribution Agreement dated August 7, 2015  1,210,328  $6,969,000 
Common Stock Purchase Agreement dated October 30, 2015  2,645,503  $20,000,000 
   6,053,175  $45,872,000 
Fiscal Year 2017        
At Market Issuance Sales Agreement dated August 7, 2015  6,137,403  $18,246,000 
Equity Distribution Agreement dated August 7, 2015  3,750,323  $13,031,000 
   9,887,726  $31,277,000 
Fiscal Year 2018        
At Market Issuance Sales Agreement dated August 7, 2015  1,051,259  $4,304,000 
Public Offering dated on February 14, 2018  10,294,445  $23,163,000 
   11,345,704  $27,467,000 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following represents additional information for each of the financing transactions included in the above table:

June 2014 AMI Sales Agreement– On June 13, 2014, we entered into an At Market Issuance Sales Agreement with MLV & Co. LLC (“MLV”), as amended on April 13, 2015 (“June 2014 AMI Sales Agreement”), pursuant to which we were able to sell shares of our common stock through MLV, as agent, for aggregate gross proceeds of up to $25,000,000 in registered transactions from our shelf registration statement on Form S-3 (File No. 333-201245), which was declared effective by the Securities and Exchange Commission (“SEC”) on January 15, 2015 (“January 2015 Shelf”). Sales of our common stock through MLV were made by any method that was deemed an “at the market offering” as defined in Rule 415 of the Securities Act. We paid MLV a commission equal to 2.5% of the gross proceeds from the sale of our common stock pursuant to the June 2014 AMI Sales Agreement. As of April 30, 2016, we had raised the full amount of gross proceeds available to us under the June 2014 AMI Sales Agreement.

August 2015 AMI Sales Agreement – On August 7, 2015, we entered into an At Market Issuance Sales Agreement (“August 2015 AMI Sales Agreement”) with MLV, pursuant to which we were able to sell shares of our common stock through MLV, as agent, for aggregate gross proceeds of up to $30,000,000, in registered transactions from our January 2015 Shelf. Sales of our common stock through MLV were made by any method that was deemed an “at the market offering” as defined in Rule 415 of the Securities Act. We paid MLV a commission equal to 2.5% of the gross proceeds from the sale of our common stock pursuant to the August 2015 AMI Sales Agreement. As of April 30, 2018, we had raised the full amount of gross proceeds available to us under the August 2015 AMI Sales Agreement.

Equity Distribution Agreement – On August 7, 2015, we entered into an Equity Distribution Agreement, with Noble International Investments, Inc., doing business as Noble Life Science Partners, a division of Noble Financial Capital Markets (“Noble”), pursuant to which we were able to sell shares of our common stock through Noble, as agent, for aggregate gross proceeds of up to $20,000,000, in registered transactions from our January 2015 Shelf. Sales of our common stock through Noble were made by any method that was deemed an “at the market offering” as defined in Rule 415 of the Securities Act. We paid Noble 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.

Common Stock Purchase Agreement – On October 30, 2015, we entered into a Common Stock Purchase Agreement with Eastern Capital Limited, pursuant to which we issued and sold 2,645,503 shares of our common stock, at a purchase price of $7.56 per share for aggregate gross proceeds of $20,000,000 before deducting issuance costs of $1,000. These shares of common stock were sold under our January 2015 Shelf pursuant to a prospectus supplement filed with the SEC on October 30, 2015.

February 2018 Public Offering – On February 14, 2018, we entered into an underwriting agreement (the “Underwriting Agreement”) with Wells Fargo Securities, LLC, as representative for the underwriters identified therein (collectively, the “Underwriters”), relating to the issuance and sale in an underwritten public offering of 9,000,000 shares of our common stock, par value $0.001 per share, at a public offering price of $2.25 per share (the “Offering”). In addition, pursuant to the Underwriting Agreement, we also granted the Underwriters a 30-day option to purchase up to an additional 1,350,000 shares of our common stock under this Offering at the public offering price of $2.25 per share less the underwriting discounts and commissions to cover over-allotments, if any (the “Over-allotment Option”).

On February 20, 2018, we completed the Offering pursuant to which we sold 10,294,445 shares of our common stock, including 1,294,445 shares sold pursuant to the Underwriter’s Over-allotment Option at the public offering price of $2.25 per share. The aggregate gross proceeds we received from the Offering, including the shares sold pursuant to the Over-allotment Option, was $23,163,000, before deducting underwriting discounts and commissions and other offering related expenses of $1,669,000.

 

 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

The OfferingOn September 23, 2019, the Rights Agreement was made pursuantfurther amended to accelerate the scheduled expiration date of the Rights Agreement from the close of business on March 16, 2021 to the close of business on September 23, 2019, and effectively terminate the Rights Agreement and the Rights granted thereunder as of such expiration date. Our Board of Directors elected to terminate the Rights Agreement and the Rights granted thereunder based on their recent evaluation of the effectiveness of, and the need for, a prospectus supplementstockholder rights plan and consideration of current corporate governance practices and proxy advisory guidelines. In connection with the termination of the Rights Agreement, we filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities Exchange Act on Form 25 with the SEC on February 14, 2018September 23, 2019, in order to our shelfwithdraw the Rights from registration statement on Form S-3 (File No. 333-222548), which was declared effective by the SEC on January 25, 2018 (“January 2018 Shelf”). As of April 30, 2018, aggregate gross proceeds of up to $101,837,000 remained available to us under the January 2018 Shelf.

Sales of Series E Preferred Stock

On June 13, 2014, we entered into an At Market Issuance Sales Agreement (“Series E AMI Sales Agreement”) with MLV, pursuant to which we may sell shares of our Series E Preferred Stock through MLV, as agent, for aggregate gross proceeds of up to $30,000,000, in registered transactions from our shelf registration statement on Form S-3 (File No. 333-193113), which was declared effective by the SEC on January 16, 2014 (“January 2014 Shelf”). Sales of our Series E Preferred Stock through MLV were be made by any method that was deemed an “at the market offering” as defined in Rule 415Section 12(b) of the Securities Act. We paid MLV a commissionExchange Act of up to 5% of1934, as amended, which deregistration was effective 90 days after the gross proceeds from the sale of our Series E Preferred Stock pursuant to the Series E AMI Sales Agreement. During the fiscal years ended April 30, 2017 and 2016, we sold 70,320 and 2,676 shares of our Series E Preferred Stock, respectively, at market prices under the Series E AMI Sales Agreement, for aggregate gross proceeds of $1,634,000 and $60,000, respectively. During January 2017, the underlying January 2014 Shelf expired, and therefore, we do not plan to issue and sell any additional shares of our Series E Preferred Stock under the Series E AMI Sales Agreement.filing date.

 

Series E Preferred Stock Rights and Preferences

 

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.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. In addition, theThe Series E Preferred Stock is classified as permanent equity in accordance with FASB Accounting Standards CodificationASC Topic 480,Distinguishing Liabilities from Equity. Certain termsAs of theApril 30, 2020 and 2019, there were 1,647,760 shares of our Series E Preferred Stock include:issued and outstanding.

 

(i) The holders are entitled to receive a 10.50% per annum cumulative quarterly dividend, payable in cash, on or about the 1st dayEach share of each of January, April, July,issued and October;

(ii) The dividend may increase to a penalty rate of 12.50% if: (a) we fail to pay dividends for any four consecutive or nonconsecutive quarterly dividend periods, or (b) once theoutstanding Series E Preferred Stock becomes initially eligible for listing on a national securities exchange, we fail, for 180 or more consecutive days, to maintain such listing;

(iii) Following a change of controlis convertible at any time, at the option of the Company (as defined inholder, into a number of shares of our common stock determined by dividing the Certificateliquidation preference of Designations) by a person or entity, we (or the acquiring entity) may, at our option, redeem the$25.00 per share Series E Preferred Stock inby the then-current conversion price per share, currently $21.00 per share, rounded down to the nearest whole but not in part, within 120 days after the date on which the changenumber. As of control has occurred for cash, at the redemption price;

(iv) OnApril 30, 2020, if all of our issued and after February 11, 2017, we may redeem theoutstanding shares of Series E Preferred Stock for cashwere converted at the conversion price of $21.00 per share, the holders of our option,Series E Preferred Stock would receive an aggregate of 1,961,619 shares of our common stock. However, because the conversion price of our Series E Preferred Stock is subject to adjustment from time to time in wholeaccordance with the applicable provisions of our certificate of incorporation, we have reserved the maximum number of shares of our common stock that could be issued upon the conversion of our Series E Preferred Stock 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 would be converted into 4.14 shares of our common stock, or 6,826,435 shares in part, at the redemption price;aggregate.

 

(v) The redemption price is $25.00 per share, plus any accrued and unpaid dividends (whether or not earned or declared) to, but excluding, the redemption date;

(vi) The liquidation preference is $25.00 per share, plus any accrued and unpaid dividends (whether or not earned or declared);

(vii) The Series E Preferred Stock has no stated maturity date or mandatory redemption and is senior to all of the Company’sour other securities;

F-19

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(viii) There is a general conversion right with respect tosecurities. We may redeem the Series E Preferred Stock with a current conversionfor cash, in whole or in part, by paying the redemption price of $21.00 (as adjusted$25.00 per share, plus any accrued and unpaid dividends to reflect the 1-for-7 reverse stock split of our issued and outstanding common stock, which took effect on July 10, 2017), a special conversion right upon a change of control, and a market trigger conversion at our option in the event of Market Trigger (as defined in the Certificate of Designations); and

(ix) The holdersredemption 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 Dividends

The following table summarizesare entitled to receive cumulative dividends at the Series E Preferred Stockrate of 10.50% per annum based on the liquidation preference of $25.00 per share, or $2.625 per annum per share, and are payable quarterly dividend payments duringin cash, on or about the threefirst day of each January, April, July, and October. For each of the fiscal years ended April 30, 2018:2020, 2019, and 2018, we paid aggregate cash dividends of $4.3 million for issued and outstanding shares of our Series E Preferred Stock.

 

Declaration

Date

 

Record

Date

 

Payment

Date

 

Dividends

Paid

  

Dividend

Per Share

 
Fiscal Year 2016          
6/5/2015 6/19/2015 7/1/2015 $1,034,000  $0.65625 
9/8/2015 9/18/2015 10/1/2015 $1,035,000  $0.65625 
12/7/2015 12/18/2015 1/4/2016 $1,035,000  $0.65625 
3/7/2016 3/18/2016 4/1/2016 $1,035,000  $0.65625 
      $4,139,000  $2.62500 
Fiscal Year 2017            
6/2/2016 6/17/2016 7/1/2016 $1,036,000  $0.65625 
9/6/2016 9/16/2016 10/3/2016 $1,081,000  $0.65625 
12/6/2016 12/16/2016 1/3/2017 $1,081,000  $0.65625 
3/9/2017 3/20/2017 4/3/2017 $1,081,000  $0.65625 
      $4,279,000  $2.62500 
Fiscal Year 2018            
6/6/2017 6/19/2017 7/3/2017 $1,081,000  $0.65625 
9/5/2017 9/18/2017 10/2/2017 $1,081,000  $0.65625 
12/7/2017 12/18/2017 1/2/2018 $1,081,000  $0.65625 
3/7/2018 3/19/2018 4/2/2018 $1,082,000  $0.65625 
      $4,325,000  $2.62500 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Sale of Common Stock

During the fiscal years ended April 30, 2020 and 2019, we had no offerings of our common 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 $23.2 million, before deducting underwriting discounts and commissions and other offering related expenses of $1.7 million.

During the fiscal year ended April 30, 2018, we sold an aggregate of 1,051,259 shares of our common stock pursuant to an At Market Issuance Sales Agreement (“AMI Sales Agreement”) for aggregate gross proceeds of $4.3 million. 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, or $0.1 million. As of April 30, 2018, we had raised the full amount of gross proceeds available to us under the AMI Sales Agreement.

Warrants

As of April 30, 2020 and 2019, we had no warrants issued and outstanding.

 

Shares of Common Stock Authorized and Reserved Forfor Future Issuance

 

We are authorized to issue up to 500,000,000 shares of our common stock. As of April 30, 2018, 55,689,2222020, 56,483,065 shares of our common stock were issued and outstanding. In addition, ourOur common stock outstanding as of April 30, 20182020 excluded the following shares of common stock reserved for future issuance:issuance (in thousands):

 

·5,316,526 shares of common stock reserved for issuance under outstanding option grants and available for issuance under our stock incentive plans;Shares
Stock Incentive Plans·1,271,409 shares of common stock reserved for and available for issuance under our ESPP;6,941
Employee Stock Purchase Plan·39,040 shares of common stock issuable upon exercise of outstanding warrants; and1,149
·6,826,435 shares of common stock issuable upon conversionConversion of our outstanding Series E Preferred Stock(1).6,826
Total common stock reserved for future issuance14,916

_____________

(1)The Series E Preferred Stock is convertible into a number of shares of our common stock determined by dividing the liquidation preference of $25.00 per share by the conversion price, currently $21.00 per share. If all of our outstanding Series E Preferred Stock were converted at the $21.00 per share conversion price, the holders of our Series E Preferred Stock would receive an aggregate of 1,961,619 shares of our common stock. However, we have reserved the maximum number of shares of our common stock that could be issued upon a change of control event assuming our shares of common stock are acquired for consideration of $5.985 per share or less. In this scenario, each outstanding share of our Series E Preferred Stock could be converted into 4.18 shares of our common stock, representing the Share Cap.

Note 6 – Benefit Plans

Stock Incentive Plans

The Avid Bioservices, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”) is a stockholder-approved 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 2018 Plan replaced our 2009, 2010 and 2011 Stock Incentive Plans (the “Prior Plans”). However, any awards outstanding under the Prior Plans as of the 2018 Plan’s 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.

 

 

 

 F-2048 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.EQUITY COMPENSATION PLANS

Stock Incentive Plans

 

WeIn addition, we currently maintain sixthree expired stock incentive plans referred to as the 20112005, 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 2010 Plan, the 2009 Plan, the 2005 Plan, the 2003 Plan,Prior Plans, and the 2002 Plan (collectivelyExpired Plans are collectively referred to as the “Stock Plans”). The 2011, 2010, 2009, 2005 and 2003 Plans were approved by our stockholders while the 2002 Plan was not submitted for stockholder approval. The Stock Plans provide for the granting of stock options, restricted stock awards and other forms of share-based awards to purchase shares of our common stock at exercise prices not less than the fair market value of our common stock at the date of grant.

As of April 30, 2018,2020, we had an aggregate of 5,316,5266,941,049 shares of our common stock reserved for issuance under the Stock Plans, of which 3,597,7383,203,034 shares were subject to outstanding stock options and 1,718,788restricted stock units and 3,738,015 shares were available for future grants of share-basedstock-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. The optionsStock 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 twoperiod of one to four year period and expire tenthree years from the date of grant, if unexercised. However, certaingrant. Stock options generally have a contractual term of seven years; however, the maximum contractual term of any stock option awards provide for accelerated vesting if there is a change in control (as defined ingranted under the Stock Plans).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.

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, 2018, 20172020, 2019 and 2016,2018, were as follows:

 

 Fiscal Year Ended April 30,  Fiscal Year Ended April 30, 
 2018  2017  2016  2020  2019  2018 
Risk-free interest rate  2.21%   1.32%   1.66%   1.86%   2.81%   2.21% 
Expected life (in years)  6.19   6.12   5.96   5.06   5.57   6.19 
Expected volatility  110.43%   111.30%   104.74%   77.45%   76.56%   110.43% 
Expected dividend yield                  

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The following summarizes our stock option transaction activity for the fiscal year ended April 30, 2018:2020:

 

Stock Options Shares  

Weighted

Average

Exercisable

Price

  

Weighted

Average

Remaining

Contractual

Term (years)

  

Aggregate

Intrinsic

Value(1)

 
Outstanding, May 1, 2017  4,081,548  $8.77         
Granted  686,097  $4.16         
Exercised  (222,255) $3.38         
Canceled or expired  (947,652) $8.90         
Outstanding, April 30, 2018  3,597,738  $8.74   4.12  $335,000 
                 
Exercisable and expected to vest  3,597,738  $8.74   4.11  $335,000 
Exercisable, April 30, 2018  2,891,282  $9.86   2.87  $219,000 
  

Stock Options

(in thousands)

  

Grant Date

Weighted

Average Exercise

Price

  

Weighted

Average

Remaining

Contractual

Life (in years)

  

Aggregate

Intrinsic

Value(1)

(in thousands)

 
Outstanding at May 1, 2019  3,274  $7.51         
Granted  887  $5.91         
Exercised  (251) $3.73         
Canceled or expired  (1,014) $10.79         
Outstanding at April 30, 2020  2,896  $6.20   5.76  $2,457 
Vested and expected to vest  2,896  $6.20   5.76  $2,457 
Exercisable at April 30, 2020  1,530  $6.77   4.89  $1,566 

______________

(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, 2018,2020, which was $3.67$6.10 per share.

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The weighted-average grant date fair value of options granted to employees during the fiscal years ended April 30, 2020, 2019 and 2018 2017was $3.74, $3.30 and 2016 was $3.50 $2.86 and $7.09 per share, respectively.

 

The aggregate intrinsic value of stock options exercised during the fiscal years ended April 30, 2020, 2019 and 2018 2017was $0.7 million, $0.5 million and 2016 was $173,000, $11,000 and $93,000,$0.2 million, respectively. Cash received from stock options exercised during fiscal years ended April 30, 2020, 2019 and 2018 2017totaled $0.9 million, $1.3 million and 2016, totaled $752,000, $31,000 and $138,000,$0.8 million, 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, 2018,2020, the total estimated unrecognized compensation cost related to non-vested employee stock options was $2,232,000.$4.1 million. This cost is expected to be recognized over a weighted average vesting period of 2.632.66 years based on current assumptions.

 

EmployeeRestricted Stock Purchase Plan

 

We have reserved a total of 2,142,857 sharesA 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.

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The following summarizes our RSUs transaction activity for the fiscal year ended April 30, 2020:

   

Shares

(in thousands)

  

Weighted Average

Grant Date

Fair Value

 
Outstanding at May 1, 2019   200  $4.32 
Granted   194   5.91 
Vested   (49)  4.30 
Forfeited   (38)  5.07 
Outstanding at April 30, 2020   307  $5.23 

The weighted-average grant date fair value of RSUs granted during the fiscal years ended April 30, 2020 and 2019 was $5.91 and $4.28 per share, respectively. No RSUs were granted during the fiscal year ended April 30, 2018.

The total fair value of RSUs vested during the fiscal year ended April 30, 2020 was $0.3 million. No RSUs vested during the fiscal years ended April 30, 2019 and 2018.

As of April 30, 2020, the total estimated unrecognized compensation cost related to non-vested RSUs was $1.3 million. This cost is expected to be purchased under ourrecognized over a weighted average vesting period of 2.82 years.

Employee Stock Purchase Plan

The Avid Bioservices, Inc. 2010 Employee Stock Purchase Plan (the “ESPP”), is a stockholder-approved plan under which employees can purchase shares of which 1,271,409 shares remained available to purchase at April 30, 2018, and areour common stock, based on a percentage of their compensation, 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 acertain limits. The purchase price per share is equal to the lesserlower of 85% of the fair market value of our common stock aton the (i) beginningfirst trading day of a six-monththe offering period or (ii) endon the last trading day of the six-month offering period. TheOn October 9, 2019, our stockholders approved an amendment to the ESPP providesto extend its term for twoan additional five years to October 21, 2025 and to change the commencement dates of the six-month offering periods from May 1 and November 1 of each fiscal year; the first offering period begins on the first trading day on or afteryear to January 1 and July 1 of each May 1; the second offering period begins on the first trading day on or after each November 1. year.

During the fiscal years ended April 30, 2020, 2019 and 2018, 2017a total of 47,526, 75,148 and 2016, 88,327 270,075 and 147,769 shares of our common stock were purchased, respectively, under the ESPP at a weighted average purchase price per share of $3.94, $3.44 and $3.59, $1.95 and $3.65, respectively. As of April 30, 2020, we had 1,148,735 shares of our common stock reserved for issuance under the ESPP.

 

The fair value of the shares purchased under the ESPP werewas determined using a Black-Scholes option pricingvaluation 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).

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The weighted average grant date fair value of purchase rights under the ESPP during fiscal years ended April 30, 2020, 2019 and 2018 2017was $1.81, $1.49 and 2016 was $1.65, $1.07 and $2.40, respectively, based on the following weighted-average Black-Scholes option valuation model inputs:

 

 Fiscal Year Ended April 30,  Fiscal Year Ended April 30, 
 2018  2017  2016  2020  2019  2018 
Risk-free interest rate  1.10%   0.46%   0.18%   2.08%   2.26%   1.10% 
Expected life (in years)  0.50   0.50   0.50   0.50   0.50   0.50 
Expected volatility  75.18%   105.27%   46.14%   56.71%   71.10%   75.18% 
Expected dividend yield                  

 

Share-based Compensation Expense401(k) Plan

 

Total share-basedWe maintain a 401(k) Plan pursuant to section 401(k) of the Internal Revenue Code that allows participating employees to defer a portion 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 share-based awards issued under our equity compensation plansmatching contributions to the 401(k) Plan was $0.5 million, $0.4 million and $0.6 million for the fiscal years ended April 30, 2020, 2019 and 2018, 2017respectively.

Stock-based Compensation Expense

Stock-based compensation expense for the fiscal years ended April 30, 2020, 2019 and 20162018 was comprised of the following:following (in thousands):

 

  2018  2017  2016 
Cost of contract manufacturing $378,000  $108,000  $41,000 
Selling, general and administrative  820,000   1,553,000   2,599,000 
Discontinued operations
  340,000   1,702,000   2,258,000 
Total $1,538,000  $3,363,000  $4,898,000 
             
Share-based compensation from:            
Stock options $1,402,000  $3,094,000  $4,720,000 
ESPP  136,000   269,000   178,000 
  $1,538,000  $3,363,000  $4,898,000 
  Fiscal Year Ended April 30, 
  2020  2019  2018 
Cost of revenues $922  $474  $378 
Selling, general and administrative expense  1,577   1,121   820 
Discontinued operations
        340 
   Total $2,499  $1,595  $1,538 

 

Due to our net loss position, no tax benefits have been recognized in the consolidated statementsConsolidated Statements of cash flows.Cash Flows.

 

Note 7 – Income Taxes

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6.WARRANTS

No warrants were issued or exercised during fiscal years ended April 30, 2018, 2017 and 2016. As of April 30, 2018, warrants to purchase 39,040 shares of our common stock at an exercise price of $17.29 were outstanding and are exercisable through August 30, 2018.

7.INCOME TAXES

 

We are primarily subject to U.S. federal and California state jurisdictions. To our knowledge, allAll tax years with tax attributes carrying forward remain open to examination by U.S. federal and state authorities.

 

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In addition, in accordance with authoritative guidance,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, 20182020 and 2017.2019. 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 statementsConsolidated Statements of operationsOperations and comprehensive loss.Comprehensive Loss. We did not recognize interest or penalties related to income taxes for fiscal years ended April 30, 2018, 2017,2020, 2019, and 2016,2018, and we did not accrue for interest or penalties as of April 30, 20182020 and 2017.2019.

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, 2018,2020, we had net deferred tax assets of $123,555,000.$118.1 million. 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, 20182019 and we subsequently reviewed ownership activity through April 30, 2020, which it was determined that no significant change in ownership had occurred. OwnershipHowever, ownership changes occurring subsequent to April 30, 20182020 may impact the utilization of net operating loss carry forwards and other tax attributes.

 

At April 30, 2018,2020, we had federal net operating loss carry forwards of approximately $433,705,000.$427 million. The federal net operating loss carry forwards generated prior to January 1, 2018 expire in fiscal years 20192021 through 2037.2038. The federal net operating loss generated after January 1, 2018 of $19.8 million can be carried forward indefinitely. Net operating losses generated after 2017 through 2020 may offset future taxable income without limitation. Utilization of net operating losses generated subsequent to 2020 are limited to 80% of future taxable income. We also have California state net operating loss carry forwards of approximately $273,091,000$277 million at April 30, 2018,2020, which begin to expire in fiscal year 2029.

On May 1, 2018, we adopted ASU 2016-09 (Note 2). Upon adoption, we have excess tax benefits for which a benefit could not previously be recognized of approximately $2.4 million. 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.

 

The provision for income taxes on our loss from continuing operations consistsfor the fiscal years ended April 30, 2020, 2019 and 2018 is comprised of the following for the three years ended April 30,(in thousands):

 

 2018  2017  2016  2020  2019  2018 
Federal income taxes at statutory rate $(6,112,000) $475,000  $1,223,000  $(2,197) $(1,120) $(6,112)
State income taxes  155,000   309,000   413,000      (48)  155 
Expiration and adjustments of deferred tax assets  1,840,000   1,693,000   1,580,000 
Expiration of deferred tax assets  2,588   2,507   1,840 
Change in valuation allowance  (57,599,000)  (2,616,000)  (3,511,000)  (1,664)  (2,480)  (57,599)
Share-based compensation  1,584,000       
Stock-based compensation  1,138   1,309   1,584 
Other, net  6,000   139,000   295,000   135   (452)  6 
Tax Cuts and Jobs Act  60,126,000               60,126 
Income tax (expense) benefit $  $  $ 
Income tax benefit $  $(284) $ 

 

 

 

 F-2353 

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

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, 20182020 and 20172019 are as follows:

 

 2018  2017  2020  2019 
Share-based compensation $4,828,000  $9,583,000 
Net operating losses $114,105  $113,612 
Stock-based compensation  2,573   3,416 
Deferred revenue  2,852,000   12,157,000   810   1,610 
Deferred rent  568,000   738,000      555 
Lease liabilities  6,324    
Other  879,000   2,984,000   1,197   1,256 
Net operating losses  115,236,000   154,030,000 
        
Total deferred tax assets  124,363,000   179,492,000   125,009   120,449 
Less valuation allowance  (123,555,000)  (178,400,000)  (118,137)  (119,516)
        
Total deferred tax assets, net of valuation allowance $808,000  $1,092,000   6,872   933 
                
Deferred tax liabilities:                
Fixed assets  (808,000)  (1,092,000)  (1,216)  (933)
Right-of-use assets  (5,656)   
Total deferred tax liabilities  (808,000)  (1,092,000)  (6,872)  (933)
Net deferred tax assets $  $  $  $ 

 

In December 2017,On March 27, 2020, the Tax CutsCARES Act was signed into law. The CARES Act provides numerous tax provisions and Jobs Act (the “Tax Act”) was enacted. The Tax Act includes a numberother stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to existing U.S.the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, the creation of certain refundable employee retention credits, and technical corrections from prior tax laws thatlegislation for tax depreciation of certain qualified improvement property. Due to our loss position, many of the provisions of the CARES Act do not impact us most notablyand the CARES Act does not have a reduction of the U.S. corporatesignificant impact on our income tax rate from 35 percent to 21 percent for tax years. The rate reduction is effective on January 1, 2018. However, as our fiscal year end is April 30, 2018, the statutory corporate tax rateprovision for the fiscal year ended April 30, 2018 will2020.

Note 8 – Net Loss per Common Share

Basic net loss per common share is computed by dividing our net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. 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 proratedissued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period.

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Net loss attributable to 29.73% withcommon stockholders represents our net loss plus Series E Preferred Stock accumulated dividends. Series E Preferred Stock accumulated dividends include dividends declared for the statutory rateperiod (regardless of whether or not the dividends have been paid) and dividends accumulated for fiscal year 2019 and beyond at 21%the period (regardless of whether or not the dividends have been declared).

 

We measure deferred tax assets and liabilities using enacted tax rates that will apply in the years in which the temporary differences areThe potential dilutive effect of stock options, unvested RSUs, shares of common stock expected to be recoveredissued 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 is calculated using the if-converted method assuming the conversion of Series E Preferred Stock as of the earliest period reported or paid. Accordingly,at the date of issuance, if later, but are excluded if their effect is anti-dilutive. Since the impact of potentially dilutive securities are anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per common share amounts for the fiscal years ended April 30, 2020, 2019 and 2018.

The calculation of weighted average diluted shares outstanding excludes the dilutive effect of the following weighted average securities, as their effect is anti-dilutive during periods of net loss (in thousands):

  2020  2019  2018 
Stock options  145   139   54 
RSUs  76   34    
ESPP  7   11   2 
Total  228   184   56 

The calculation of weighted average diluted shares outstanding also excludes the following weighted average securities, as their exercise prices or conversion price were greater than the average market price of our deferred tax assetscommon stock during the respective periods, resulting in an anti-dilutive effect (in thousands):

  2020  2019  2018 
Stock options  2,650   2,712   3,637 
RSUs  7   34    
Warrants     13   39 
Series E Preferred Stock  1,979   1,979   1,979 
Total  4,636   4,738   5,655 

Note 9 – 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 were remeasuredwhen 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 reductionimpact 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 U.S. corporate income tax rate from 35 percent to 21 percent, resulting inaggregate, would have a provisional $60.1 million increase in tax expense for the fiscal year ended April 30, 2018 and a corresponding provisional $60.1 million decrease in net deferred tax assets asmaterial adverse effect on our consolidated financial condition or results of April 30, 2018. The impact was fully offset by a valuation allowance.operations.

 

On December 22, 2017,

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In March 2020, the SEC staff issued Staff Accounting Bulletin No. 118World Health Organization declared the global novel coronavirus disease (“COVID-19”) outbreak a pandemic and recommended containment and mitigation measures worldwide. We are monitoring this closely, and although the COVID-19 pandemic has not had a significant impact on our operations to addressdate, the applicationultimate duration and severity of U.S. GAAP in situations when a registrant doesthe outbreak and its impact on the economic environment and our business is highly uncertain. Accordingly, we cannot provide any assurance that the COVID-19 pandemic will not have a material adverse impact on our operations or future results. The extent to which the necessary information available, prepared, or analyzed (including computations) in reasonable detailCOVID-19 pandemic impacts our future business, strategic initiatives, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to complete the accounting for certain income taxduration, spread, severity and resurgence of the COVID-19 pandemic, the effects of the Tax Act. As discussed above, forCOVID-19 pandemic on our customers, vendors, and employees and the fiscal year ended April 30, 2018, we recognized provisional tax impacts relatedremedial actions and stimulus measures adopted by local and federal governments, and to the revaluation of deferred tax assetswhat extent normal economic 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 is expected to be complete when our 2017 U.S. corporate income tax return is filed in calendar year 2018.operating conditions can resume.

 

8.RESTRUCTURING

Note 10 – Restructuring Charges

 

OnIn August 9, 2017, our Board of Directors approved, and our managementwe 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 $1,588,000$1.6 million in restructuring costs consisting of one-time termination benefits, including severance, and other employee-related costs, of which $330,000 related to our$0.3 million is from discontinued researchoperations and development segment and $1,258,000 related to our contract manufacturing services segment.$1.3 million is from continuing operations. The restructuring costs associated with ourfrom discontinued research and development segmentoperations are included in loss from discontinued operations, net of tax, in the accompanying consolidated financial statementsConsolidated Financial Statements for the fiscal year ended April 30, 2018 (Note 9)11). The restructuring costs associated with our contract manufacturing services segmentfrom continuing operations are included in operating expenses in the accompanying consolidated financial statementsConsolidated Financial Statements for the fiscal year ended April 30, 2018. All restructuring costs were paid as of thein full during fiscal quarter ended January 31,year 2018.

 

Note 11 – Sale of Research and Development Assets

 

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9.SALE OF RESEARCH AND DEVELOPMENT ASSETS

Asset Assignment and Purchase Agreement

OnIn February 12, 2018, we entered into an Asset Assignment and Purchase Agreement (the “Purchase“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 PS-targetingphosphatidylserine (“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 are entitled to receivereceived an aggregate of $8$8.0 million from Oncologie, payable in three installments over a period of approximately six and one-half months following the date of the Purchase Agreement, of which $3$3.0 million was received in Marchfiscal year 2018 (first installment) and $3$5.0 million was received in June 2018 (second installment).fiscal year 2019. We are also eligible to receive up to an additional $95$95.0 million 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, 2018,2020, no development, regulatory andor commercialization milestones as defined in the Purchase Agreement have been achieved by Oncologie.Oncologie under the February 2018 Purchase Agreement. 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). assets.

In addition, during MaySeptember 2018, we entered into a separate services agreementAsset Assignment and Purchase Agreement (the “September 2018 Purchase Agreement”) with Oncologie, pursuant to provide contractwhich we sold to Oncologie our r84 technology, which included the assignment of certain licenses, patents and other assets useful and/or necessary for the potential commercialization of the r84 technology.

Pursuant to the September 2018 Purchase Agreement, we received $1.0 million from Oncologie, which amount was paid in fiscal year 2019. We are also eligible to receive up to an additional $21.0 million 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, 2020, no development, regulatory or commercialization milestones have been achieved by Oncologie under the September 2018 Purchase Agreement. Oncologie is responsible for all future research, development and manufacturing services, at our commercial rates, in supportcommercialization of r84, including all related intellectual property costs and all other future liabilities and obligations arising out of the research and development assets sold underownership of the Purchase Agreement. To date no services have been committed to under the separate services agreement.transferred assets.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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)and r84 technologies, 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 are reportedhave been excluded from continuing operations and presented as a loss from discontinued operations in the accompanying consolidated statements of operations and comprehensive lossConsolidated Financial Statements for all periods presented (Note 1). Accordingly,presented. During the fiscal years ended April 30, 2019 and 2018, we recorded a gain of $1.0 million and $8.0 million, 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 financial statementsConsolidated Statements of Operations and Comprehensive Loss for the fiscal years ended April 30, 2019 and 2018, 2017 and 2016 reflect the operations and related assets and liabilities of our research and development segment as a discontinued operation. During the fiscal quarter ended April 30, 2018, we recorded a gain of $8 million upon the completion of the Purchase Agreement, which amount is included in loss from discontinued operations in the accompanying consolidated statements of operations and comprehensive loss for the fiscal year ended April 30, 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, thethese results of operations from the 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.

There were no operating results from discontinued operations for the fiscal year ended April 30, 2020.

 

The following table summarizes the results of discontinued operations for the fiscal years ended April 30, 2019 and 2018 2017 and 2016:(in thousands):

 

 Fiscal Year Ended April 30, 
 2018  2017  2016  2019  2018 
License revenue $25,000  $  $329,000  $  $25 
            
Operating expenses:                    
Research and development  6,782,000   27,992,000   58,660,000      6,782 
Selling, general and administrative  2,163,000   1,560,000   1,516,000      2,163 
Restructuring charges  330,000            330 
            
Total operating expenses  9,275,000   29,552,000   60,176,000      9,275 
                    
Other income        598,000   125    
Gain on sale of research and development assets  8,000,000       
Loss from discontinued operations $(1,250,000) $(29,552,000) $(59,249,000)
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)

 

 

 

 F-2557 

 

avid bioservices, inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

Note 12 – Selected Quarterly Financial Data (Unaudited)

 

The following table summarizes the assets and liabilitiesis a summary of discontinued operations as of April 30, 2018 and 2017:

  2018  2017 
Assets:        
Other receivables $5,000,000  $ 
Prepaid expenses     652,000 
Property and equipment, net     470,000 
Other assets     304,000 
Total assets of discontinued operations $5,000,000  $1,426,000 
         
Liabilities:        
Accounts payable $32,000  $2,779,000 
Accrued clinical trial and related fees  3,613,000   4,558,000 
Accrued payroll and related costs  614,000   1,029,000 
Other liabilities  291,000   357,000 
Total liabilities of discontinued operations $4,550,000  $8,723,000 

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 sheets at April 30, 2018 and 2017 as Oncologie did not purchase or assume any of the reported assets or liabilities under the Purchase Agreement.

10.BENEFIT PLAN

During fiscal year 1997, we adopted a 401(k) benefit plan (the “Plan”) for all full-time employees who are at least the age of 21 and have three or more months of continuous service. The Plan provides for employee contributions of up to 100% of their compensation on a tax deferred basis up to the maximum amount permitted by the Internal Revenue Code. We are not required to make matching contributions under the Plan, and prior to January 2010, we did not make any matching contributions from the Plan’s inception. Presently, we have voluntarily agreed to match 50% of employee contributions of up to 6% of their annual eligible compensation, subject to certain IRS limitations.

Under the Plan, each participating employee is fully vested in his or her contributions to the Plan and our contributions to the Plan will fully vest after six years of service. The expense related to our matching contributions to the Plan was $564,000, $845,000, and $543,000 for the fiscal years ended April 30, 2018, 2017, and 2016, respectively.

11.SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Selectedunaudited quarterly financial informationresults for each of the two most recent fiscal years is as follows:(in thousands, except per share amounts):

 

    
  Quarter Ended 
  July 31,
2017
  October 31,
2017
  January 31,
2018
  April 30,
2018
 
Contract manufacturing revenue $27,077,000  $12,782,000  $6,819,000  $6,943,000 
Gross profit (loss) (a) $6,629,000  $(3,460,000) $(4,132,000) $(1,961,000)
Income (loss) from continuing operations $2,800,000  $(8,301,000) $(8,928,000) $(6,134,000)
Income (loss) from discontinued operations (b)(c) $(4,005,000) $(4,323,000) $(2,076,000) $9,154,000 
Net income (loss) $(1,205,000) $(12,624,000) $(11,004,000) $3,020,000 
Series E preferred stock accumulated dividends (d) $(1,442,000) $(1,442,000) $(1,442,000) $(1,442,000)
Net income (loss) attributable to common stockholders $(2,647,000) $(14,066,000) $(12,446,000) $1,578,000 
Basic and diluted weighted average common shares outstanding  44,773,727   45,097,474   45,225,804   53,360,424 
Basic and diluted net income (loss) per common share attributable to common stockholders (e)                
Continuing operations $0.03  $(0.21) $(0.23) $(0.14)
Discontinued operations $(0.09) $(0.10) $(0.05) $0.17 
Net income (loss) per common share attributable to common stockholders $(0.06) $(0.31) $(0.28) $0.03 
  Fiscal Year Ended April 30, 2020 
   

First

Quarter

   

Second

Quarter

   

Third

Quarter

   

Fourth

Quarter

 
Revenues(a) $15,254  $18,313  $13,585  $12,550 
Gross profit (loss) $1,086  $3,360  $785  $(1,299)
Loss from continuing operations, net of tax(b) $(3,164) $(430) $(2,104) $(4,768)
Net loss $(3,164) $(430) $(2,104) $(4,768)
Net loss attributable to common stockholders $(4,606) $(1,872) $(3,546) $(6,210)
Basic and diluted net loss per common share attributable to common stockholders(c) $(0.08) $(0.03) $(0.06) $(0.11)

 

 

   Fiscal Year Ended April 30, 2019 
   

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, net of tax $(1,961) $(2,190) $(1,139) $234 
Income from discontinued operations, net of tax(d)(e) $  $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(c)                
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)

F-26

avid bioservices, inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

  Quarter Ended 
  July 31,
2016
  October 31,
2016
  January 31,
2017
  April 30,
2017
 
Contract manufacturing revenue $5,609,000  $23,370,000  $10,747,000  $17,904,000 
Gross profit $2,547,000  $7,929,000  $2,773,000  $6,122,000 
Income (loss) from continuing operations $(2,018,000) $3,303,000  $(1,569,000) $1,677,000 
Loss from discontinued operations (b) $(9,039,000) $(7,359,000) $(6,205,000) $(6,949,000)
Net loss $(11,057,000) $(4,056,000) $(7,774,000) $(5,272,000)
Series E preferred stock accumulated dividends (d) $(1,380,000) $(1,442,000) $(1,442,000) $(1,442,000)
Net loss attributable to common stockholders $(12,437,000) $(5,498,000) $(9,216,000) $(6,714,000)
Basic and diluted weighted average common shares outstanding  34,227,870   34,973,681   37,258,794   42,141,720 
Basic and diluted net income (loss) per common share attributable to common stockholders (e)                
Continuing operations $(0.10) $0.05  $(0.08) $0.01 
Discontinued operations $(0.26) $(0.21) $(0.17) $(0.17)
Net income (loss) per common share attributable to common stockholders $(0.36) $(0.16) $(0.25) $(0.16)

___________________________________

(a)Gross profit (loss)Revenues for the first, second, third, and fourth quartersquarter of fiscal year 2018ended April 30, 2020, includes idle capacity costsa $1.5 million reduction due to changes in estimates for variable consideration as compared to the third quarter of $900,000, $4,938,000, $5,344,000 and $2,784,000, respectively, which amounts were expensed directly to cost of contract manufacturing. No idle capacity costs were incurred during the same priorfiscal year periods.ended April 30, 2020.
(b)As of January 31, 2018, our research and development segment met all the conditions required in order to be classified as a discontinued operation (Note 2). Accordingly, the operating results of our research and development segment are reported as income (loss)Loss from discontinued operations for all periods presented.
(c)Income from discontinuedcontinuing operations for the second quarter of fiscal year ended April 30, 20182020 includes a gainloss on salelease termination of research and development assets of $8,000,000$0.4 million (Note 9).4)
(d)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).
(e)(c)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 (loss) income (loss) per common share amount for the fiscal year.
(d)For the fiscal year ended April 30, 2019, the operating results of our former research and development segment are reported as income from discontinued operations, net of tax (Note 1).There were no operating results from discontinued operations for the fiscal year ended April 30, 2020.
(e)Income from discontinued operations, net of tax, for the second quarter of fiscal year ended April 30, 2019 includes a gain on sale of research and development assets before tax of $1.0 million (Note 11).

 

12.SUBSEQUENT EVENTS58

avid bioservices, inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13 – Subsequent Events

Repayment of PPP Loan

On May 12, 2020, we paid off in full the principal and interest on the PPP Loan, resulting in the termination of the Note (Note 3).

Series E Preferred Stock Dividend

 

On June 6, 2018,3, 2020, 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, 20182020 through June 30, 2018.2020.  The cash dividend of $1,081,000 was paid$1.1 million is payable on July 2, 20181, 2020 to holders of the Series E Preferred Stock of record on June 18, 2018.15, 2020.

 

 F-2759

Item 9.Changes In And Disagreements With Accountants On Accounting And Financial Disclosures

None.

Item 9A.Controls And Procedures

Evaluation of Disclosure Controls and Procedures

The term “disclosure controls and procedures” defined in Rule 13a-15(e) under the Exchange Act refers to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the required time periods. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Under the supervision and with the participation of our management, including our interim chief executive officer and chief financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of April 30, 2020. Based on this evaluation, our interim president and chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of April 30, 2020 to ensure the timely disclosure of required information in our SEC filings.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting. The Company’s internal control over financial reporting is a process designed, as defined in Rule 13a-15(f) under the Exchange Act, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles.

The Company’s internal control over financial reporting is supported by written policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In connection with the preparation of the Company’s annual consolidated financial statements, management of the Company has undertaken an assessment of the effectiveness of the Company’s internal control over financial reporting based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included an evaluation of the design of the Company’s internal control over financial reporting and testing of the operational effectiveness of the Company’s internal control over financial reporting.

Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of April 30, 2020.

Our internal control over financial reporting as of April 30, 2020 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report included herein.

Changes in Internal Control over Financial Reporting

Management has determined that, as of April 30, 2020, there were no significant changes in our internal control over financial reporting during the fourth quarter of the fiscal year ended April 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

60

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Avid Bioservices, Inc.

Opinion on Internal Control over Financial Reporting

We have audited Avid Bioservices, Inc.’s internal control over financial reporting as of April 30, 2020, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Avid Bioservices, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of April 30, 2020, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of April 30, 2020 and 2019, the related consolidated statements of operations and comprehensive loss, stockholders’ equity and cash flows for each of the three years in the period ended April 30, 2020, and the related notes and our report dated June 30, 2020 expressed an unqualified opinion thereon.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Ernst & Young LLP

Irvine, California

June 30, 2020

Item 9B.Other Information

None.

61

PART III

Item 10.Directors, Executive Officers And Corporate Governance

The information required by this Item regarding our directors, executive officers and committees of our board of directors is incorporated by reference to the information set forth under the captions, “Election of Directors,” “Executive Compensation” and “Corporate Governance” in our 2020 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2020 (the “2020 Definitive Proxy Statement”).

Information required by this Item regarding Section 16(a) reporting compliance is incorporated by reference to the information set forth under the caption, “Delinquent Section 16(a) Reports” in our 2020 Definitive Proxy Statement.

Information required by this Item regarding our code of ethics is incorporated by reference to the information set forth under the caption, “Corporate Governance” in our 2020 Definitive Proxy Statement.

Item 11.Executive Compensation

The information required by this Item is incorporated by reference to the information set forth under the captions, “Director Compensation,” “Compensation Discussion and Analysis” and “Executive Compensation” in our 2020 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2020.

Item 12.Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters

Other than as set forth below, the information required by this Item is incorporated by reference to the information set forth under the caption, “Security Ownership of Certain Beneficial Owners, Directors and Management” in our 2020 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2020.

Equity Compensation Plan Information

The following table summarizes our compensation plans under which our equity securities are authorized for issuance as of April 30, 2020:

 

 

 

 

 

 

Plan Category

 

 

(a)

Number of Securities to be Issued Upon the Exercise of Outstanding Options, Warrants and Rights

  

(b)

Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights ($/share)

  

(c)

Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a))

 
Equity compensation plans approved by stockholders(1)  3,193,204   6.17   3,738,015 
Equity compensation plans not approved by stockholders(2)  9,830   15.75    
Employee Stock Purchase Plan approved by stockholders        1,148,735 
Total  3,203,034   6.20(3)   4,886,750 

 ______________________

(1)Represents stock options and restricted stock units under our stockholder approved equity compensation plans referred to as the 2018 Omnibus Incentive Plan, the 2011 Stock Incentive Plan, the 2010 Stock Incentive Plan, the 2009 Stock Incentive Plan, the 2005 Stock Incentive Plan and the 2003 Stock Incentive Plan.
(2)Represents stock options under our 2002 Stock Incentive Plan (the “2002 Plan”), which was not submitted for stockholder approval. The 2002 Plan, which expired in June 2012, was a broad-based non-qualified stock option plan for the issuance of up to 85,714 stock options. The 2002 Plan provided for the granting of options to purchase shares of our common stock at prices not less than the fair market value of our common stock at the date of grant and generally expired ten years after the date of grant. No additional grants of stock options can be granted under the 2002 Plan, however, the terms of the 2002 Plan remain in effect with respect to the outstanding options granted under the 2002 Plan until they are exercised, canceled or expired
(3)Represents the weighted-average exercise price of outstanding stock options as there is no exercise price for restricted stock units.

62

Item 13.Certain Relationships And Related Transactions, And Director Independence

The information required by this Item is incorporated by reference to the information set forth under the captions, “Certain Relationships and Related Transactions,” “Director Independence” and “Compensation Committee Interlocks and Insider Participation” in our 2020 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2020.

Item 14.Principal Accounting Fees and Services

The information required by this Item is incorporated by reference to the information set forth under the caption, “Independent Registered Public Accounting Firm Fees” in our 2020 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2020.

63

PART IV

Item 15.Exhibits And Financial Statement Schedules

(a)Documents filed as part of this report on Form 10-K:

(1)Consolidated Financial Statements

Index to Consolidated Financial StatementsPage
Report of Independent Registered Public Accounting Firm31
Consolidated Balance Sheets as of April 30, 2020 and 201932
Consolidated Statements of Operations and Comprehensive Loss for each of the three years in the period ended
   April 30, 2020

33
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended April 30, 202034
Consolidated Statements of Cash Flows for each of the three years in the period ended April 30, 202035
Notes to Consolidated Financial Statements36

(2)Financial Statement Schedules

All schedules are omitted as the required information is inapplicable, or the information is presented in the consolidated financial statements or related notes.

(3)Exhibits

The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this report on Form 10-K.

Item 16.FORM 10-K SUMMARY

None.

64

EXHIBIT INDEX

    Incorporated by Reference 

Exhibit

Number

 

 

Description

 

 

Form

 

Date

Filed

 

Exhibit

Number

 

Filed

Herewith

 
3.1 Certificate of Incorporation, as amended through October 4, 2018 10-Q 12/10/2018 3.1   
3.2 Amended and Restated Bylaws 8-K 11/14/2014 3.2   
3.3 Amendment No. 1 to Amended and Restated Bylaws 8-K 3/13/2018 3.2   
4.1 Form of Certificate for Common Stock 10-K 1988 4.1   
4.2* 2002 Non-Qualified Stock Option Plan S-8 6/23/2006 4.17   
4.3* Form of 2002 Non-Qualified Stock Option Agreement S-8 6/23/2006 4.18   
4.4* 2003 Stock Incentive Plan Non-qualified Stock Option Agreement S-8 12/16/2004 10.95   
4.5* 2003 Stock Incentive Plan Incentive Stock Option Agreement S-8 12/16/2004 10.96   
4.6* 2010 Stock Incentive Plan DEF-14A 8/27/2010 A   
4.7* Form of Stock Option Award Agreement under 2010 Stock Incentive Plan S-8 12/9/2010 4.17   
4.8* 2010 Employee Stock Purchase Plan DEF-14A 8/27/2010 B   
4.9* Amendment to the 2010 Employee Stock Purchase Plan DEF-14A 8/26/2016 B   
4.10* 2011 Stock Incentive Plan DEF-14A 8/26/2011 A   
4.11* Form of Stock Option Award Agreement under 2011 Stock Incentive Plan S-8 12/12/2011 4.20   
4.12* First Amendment to 2011 Stock Incentive Plan DEF-14A 8/27/2012 A   
4.13* Second Amendment to 2011 Stock Incentive Plan DEF-14A 8/26/2013 A   
4.14* Third Amendment to 2011 Stock Incentive Plan 10-K 7/14/2015 4.24   
4.15* Form of Amendment to Stock Option Award Agreement Under 2011 Stock Incentive Plan related to Non-Employee Director stock option awards 10-K 7/14/2015 4.27   
4.16* Fourth Amendment to 2011 Stock Incentive Plan DEF-14A 8/28/2015 B   
4.17 Form of Indenture S-3 1/12/2018 4.4   
4.18* Avid Bioservices, Inc. 2018 Omnibus Incentive Plan DEF-14A 8/17/2018 A   
4.19* Form of Stock Option Award Agreement under 2018 Omnibus Incentive Plan S-8 12/10/2018 4.2   
              

65

    Incorporated by Reference 

Exhibit

Number

 

 

Description

 

 

Form

 

Date

Filed

 

Exhibit

Number

 

Filed

Herewith

 
4.20* Form of Restricted Stock Unit Award Agreement under 2018 Omnibus Incentive Plan S-8 12/10/2018 4.3   
4.21 Description of Registrant’s Securities       X 
10.1 Lease and Agreement of Lease between TNCA, LLC, as Landlord, and Avid Bioservices, Inc., as Tenant, dated as of December 24, 1998 10-Q 3/12/1999 10.48   
10.2 First Amendment to Lease andAgreement of Lease between TNCA, LLC, as Landlord, and Avid Bioservices, Inc., as Tenant, dated December 22, 2005 8-K 12/23/2005 99.1  99.2   
10.3* Amended and Restated Employment Agreement by and between Avid Bioservices, Inc. and Mark R. Ziebell, effective December 27, 2012 10-Q 3/12/2013 10.38   
10.4** Asset Assignment and Purchase Agreement by and between Avid Bioservices, Inc. and Oncologie, Inc., dated February 12, 2018 10-K 7/16/2018 10.11   
10.5* Employment Agreement by and between Avid Bioservices, Inc. and Daniel R. Hart, effective June 26, 2019 10-K 6/27/2019 10.7   
10.6* Amendment to 2010 Employee Stock Purchase Plan DEF-14A 8/21/2019 A   
10.7 Promissory Note, dated April 17, 2020, by and between Avid Bioservices, Inc. and City National Bank 8-K 4/23/2020 10.1   
23.1 Consent of Independent Registered Public Accounting Firm       X 
24 Power of Attorney (included on signature page of Annual Report)       X 
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended       X 
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended       X 
32 

Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350

       X 
101.INS XBRL Taxonomy Extension Instance Document       X 
101.SCH XBRL Taxonomy Extension Schema Document       X 
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document       X 
101.DEF XBRL Taxonomy Extension Definition Linkbase Document       X 
101.LAB XBRL Taxonomy Extension Label Linkbase Document       X 
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This Exhibit is a management contract or a compensation plan or arrangement.

Portions omitted pursuant to a request of confidentiality filed separately with the SEC.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

AVID BIOSERVICES, INC.
Date: June 30, 2020By: /s/ /Richard B. Hancock

Richard B. Hancock
Interim President and Chief Executive Officer

(Principal Executive Officer)

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard B. Hancock, Interim President and Chief Executive Officer, and Daniel R. Hart, Chief Financial Officer, and each of them, his true and lawful attorneys-in-fact and agents, with the full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments to this report, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agent full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

NameTitleDate
/s/ Richard B. HancockInterim President and Chief Executive Officer and DirectorJune 30, 2020
Richard B. Hancock(Principal Executive Officer)
/s/ Daniel R. HartChief Financial OfficerJune 30, 2020
Daniel R. Hart(Principal Financial Officer and Principal Accounting Officer)
/s/ Joseph Carleone, Ph.D.Chairman of the Board of DirectorsJune 30, 2020
Joseph Carleone, Ph.D.
/s/ Mark R. BamforthDirectorJune 30, 2020
Mark R. Bamforth
/s/ Catherine J. Mackey, Ph.D.DirectorJune 30, 2020
Catherine J. Mackey, Ph.D.
/s/ Gregory P. SargenDirectorJune 30, 2020
Gregory P. Sargen
/s/ Patrick D. WalshDirectorJune 30, 2020
Patrick D. Walsh

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