UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 20172018
OR
o TRANSITION 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
PEREGRINE PHARMACEUTICALS,AVID BIOSERVICES, INC.
(Exact name of Registrant as specified in its charter)
| Delaware | 95-3698422 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
| 92780 | ||
| (Address of principal executive offices) | (Zip Code) |
(714) 508-6000508-6100
(Registrant’s telephone number, including area code)
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.
Yes ý No o
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yesý Noo
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 o | Accelerated filer | Non-accelerated filer o | Smaller reporting company |
| 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso No ý
As of December 6, 2017,3, 2018, there were 45,212,76056,067,867 shares of common stock, $0.001 par value, outstanding.
PEREGRINE PHARMACEUTICALS,AVID BIOSERVICES, INC.
TheAs used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, the terms “we,” “us,” “our,” “the Company,” and “Peregrine,“Avid,” as used in this Quarterly Report on Form 10-Q refer to Peregrine Pharmaceuticals,Avid Bioservices, Inc. and its wholly-owned subsidiary, Avid Bioservices, Inc.consolidated subsidiaries.
PART I - FINANCIAL INFORMATION
| Item 1. | Condensed Consolidated Financial Statements. |
PEREGRINE PHARMACEUTICALS,avid bioservices, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
October 31, 2017 | April 30, 2017 | |||||||
| Unaudited | (Note 2) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 27,727,000 | $ | 46,799,000 | ||||
| Trade and other receivables | 3,508,000 | 7,742,000 | ||||||
| Inventories | 16,518,000 | 33,099,000 | ||||||
| Prepaid expenses | 1,223,000 | 1,460,000 | ||||||
| Total current assets | 48,976,000 | 89,100,000 | ||||||
| Property and equipment, net | 27,148,000 | 26,515,000 | ||||||
| Restricted cash | 1,150,000 | 1,150,000 | ||||||
| Other assets | 1,353,000 | 1,347,000 | ||||||
| Total assets | $ | 78,627,000 | $ | 118,112,000 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,739,000 | $ | 5,779,000 | ||||
| Accrued clinical trial and related fees | 5,392,000 | 4,558,000 | ||||||
| Accrued payroll and related costs | 4,063,000 | 6,084,000 | ||||||
| Deferred revenue | 7,473,000 | 28,500,000 | ||||||
| Customer deposits | 13,138,000 | 17,017,000 | ||||||
| Other current liabilities | 745,000 | 993,000 | ||||||
| Total current liabilities | 33,550,000 | 62,931,000 | ||||||
| Deferred rent, less current portion | 2,171,000 | 1,599,000 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock—$0.001 par value; authorized 5,000,000 shares; 1,647,760 issued and outstanding at October 31, 2017 and April 30, 2017, respectively | 2,000 | 2,000 | ||||||
| Common stock—$0.001 par value; authorized 500,000,000 shares; 45,172,632 and 44,014,040 issued and outstanding at October 31, 2017 and April 30, 2017, respectively | 45,000 | 44,000 | ||||||
| Additional paid-in capital | 594,004,000 | 590,971,000 | ||||||
| Accumulated deficit | (551,145,000 | ) | (537,435,000 | ) | ||||
| Total stockholders’ equity | 42,906,000 | 53,582,000 | ||||||
| Total liabilities and stockholders’ equity | $ | 78,627,000 | $ | 118,112,000 | ||||
October 31, 2018 | April 30, 2018 | |||||||
| Unaudited | (Note 1) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 32,694 | $ | 42,265 | ||||
| Trade and other receivables | 4,197 | 3,754 | ||||||
| Contract assets | 5,092 | – | ||||||
| Inventories | 9,736 | 16,129 | ||||||
| Prepaid expenses | 774 | 679 | ||||||
| Assets of discontinued operations | – | 5,000 | ||||||
| Total current assets | 52,493 | 67,827 | ||||||
| Property and equipment, net | 26,279 | 26,479 | ||||||
| Restricted cash | 1,150 | 1,150 | ||||||
| Other assets | 302 | 304 | ||||||
| Total assets | $ | 80,224 | $ | 95,760 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 3,223 | $ | 1,909 | ||||
| Accrued payroll and related costs | 1,829 | 2,564 | ||||||
| Contract liabilities | 17,307 | 27,935 | ||||||
| Other current liabilities | 433 | 905 | ||||||
| Liabilities of discontinued operations | 416 | 4,550 | ||||||
| Total current liabilities | 23,208 | 37,863 | ||||||
| Deferred rent, less current portion | 2,126 | 2,159 | ||||||
| Capital lease, less current portion | 93 | – | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock—$0.001 par value; 5,000,000 shares authorized; 1,647,760 shares issued and outstanding at October 31, 2018 and April 30, 2018, respectively | 2 | 2 | ||||||
| Common stock—$0.001 par value; 150,000,000 shares authorized; 56,063,488 and 55,689,222 shares issued and outstanding at October 31, 2018 and April 30, 2018, respectively | 56 | 55 | ||||||
| Additional paid-in capital | 614,541 | 614,810 | ||||||
| Accumulated deficit | (559,802 | ) | (559,129 | ) | ||||
| Total stockholders’ equity | 54,797 | 55,738 | ||||||
| Total liabilities and stockholders’ equity | $ | 80,224 | $ | 95,760 | ||||
See accompanying notes to condensed consolidated financial statements.
| 3 |
avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and comprehensive loss (UNAUDITED)
(in thousands, except share and per share information)
| Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Contract manufacturing revenue | $ | 10,178 | $ | 12,782 | $ | 22,767 | $ | 39,859 | ||||||||
| Cost of contract manufacturing | 9,844 | 16,242 | 21,241 | 36,690 | ||||||||||||
| Gross profit (loss) | 334 | (3,460 | ) | 1,526 | 3,169 | |||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 2,816 | 3,596 | 6,031 | 7,449 | ||||||||||||
| Restructuring charges | – | 1,258 | – | 1,258 | ||||||||||||
| Total operating expenses | 2,816 | 4,854 | 6,031 | 8,707 | ||||||||||||
| Operating loss | (2,482 | ) | (8,314 | ) | (4,505 | ) | (5,538 | ) | ||||||||
| Interest and other income, net | 119 | 13 | 181 | 37 | ||||||||||||
| Loss from continuing operations before income taxes | $ | (2,363 | ) | $ | (8,301 | ) | $ | (4,324 | ) | $ | (5,501 | ) | ||||
| Income tax benefit | 173 | – | 173 | – | ||||||||||||
| Loss from continuing operations | $ | (2,190 | ) | $ | (8,301 | ) | $ | (4,151 | ) | $ | (5,501 | ) | ||||
| Income (loss) from discontinued operations, net of tax | 739 | (4,323 | ) | 739 | (8,328 | ) | ||||||||||
| Net loss | $ | (1,451 | ) | $ | (12,624 | ) | $ | (3,412 | ) | $ | (13,829 | ) | ||||
| Comprehensive loss | $ | (1,451 | ) | $ | (12,624 | ) | $ | (3,412 | ) | $ | (13,829 | ) | ||||
| Series E preferred stock accumulated dividends | (1,442 | ) | (1,442 | ) | (2,523 | ) | (2,523 | ) | ||||||||
| Net loss attributable to common stockholders | $ | (2,893 | ) | $ | (14,066 | ) | $ | (5,935 | ) | $ | (16,352 | ) | ||||
| Basic and diluted weighted average common shares outstanding | 56,008,541 | 45,097,474 | 55,889,325 | 44,935,600 | ||||||||||||
| Basic and diluted net (loss) income per common share attributable to common stockholders: | ||||||||||||||||
| Continuing operations | $ | (0.06 | ) | $ | (0.21 | ) | $ | (0.12 | ) | $ | (0.18 | ) | ||||
| Discontinued operations | $ | 0.01 | $ | (0.10 | ) | $ | 0.01 | $ | (0.18 | ) | ||||||
| Net loss per share attributable to common stockholders | $ | (0.05 | ) | $ | (0.31 | ) | $ | (0.11 | ) | $ | (0.36 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
PEREGRINE PHARMACEUTICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and comprehensive loss (UNAUDITED)
| Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Contract manufacturing revenue | $ | 12,782,000 | $ | 23,370,000 | $ | 39,859,000 | $ | 28,979,000 | ||||||||
| Cost of contract manufacturing | 16,242,000 | 15,441,000 | 36,690,000 | 18,503,000 | ||||||||||||
| Gross profit (loss) | (3,460,000 | ) | 7,929,000 | 3,169,000 | 10,476,000 | |||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 3,867,000 | 4,984,000 | 8,080,000 | 10,044,000 | ||||||||||||
| Research and development | 3,722,000 | 7,022,000 | 7,367,000 | 15,591,000 | ||||||||||||
| Restructuring charges | 1,588,000 | – | 1,588,000 | – | ||||||||||||
| Total operating expenses | 9,177,000 | 12,006,000 | 17,035,000 | 25,635,000 | ||||||||||||
| Operating loss | (12,637,000 | ) | (4,077,000 | ) | (13,866,000 | ) | (15,159,000 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest and other income | 14,000 | 21,000 | 41,000 | 46,000 | ||||||||||||
| Interest and other expense | (1,000 | ) | – | (4,000 | ) | – | ||||||||||
| Net loss | $ | (12,624,000 | ) | $ | (4,056,000 | ) | $ | (13,829,000 | ) | $ | (15,113,000 | ) | ||||
| Comprehensive loss | $ | (12,624,000 | ) | $ | (4,056,000 | ) | $ | (13,829,000 | ) | $ | (15,113,000 | ) | ||||
| Series E preferred stock accumulated dividends | (1,442,000 | ) | (1,442,000 | ) | (2,523,000 | ) | (2,477,000 | ) | ||||||||
| Net loss attributable to common stockholders | $ | (14,066,000 | ) | $ | (5,498,000 | ) | $ | (16,352,000 | ) | $ | (17,590,000 | ) | ||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic and Diluted(1) | 45,097,474 | 34,973,681 | 44,935,600 | 34,600,776 | ||||||||||||
| Basic and diluted loss per common share(1) | $ | (0.31 | ) | $ | (0.16 | ) | $ | (0.36 | ) | $ | (0.51 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
PEREGRINE PHARMACEUTICALS,avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
Six Months Ended October 31, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (13,829,000 | ) | $ | (15,113,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Share-based compensation | 794,000 | 1,722,000 | ||||||
| Depreciation and amortization | 1,300,000 | 1,219,000 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Trade and other receivables | 4,234,000 | (3,207,000 | ) | |||||
| Inventories | 16,581,000 | (9,738,000 | ) | |||||
| Prepaid expenses | 237,000 | (360,000 | ) | |||||
| Other non-current assets | 9,000 | 156,000 | ||||||
| Accounts payable | (3,179,000 | ) | 2,888,000 | |||||
| Accrued clinical trial and related fees | 834,000 | (3,955,000 | ) | |||||
| Accrued payroll and related expenses | (2,021,000 | ) | (541,000 | ) | ||||
| Deferred revenue | (21,027,000 | ) | 7,950,000 | |||||
| Customer deposits | (3,879,000 | ) | 2,716,000 | |||||
| Other accrued expenses and current liabilities | (94,000 | ) | (476,000 | ) | ||||
| Deferred rent, less current portion | 572,000 | (48,000 | ) | |||||
| Net cash used in operating activities | (19,468,000 | ) | (16,787,000 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Property and equipment acquisitions | (1,794,000 | ) | (1,066,000 | ) | ||||
| Increase in other assets | (15,000 | ) | – | |||||
| Net cash used in investing activities | (1,809,000 | ) | (1,066,000 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from issuance of common stock, net of issuance costs of $111,000 and $185,000, respectively | 4,193,000 | 5,781,000 | ||||||
| Proceeds from issuance of Series E preferred stock, net of issuance costs of nil and $57,000, respectively | – | 1,577,000 | ||||||
| Proceeds from issuance of common stock under Employee Stock Purchase Plan | 216,000 | 254,000 | ||||||
| Proceeds from exercise of stock options | 112,000 | – | ||||||
| Dividends paid on Series E preferred stock | (2,162,000 | ) | (2,116,000 | ) | ||||
| Principal payments on capital lease | (154,000 | ) | – | |||||
| Net cash provided by financing activities | 2,205,000 | 5,496,000 | ||||||
| NET DECREASE IN CASH AND CASH EQUIVALENTS | (19,072,000 | ) | (12,357,000 | ) | ||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 46,799,000 | 61,412,000 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 27,727,000 | $ | 49,055,000 | ||||
| SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Accounts payable for purchase of property and equipment and other assets | $ | 139,000 | $ | 255,000 | ||||
Six Months Ended October 31, | ||||||||
| 2018 | 2017 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (3,412 | ) | $ | (13,829 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,325 | 1,300 | ||||||
| Stock-based compensation | 622 | 794 | ||||||
| Gain on sale of research and development assets | (1,000 | ) | – | |||||
| Changes in operating assets and liabilities: | ||||||||
| Trade and other receivables | (443 | ) | 4,234 | |||||
| Contract assets | (2,204 | ) | – | |||||
| Inventories | (1,478 | ) | 16,581 | |||||
| Prepaid expenses | (95 | ) | (300 | ) | ||||
| Other non-current assets | 2 | 9 | ||||||
| Accounts payable | 880 | (1,426 | ) | |||||
| Accrued payroll and related expenses | (735 | ) | (1,787 | ) | ||||
| Contract liabilities | (2,715 | ) | (24,906 | ) | ||||
| Other accrued expenses and current liabilities | (741 | ) | 172 | |||||
| Assets and liabilities of discontinued operations | (4,134 | ) | (882 | ) | ||||
| Deferred rent, less current portion | (33 | ) | 572 | |||||
| Net cash used in operating activities | (14,161 | ) | (19,468 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of property and equipment | (446 | ) | (1,809 | ) | ||||
| Proceeds from sale of research and development assets | 6,000 | – | ||||||
| Net cash provided by (used in) investing activities | 5,554 | (1,809 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Dividends paid on Series E preferred stock | (2,162 | ) | (2,162 | ) | ||||
| Net proceeds from issuance of common stock | – | 4,193 | ||||||
| Proceeds from issuance of common stock under Employee Stock Purchase Plan | 114 | 216 | ||||||
| Proceeds from exercise of stock options | 1,158 | 112 | ||||||
| Principal payments on capital lease obligation | (74 | ) | (154 | ) | ||||
| Net cash (used in) provided by financing activities | (964 | ) | 2,205 | |||||
| Net decrease in cash, cash equivalents and restricted cash | (9,571 | ) | (19,072 | ) | ||||
| Cash, cash equivalents and restricted cash at beginning of period | 43,415 | 47,949 | ||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 33,844 | $ | 28,877 | ||||
| SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||||
| Accounts payable for purchase of property and equipment | $ | 434 | $ | 139 | ||||
| Property and equipment acquired under capital lease | $ | 245 | $ | – | ||||
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets to the total of the same amounts shown above:
| October 31, 2018 | April 30, 2018 | October 31, 2017 | April 30, 2017 | |||||||||||||
| Cash and cash equivalents | $ | 32,694 | $ | 42,265 | $ | 27,727 | $ | 46,799 | ||||||||
| Restricted cash | 1,150 | 1,150 | 1,150 | 1,150 | ||||||||||||
| Total cash, cash equivalents and restricted cash | $ | 33,844 | $ | 43,415 | $ | 28,877 | $ | 47,949 | ||||||||
See accompanying notes to condensed consolidated financial statements.
PEREGRINE PHARMACEUTICALS,avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (unaudited) (UNAUDITED)
(in thousands, except share and per share information)
1. ORGANIZATION AND BUSINESS
| 1. | DESCRIPTION OF COMPANY AND BASIS OF PRESENTATION |
Business Description –We are a company committed to improving the lives of patients by manufacturing pharmaceutical products through our contract development and manufacturing organization (“CDMO”), Avid Bioservices, Inc. that provides a comprehensive range of services from process development to current Good Manufacturing Practices (“Avid”cGMP”). Over the next sixty days, we plan to complete the transition from a research and development company to a dedicated CDMO company commercial manufacturing focused on development and manufacturing of biopharmaceutical products derived from mammalian cell culture.culture for biotechnology and pharmaceutical companies.
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 unaudited condensed 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
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to quarterly reports on Form 10-Q. Accordingly,10-Q, and accordingly, they do not include all of the information and disclosures required by U.S. GAAP for a complete set ofannual financial statements. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017.2018. The condensed consolidated balance sheet at April 30, 20172018 has been derived from audited financial statements at that date. The unaudited financial information for the interim periods presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments. Results of operations for interim periods covered by this Quarterly Report on Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or any other interim period.
The unaudited condensed consolidated financial statements include the accounts of Peregrine Pharmaceuticals,Avid Bioservices, Inc., and our wholly-owned subsidiary, Avid.its subsidiaries. All intercompany accounts and transactions among the consolidated entities have been eliminated in the unaudited condensed consolidated financial statements.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts, as well as disclosures of commitments and contingencies in the financial statements and accompanying notes. Actual results could differ materially from those estimates and assumptions.
Discontinued Operations
For all periods presented, the operating results of our former research and development segment have been excluded from continuing operations and reported as income (loss) from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. In addition, the assets and liabilities related to our discontinued research and development segment are reported as assets and liabilities of discontinued operations in the accompanying unaudited condensed consolidated balance sheets at October 31, 2018 and April 30, 2018. For additional information on the discontinuation of our research and development segment, refer to Note 11, “Sale of Research and Development Assets”.
Segment Reporting
Historically, our business had been organized into two reportable operating segments: (i) our research and development segment, and (ii) our contract manufacturing services segment. However, as a result of the aforementioned discontinued operation of our research and development segment (Note 11),management has determined that the Company now operates in only one operating segment. Accordingly, we reported our financial results for one reportable segment to reflect this new organizational structure.
PEREGRINE PHARMACEUTICALS,avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, (UNAUDITED)
(in thousands, except share and per share information)
Restructuring
Restructuring charges consist of one-time termination benefits, including severance and other employee related costs related to a workforce reduction pursuant to a restructuring plan we implemented in August 2017 (unaudited)(continued)
(fiscal year 2018). Under this restructuring plan, which we completed in October 2017, we incurred an aggregate of $1,588 in restructuring charges, of which $330 related to our discontinued research and development segment (Note 11) and $1,258 related to our contract manufacturing services segment.
Going Concern
The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that we are unable to continue as a going concern.
At October 31, 2017,2018, we had $27,727,000$32,694 in cash and cash equivalents. Our ability to fund our operations depends on the amount of cash on hand and our ability to generate sufficient revenue to cover our operations. We have expended substantial funds on our legacy research and development of pharmaceutical product candidates (which we are seeking to license or divest)(discontinued operations) and funding the operations of Avid.our contract manufacturing business (continuing operations). 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, we expect negative cash flows from operations to continue for the foreseeable future until we can generate sufficient revenue to generate positive cash flow from Avid’s contract manufacturing services to achieve profitability. Therefore, unless and untiloperations.
In the event we are ableunable to generateobtain sufficient revenue from Avid’s contract manufacturing services,business to support our operations beyond the next twelve months, we expect such lossesmay need to continue in the foreseeable future, and as a result, we must raise additional capital during fiscal year 2018 in order to fund our operations and to execute on our business plans.
Historically, we have funded a significant portion of our operations through the issuance of equity; however, during the quarter ended October 31, 2017, we did not raise any additional capital through the issuance of equity. During the quarter ended July 31, 2017, we raised $4,304,000 in aggregate gross proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement (Note 6). In addition, as of July 31, 2017, we had raised the full amount of gross proceeds available to us under the At Market Issuance Sales Agreement (Note 6). As of October 31, 2017, $67,674,000 remained available to us under our effective shelf registration statement (which shelf expires in mid-January 2018), which allows us from time to time to offer and sell shares of our common stock, in one or more offerings, either individually or in combination.
capital. Our ability to raise additional capital in the equity markets to fund our obligations in future periods is dependentdepends 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, from Avid, we may need to further restructure, or cease, our operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.
As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that our accompanying unaudited condensed consolidated financial statements are issued.
ReclassificationReclassifications
Certain prior year amounts related to other assetsdeferred revenue and customer deposits have been reclassified to property and equipmentcontract liabilities in our accompanying condensed consolidated balance sheet for the fiscal year ended April 30, 20172018 and in our accompanying unaudited condensed consolidated statement of cash flows for the six months ended October 31, 20162017 to conform to the current year presentation.period presentation (Note 2). This reclassification had no effect on previously reported net loss.
Restructuring
Restructuring charges consist
| 7 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
| 2. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606):Revenue from Contracts with Customers(“ASC 606”), which, along with subsequent amendments issued after May 2014, replaced substantially all then relevant U.S. GAAP revenue recognition guidance. ASC 606, as amended, is based on the principle that revenue is recognized to depict the contractual transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services utilizing a new five-step revenue recognition model, which steps include (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
On May 1, 2018, we adopted ASC 606, as amended, to all contracts not completed as of May 1, 2018 using the modified retrospective method. Results for the reporting period beginning after May 1, 2018 are presented in accordance with ASC 606, while prior period amounts continue to be reported under the accounting standards that were in effect for the prior period. The accounting policy for revenue recognition for periods prior to May 1, 2018 is described in Note 2 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.
The cumulative effect of adopting ASC 606 resulted in a one-time termination benefits, including severanceadjustment of $2,739 to the opening balance of accumulated deficit. The cumulative effect adjustment relates to the recognition of revenue and other employee related costs for customer contracts that transfer goods or services over time. Under ASC 606, the timing of the recognition of contract manufacturing revenue and the related cost of contract manufacturing associated with goods or services provided to customers with no alternative use are recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation. By contrast, in the prior period, contract manufacturing revenue and the related costs were recognized upon completion of the performance obligation in accordance with accounting standards that were in effect in the prior period. Under these customer contracts the customer retains control of the product as it is being created or enhanced by our services and/or we are entitled to compensation for progress to date that includes an element of profit margin.
The following table summarizes the cumulative effect of the adoption of ASC 606 on amounts previously reported in our consolidated balance sheet at April 30, 2018:
As Reported April 30, 2018 | ASC 606 Transition Adjustment |
Balance at May 1, 2018 | ||||||||||
| Contract assets | $ | – | $ | 2,888 | $ | 2,888 | ||||||
| Inventories | 16,129 | (7,871 | ) | 8,258 | ||||||||
| Contract liabilities | 27,935 | (7,913 | ) | 20,022 | ||||||||
| Other current liabilities | 905 | 191 | 1,096 | |||||||||
| Accumulated deficit | (559,129 | ) | 2,739 | (556,390 | ) | |||||||
| 8 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
The following tables summarize the effect of the adoption of ASC 606 on our unaudited condensed consolidated balance sheet at October 31, 2018 and our unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended October 31, 2018:
As Reported | Effect of Change Higher/(Lower) | Balance Without Adoption of ASC 606 | ||||||||||
| Contract assets | $ | 5,092 | $ | 5,092 | $ | – | ||||||
| Inventories | 9,736 | (16,244 | ) | 25,980 | ||||||||
| Contract liabilities | 17,307 | (17,506 | ) | 34,813 | ||||||||
| Three Months Ended October 31, 2018 | ||||||||||||
As Reported | Effect of Change Higher/(Lower) | Balance Without Adoption of ASC 606 | ||||||||||
| Contract manufacturing revenue | $ | 10,178 | $ | 1,215 | $ | 8,963 | ||||||
| Cost of contract manufacturing | 9,844 | (79 | ) | 9,923 | ||||||||
| Gross profit (loss) | 334 | 1,294 | (960 | ) | ||||||||
| Operating loss | (2,482 | ) | 1,294 | (3,776 | ) | |||||||
| Loss from continuing operations | (2,190 | ) | 1,294 | (3,484 | ) | |||||||
| Six Months Ended October 31, 2018 | ||||||||||||
As Reported |
Effect of Change Higher/(Lower) | Balance Without Adoption of ASC 606 | ||||||||||
| Contract manufacturing revenue | $ | 22,767 | $ | 11,831 | $ | 10,936 | ||||||
| Cost of contract manufacturing | 21,241 | 7,905 | 13,336 | |||||||||
| Gross profit (loss) | 1,526 | 3,926 | (2,400 | ) | ||||||||
| Operating loss | (4,505 | ) | 3,926 | (8,431 | ) | |||||||
| Loss from continuing operations | (4,151 | ) | 3,926 | (8,077 | ) | |||||||
Revenue Recognition
We derive revenue from contract manufacturing services provided under our customer contracts, which we have disaggregated into the following revenue streams:
Manufacturing revenue
The manufacturing revenue stream represents revenue from the manufacturing of customer product(s) derived from mammalian cell culture covering clinical through commercial manufacturing runs. Under a workforce reduction pursuantmanufacturing contract, a quantity of manufacturing runs are ordered and the product is manufactured according to the customer’s specifications and typically only one performance obligation is included. Each manufacturing run represents a restructuring plandistinct service that is sold separately and has stand-alone value to the customer. The product(s) are manufactured exclusively for a specific customer and have no alternative use. The customer retains control of their product during the entire manufacturing process and can make changes to the process or specifications at their request. Under these agreements, we implemented are entitled to consideration for progress to date that includes an element of profit margin. Revenue associated with this stream is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation.
| 9 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in Augustthousands, except share and per share information)
Process development revenue
The process development revenue stream represents revenue from non-manufacturing related services associated with the custom development of a customer’s product. Under a process development contract, the customer owns the product details and process, which has no alternative use. These process development projects are customized to each customer to meet their specifications and typically only one performance obligation is included. Each process represents a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of their product as the product is being created or enhanced by our services and can make changes to their process or specifications upon request. Revenue associated with this stream is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation.
The following table disaggregates our contract manufacturing revenue for the three and six months ended October 31, 2018 and 2017 (Note 9)by revenue stream. One-time termination benefitsContract manufacturing revenue for the three and six months ended October 31, 2017 has not been adjusted in accordance with our modified retrospective adoption of ASC 606 and continues to be reported under the accounting standards that were in effect prior to our adoption of ASC 606 on May 1, 2018:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Manufacturing revenue | $ | 7,243 | $ | 11,437 | $ | 17,543 | $ | 36,236 | ||||||||
| Process development revenue | 2,935 | 1,345 | 5,224 | 3,623 | ||||||||||||
| Total contract manufacturing revenue | $ | 10,178 | $ | 12,782 | $ | 22,767 | $ | 39,859 | ||||||||
Contract balances
The timing of revenue recognition, billings and cash collections results in billed trade receivables, contract assets (unbilled receivables), and contract liabilities (customer deposits and deferred revenue). Contract assets are recorded when our right to consideration is conditioned on something other than the passage of time. Contract assets are reclassified to trade receivables on the balance sheet when our rights become unconditional. Contract liabilities represent customer deposits and deferred revenue billed and/or received in advance of our fulfillment of performance obligations. Contract liabilities will convert to contract manufacturing revenue as we perform our obligations under the contract.
We recognized contract manufacturing revenue of $3,063 and $10,025, respectively, during the three and six months ended October 31, 2018 for which the contract liability was recorded in the prior year.
Practical expedients and contract costs
We apply the practical expedient available under ASC 606 that permits us not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. In addition, we currently do not have any unsatisfied performance obligations for contracts greater than one year.
Costs incurred to obtain or fulfill a contract are not material. These costs are generally employee sales commissions, which are expensed atwhen incurred and included in selling, general and administrative expense in the date we notified the employee, unless the employee was required to provide future service, accompanying condensed consolidated statements of operations and comprehensive loss.
| 10 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in which case, the benefits are expensed ratably over the future service period.thousands, except share and per share information)
Cash and Cash Equivalents
We consider all short-term investments readily convertible to cash with an initial maturity of three months or less to be cash equivalents.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (unaudited)(continued)
Restricted Cash
Under the terms of three separate operating leases related to our facilities, we are required to maintain, as collateral, letters of credit during the terms of such leases. At October 31, 20172018 and April 30, 2017,2018, restricted cash of $1,150,000$1,150 was pledged as collateral under these letters of credit.
Concentrations of Credit Risk and Customer Base
Financial instruments that potentially subject us to a significant concentration of credit risk consist of cash and cash equivalents, restricted cash and trade receivables. 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 unaudited condensed consolidated balance sheet.
Our trade receivables from amounts billed for contract manufacturing services provided by Avid have historically been derived from a small customer base. Most contracts require up-front payments and installment payments during the service period. We perform periodic evaluations of the financial condition of our customers and generally do not require collateral, but we can terminate any contract if a material default occurs. At October 31, 2017 and April 30, 2017, approximately 95% and 93%, respectively, of our trade receivables were due from seven or fewer customers.
In addition, contract manufacturing revenue generated by Avid has historically been derived from a small customer base. Historically, these customers have not entered into long-term contracts because their need for drug supply depends on a variety of factors, including the drug’s stage of development, their financial resources, and, with respect to commercial drugs, demand for the drug in the market. During the three and six months ended October 31, 2017, approximately, 81% and 83%, respectively, of our contract manufacturing revenue was derived from our two largest customers.
Based on our current commitments for manufacturing services from our two largest customers, we expect our future results of operations to be adversely affected if revenue from either one of these primary customers continues to be further reduced, delayed, or eliminated, or until we are able to further diversify our customer base.
Comprehensive Loss
Comprehensive loss is defined as 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.
Impairment
Long-lived assets are reviewed for impairment in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events or changes in circumstances, which indicate that their carrying value may not be recoverable. Long-lived assets are reported at the lower of carrying amount or fair value less cost to sell. For the six months ended October 31, 20172018 and 2016,2017, there were no indicators of impairment of the value of our long-lived assets.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:
| · | Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities. |
| · | Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets or liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets. |
| · | Level 3 – Unobservable inputs that are supported by little or no market activity and significant to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation techniques and assumptions. |
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (unaudited)(continued)
As of October 31, 20172018 and April 30, 2017,2018, we do not have any Level 2 or Level 3 financial assets or liabilities and our cash equivalents, which are primarily invested in money market funds with one major commercial bank, are carried at fair value based on quoted market prices for identical securities (Level 1 input). In addition, there were no transfers between any Levels of the fair value hierarchy during the three and six months ended October 31, 20172018 and 2016.2017.
Customer Deposits
Customer deposits primarily represent advance billings and/or payments received for services or raw materials from Avid’s third-party customers prior to the initiation of contract manufacturing services.
Revenue Recognition
We currently derive revenue from our contract manufacturing services provided by Avid. We recognize 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 manufactured by Avid 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 unaudited condensed consolidated financial statements. We also record a provision for estimated contract losses, if any, in the period in which they are determined.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (unaudited)(continued)
Research and Development Expenses
Research and development expenses primarily include (i) payroll and related costs, including share-based compensation associated with research and development personnel, (ii) costs related to clinical trials and preclinical testing of our technologies under development, (iii) costs to develop and manufacture the product candidates, including raw materials and supplies, product testing, depreciation, and facility related expenses, (iv) expenses for research services provided by universities and contract laboratories, including sponsored research funding, and (v) other research and development expenses. Research and development expenses are charged to expense as incurred when these expenditures relate to our research and development efforts and have no alternative future uses.
Clinical trial costs have been a significant component of our research and development expenses. We have historically contracted with third parties to perform various clinical trial activities on our behalf. The financial terms of these contracts are subject to negotiations and may vary from contract to contract and may result in uneven payment flow. Expenses related to clinical trials are accrued based on our estimates and/or representations from third parties (including clinical research organizations) regarding services performed. If the contracted amounts are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), we modify our accruals accordingly on a prospective basis. Revisions in the scope of a contract are charged to expense in the period in which the facts that give rise to the revision become reasonably certain. There were no material adjustments for a change in estimate to research and development expenses in the accompanying unaudited condensed consolidated financial statements for the three and six months ended October 31, 2017 and 2016.
Under certain research and development agreements, we are obligated to make certain advance payments, including nonrefundable amounts, for goods or services that will be used or rendered for future research and development activities and are deferred and capitalized as prepaid research and development expenses. These advance payments are recognized as an expense in the period the related goods are delivered or the related services are performed. We assess our prepaid research and development expenses for impairment when events or changes in circumstances indicate that the carrying amount of the prepaid expense may not be recoverable or provide future economic benefit. During the three months ended October 31, 2017, we wrote-off $757,000 in prepaid research and development expenses, which amount is included in research and development expense in the accompanying unaudited condensed consolidated financial statements for the three and six months ended October 31, 2017, as we believe there is no probable future economic benefit based on our transition from a research and development company to a dedicated CDMO.
In addition, under certain in-licensing agreements associated with the research and development of our product candidates, we are obligated to pay certain milestone payments based on potential clinical development and regulatory milestones. These milestone payments have no alternative future uses (in other research and development projects or otherwise) and therefore have no separate economic values and are expensed as research and development costs at the time the costs are incurred. We have no in-licensed product candidates that have alternative future uses in research and development projects or otherwise. In addition, we do not perform any research and development activities for any unrelated entities.
Share-basedStock-based Compensation
We account for stock options, restricted stock rights 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. TheIn addition, the fair value of modifications to share-based awards, if any,restricted stock rights 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. Pursuant tostraight-line basis over the adoptionperiod of ASU 2016-09 (Note 2), forfeituresvesting. Forfeitures are recognized as a reduction of share-basedstock-based compensation expense as they occur. As of October 31, 2017,2018, there were no outstanding share-basedstock-based awards with market or performance conditions.
PEREGRINE PHARMACEUTICALS,
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (UNAUDITED)
(unaudited)(continued)in thousands, except share and per share information)
Basic and Dilutive Net Loss Per Common Share
Income Taxes
Basic net loss per common share is computed by dividing our net lossDeferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to common stockholders bydifferences between the weighted average numberfinancial reporting and tax bases of shares of common stock outstanding duringassets and liabilities and are measured using enacted tax rates in effect for the period excluding the dilutive effects of stock options, shares of common stockyear in which those temporary differences are expected to be issued under our Employee Stock Purchase Plan (the “ESPP”), warrants, and Series E Preferred Stock outstanding duringrecovered or settled. A valuation allowance is provided for the period. Diluted net loss per common share is computed by dividing our net loss attributable to common stockholders by the sumamount 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 stockdeferred tax assets that, based on available evidence, are not expected to be issued underrealized. As a result of our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Net loss attributable to common stockholders representscumulative losses, management has concluded that a full valuation allowance against 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).deferred tax assets is appropriate.
The potential dilutive effectincome tax benefit recognized in the accompanying unaudited condensed consolidated statements of stock options, shares of common stock expected to be issued under our ESPP,operations and warrants outstandingcomprehensive loss during the period are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive effect of our Series E Preferred Stock outstanding during the period was calculated using the if-converted method assuming the conversion of Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but are excluded if their effect is anti-dilutive. However, because the impact of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per common share amounts for the three and six months ended October 31, 20172018 resulted from the “Intraperiod Tax Allocation” rules under ASC 740:Income Taxes, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, 2016.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).
In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The calculationTax Act includes a number of weighted average diluted shares outstandingchanges to existing U.S. tax laws that impact us, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years, effective January 1, 2018. We performed a review of the Tax Act for the threefiscal year ended April 30, 2018, and six months ended October 31,based on the information available at that time, recorded certain provisional amounts related to the revaluation of our deferred tax assets and liabilities, which were fully offset by a valuation allowance.
In December 2017, and 2016 excludes the dilutive effectSEC issued interpretive guidance under Staff Accounting Bulletin No. 118 to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the following weighted average outstanding stock optionsTax Act. As discussed above, for the fiscal year ended April 30, 2018, we recognized provisional tax impacts related to the revaluation of deferred tax assets and sharesliabilities, 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 common stockthe Tax Act. The accounting for these provisions is expected to be issued undercomplete when our ESPP as their impact are anti-dilutive during periods2017 U.S. corporate income tax return is filed in the first quarter of net loss:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Stock Options | 31,877 | – | 69,065 | – | ||||||||||||
| ESPP | – | 23,668 | 133 | 17,139 | ||||||||||||
| Total | 31,877 | 23,668 | 69,198 | 17,139 | ||||||||||||
The calculation of weighted average diluted shares outstanding for the three and six months ended October 31, 2017 and 2016 also excludes the following weighted average outstanding stock options, warrants, shares of common stock expected to be issued under our ESPP, and Series E Preferred Stock (assuming the if-converted method), as their exercise price, purchase price and/or conversion price were greater than the average market price of our common stock during the respective periods, resulting in an anti-dilutive effect:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Stock Options | 3,600,478 | 4,258,060 | 3,608,917 | 4,119,209 | ||||||||||||
| ESPP | 43,332 | – | – | – | ||||||||||||
| Warrants | 39,040 | 39,040 | 39,040 | 39,040 | ||||||||||||
| Series E Preferred Stock | 1,978,783 | 1,971,206 | 1,978,783 | 1,932,771 | ||||||||||||
| Total | 5,661,633 | 6,268,306 | 5,626,740 | 6,091,020 | ||||||||||||
calendar year 2019.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (unaudited)(continued)
Recently AdoptedAdoption of Other Recent Accounting Pronouncements
EffectiveIn November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):Restricted Cash, which clarifies the presentation requirements of restricted cash within the statement of cash flows. ASU 2016-18 will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We adopted ASU 2016-18 on May 1, 2017, we adopted Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330):Simplifying2018 and the Measurement of Inventory. ASU 2015-11 requires that inventory should be measuredcash and cash equivalents at the lowerbeginning-of-period and end-of-period total amounts in our condensed consolidated statements of cost and net realizable valuecash flows have been adjusted to include $1,150 of restricted cash for entities that measure inventory usingeach of the first-in, first-out method.periods presented.
In May 2017, the FASB issued ASU 2015-11 defines net realizable value as2017-09, Compensation - Stock Compensation (Topic 718):Scope of Modification Accounting,which provides guidance about which changes to the estimated selling pricesterms or conditions of a stock-based payment award require an entity to apply modification accounting in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. We adopted ASU 2017-09 on May 1, 2018. The adoption of this ASU 2015-11 did not have a material impact on our condensed consolidated financial statements.statements and related disclosures.
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 condensed consolidated financial statements.
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 be 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 on our condensed consolidated financial statements.
Pending Adoption of Recent Accounting Pronouncements
| 12 |
In May 2014, the Financial
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
New Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606):Revenue from Contracts with Customers, which, along with subsequent amendments issued in 2015 and 2016, will replace substantially all current US 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. The new guidance also requires additional disclosure about the nature, amount, timing 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 annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which will be our fiscal year 2019 beginning May 1, 2018. The new guidance permits adoption either by using (i) a full retrospective approach for all 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. We are continuing to assess the impact of the new guidance on our accounting policies and procedures and are evaluating the new requirements as applied to existing manufacturing contracts under our CDMO business. While we continue to assess the impact of the new guidance, we believe the adoption of ASU 2014-09 will modify the way we analyze contracts. We have identified our revenue streams and based on our preliminary assessment, we believe the most significant impact may relate to the recognition of contract manufacturing revenue over a period of time rather than at a point in time. We plan to adopt ASU 2014-09, as amended, on May 1, 2018, on a modified retrospective basis.Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-2The new standard requires an entitylessees to recognize right-of-use assets and lease liabilities on its balance sheet for all leases with lease terms greater than 12 months and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, which will be our fiscal year 2020 beginning May 1, 2019. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of ASU 2016-02 on our condensed consolidated financial statements and related disclosures.
| 3. | Trade and other RECEIVABLEs |
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (unaudited)(continued)
In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):Restricted Cash, which addresses diversity in practice related to the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, which will be our fiscal year 2019 beginning May 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-18 to have a material impact on our condensed 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. Early adoption is permitted. We do not expect the adoption of ASU 2016-09 to have a material impact on our condensed consolidated financial statements and related disclosures.
3. Trade and other RECEIVABLEs
Trade receivables represent amounts billed for contract manufacturing services and are recorded at the invoiced amount net of an allowance for doubtful accounts, if necessary. Other receivables are reported at amounts expected to be collected net of an allowance for doubtful accounts, if necessary. Trade and other receivables consist of the following:
October 31, 2017 | April 30, 2017 | |||||||
| Trade receivables(1) | $ | 3,439,000 | $ | 7,274,000 | ||||
| Other receivables | 69,000 | 468,000 | ||||||
| Total trade and other receivables | $ | 3,508,000 | $ | 7,742,000 | ||||
______________
(1) Represents amounts billed for contract manufacturing services provided by Avid.
October 31, 2018 | April 30, 2018 | |||||||
| Trade receivables | $ | 4,183 | $ | 3,539 | ||||
| Other receivables | 14 | 215 | ||||||
| Total trade and other receivables | $ | 4,197 | $ | 3,754 | ||||
We continually monitor our allowance for doubtful accounts for all receivables. We apply judgment in assessing the ultimate realization of our receivables and we estimate an allowance for doubtful accounts based on various factors, such as, the aging of accounts receivable balances, historical experience, and the financial condition of our customers. Based on our analysis of our receivables as of October 31, 20172018 and April 30, 2017,2018, we determined no allowance for doubtful accounts was necessary.
| 4. | INVENTORIES |
4. PROPERTY AND EQUIPMENT
Inventories are recorded at the lower of cost or market (net realizable value) and include raw materials and work-in-process (comprised of raw materials, direct labor and overhead costs associated with in-process manufacturing services) associated with contract manufacturing services. Overhead costs allocated to work-in-process inventory are based on the normal capacity of our production facilities and do not include costs from abnormally low production or idle capacity, which are expensed directly to cost of contract manufacturing in the period incurred. During the three and six months ended October 31, 2018 and 2017, we expensed $2,923 and $4,652, respectively, and $4,938 and $5,838, respectively, in idle capacity costs directly to cost of contract manufacturing in the accompanying condensed consolidated financial statements. Subsequent to the adoption of ASC 606, manufacturing costs associated with work-in-process are recorded to cost of contract manufacturing in the accompanying condensed consolidated financial statements as incurred. Cost is determined by the first-in, first-out method. Inventories consist of the following:
October 31, 2018 | April 30, 2018 | |||||||
| Raw materials | $ | 9,648 | $ | 8,165 | ||||
| Work-in-process | 88 | 7,964 | ||||||
| Total inventories | $ | 9,736 | $ | 16,129 | ||||
| 13 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
| 5. | PROPERTY AND EQUIPMENT |
Property and equipment is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related asset, generally ranging from three to ten years. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the estimated useful life of the asset or the remaining lease term. Construction-in-progress, which represents direct costs related to the construction of various equipment and leasehold improvements associated with our manufacturing facilities, are not depreciated until the asset is completed and placed into service. No interest was incurred or capitalized as construction-in-progress as of October 31, 2017.
PEREGRINE PHARMACEUTICALS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (unaudited)(continued)
2018 and April 30, 2018. All of our property and equipment are located in the U.S.
Property and equipment, net, consists of the following:
October 31, 2017 | April 30, 2017 | October 31, 2018 | April 30, 2018 | |||||||||||||
| Leasehold improvements | $ | 20,922,000 | $ | 20,098,000 | $ | 20,738 | $ | 20,686 | ||||||||
| Laboratory equipment | 11,423,000 | 10,777,000 | 12,380 | 10,258 | ||||||||||||
| Furniture, fixtures, office equipment and software | 4,810,000 | 4,499,000 | 5,159 | 4,597 | ||||||||||||
| Construction-in-progress | 2,993,000 | 2,841,000 | 1,644 | 3,310 | ||||||||||||
| Total property and equipment | 40,148,000 | 38,215,000 | 39,921 | 38,851 | ||||||||||||
| Less accumulated depreciation and amortization | (13,000,000 | ) | (11,700,000 | ) | (13,642 | ) | (12,372 | ) | ||||||||
| Total property and equipment, net | $ | 27,148,000 | $ | 26,515,000 | $ | 26,279 | $ | 26,479 | ||||||||
Depreciation and amortization expense for the three and six months ended October 31, 20172018 was $658,000$683 and $1,300,000,$1,325, respectively. Depreciation and amortization expense for the three and six months ended October 31, 20162017 was $606,000$658 and $1,219,000,$1,300, respectively.
5. INVENTORIES
| 6. | Capital lease obligation |
InventoriesIn June 2018, we financed certain software under a capital lease agreement that bears interest at a rate of approximately 4.19% per annum. The gross value of software purchased under the capital lease of $245 and the related accumulated amortization of $34 are recorded at the lower of cost or market (net realizable value)included in property 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 our wholly-owned subsidiary, Avid. Overhead costs allocated to work-in-process inventory are based on the normal capacity of our production facilities and do not include costs from abnormally low production or idle capacity, which are expensed directly to cost of contract manufacturing in the period incurred. During the three and six months ended October 31, 2017, we expensed $4,938,000 and $5,838,000, respectively, in idle capacity costs directly to cost of contract manufacturingequipment, net in the accompanying unaudited condensed consolidated financial statements. No idle capacity costs were incurred during the same prior year periods. Cost is determined by the first-in, first-out method. Inventories consist of the following:
October 31, 2017 | April 30, 2017 | |||||||
| Raw materials | $ | 9,439,000 | $ | 11,304,000 | ||||
| Work-in-process | 7,079,000 | 13,755,000 | ||||||
| Finished goods | – | 8,040,000 | ||||||
| Total inventories | $ | 16,518,000 | $ | 33,099,000 | ||||
6. STOCKHOLDERS’ EQUITYbalance sheet at October 31, 2018.
SalesMinimum future lease payments under the capital lease as of Common StockOctober 31, 2018 are as follows:
Our ability to continue to fund our operations is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity.
| Fiscal Year ending April 30,: | ||||
| 2019 (remainder of fiscal year) | $ | – | ||
| 2020 | 85 | |||
| 2021 | 97 | |||
| Total minimum lease payments | 182 | |||
| Amount representing interest | (11 | ) | ||
| Net present value minimum lease payments | 171 | |||
| Less current portion included in other current liabilities | (78 | ) | ||
| Long-term portion included in capital lease obligation, less current portion | $ | 93 | ||
During the six months ended October 31, 2017, we issued shares of our common stock under the following agreement:
AMI Sales Agreement - On August 7, 2015, we entered into an At Market Issuance Sales Agreement (“AMI Sales Agreement”) with MLV & Co. LLC (“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 shelf registration statement on Form S-3 (File No. 333-201245), which was declared effective by the SEC on January 15, 2015. 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 AMI Sales Agreement. During the quarter ended July 31, 2017, we sold 1,051,258 shares of our common stock at market prices under the AMI Sales Agreement, for aggregate gross proceeds of $4,304,000 before deducting commissions and other issuance costs of $111,000. As of July 31, 2017, we had raised the full amount of gross proceeds available to us under the AMI Sales Agreement.
PEREGRINE PHARMACEUTICALS,
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (UNAUDITED)
(unaudited)(continued)in thousands, except share and per share information)
| 7. | STOCKHOLDERS’ EQUITY |
Series E Preferred Stock Dividend
The following table summarizes the 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”) quarterly dividend activity during the six months ended October 31, 2017:2018:
| Declaration Date | Record Date | Payment Date | Dividends Paid | Dividend Per Share | ||||
| 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 |
Declaration Date | Record Date | Payment Date | Dividends Paid | Dividend Per Share | ||||||||
| 6/6/2018 | 6/18/2018 | 7/2/2018 | $ | 1,081,000 | $ | 0.65625 | ||||||
| 9/5/2018 | 9/17/2018 | 10/1/2018 | $ | 1,081,000 | $ | 0.65625 | ||||||
Shares of Common Stock Authorized and Reserved for Future Issuance
We areOn October 4, 2018, our stockholders approved an amendment to our Certificate of Incorporation to decrease our authorized to issue up tonumber of shares of common stock from 500,000,000 shares to 150,000,000 shares (the “Certificate of our common stock. Amendment”). The Certificate of Amendment became effective upon filing with the Secretary of State of the State of Delaware on October 4, 2018.
As of October 31, 2017, 45,172,6322018, 56,063,488 shares of our common stock were issued and outstanding. In addition, our common stock outstanding as of October 31, 20172018 excluded the following shares of our common stock reserved for future issuance:
| · |
| · |
| · | 6,826,435 shares of common stock issuable upon conversion of our outstanding Series E Preferred Stock(1). |
_____________
| (1) | The Series E Preferred Stock is convertible into a number of shares of our common stock determined by dividing the liquidation preference of $25.00 per share by the conversion price, currently $21.00 per share. If all of our outstanding shares of Series E Preferred Stock were converted at the $21.00 per share conversion price, the holders of our Series E Preferred Stock would receive an aggregate of 1,961,619 shares of our common stock. However, we have reserved the maximum number of shares of our common stock that could be issued upon a change of control event assuming our shares of common stock are acquired for consideration of $5.985 per share or less. In this scenario, each outstanding share of our Series E Preferred Stock could be converted into 4.18 shares of our common |
7. equity compensation plans
| 15 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
| 8. | equity compensation plans |
Stock Incentive Plans
On October 4, 2018, our stockholders approved the Avid Bioservices, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”) which provides, among other things, the ability for us to grant stock options, restricted stock, stock appreciation rights, restricted stock units and other forms of share-based awards.
The number of shares of our common stock authorized for issuance under the 2018 Plan is the sum of (A) 2,350,000 and (B) the aggregate number of shares of common stock available for the grant of awards under our 2009, 2010, and 2011 Stock Incentive Plans (the “Prior Plans”) as of October 4, 2018 (the “Effective Date” of the 2018 Plan). The 2018 Plan replaced the Prior Plans, and no new awards will be granted under the Prior Plans as of the Effective Date. However, any awards outstanding under the Prior Plans on the Effective Date will remain subject to and be paid under the applicable Prior Plan, and any shares subject to outstanding awards under the Prior Plans that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become available for issuance under the 2018 Plan.
As of October 31, 2017,2018, we had an aggregate of 5,586,0967,313,424 shares of our common stock reserved for issuance under our stock incentive plans, of which, 4,123,0543,146,713 shares were subject to outstanding options and 1,463,042restricted stock rights and 4,166,711 shares were available for future grants of share-basedstock-based awards.
Stock Options
The following summarizes our stock option transaction activity for the six months ended October 31, 2017:2018:
| Stock Options | Shares | Weighted Average Exercisable Price | Shares | Weighted Average Exercisable Price | ||||||||||||
| Outstanding, May 1, 2017 | 4,081,548 | $ 8.77 | ||||||||||||||
| Outstanding, May 1, 2018 | 3,597,738 | $ | 8.74 | |||||||||||||
| Granted | 327,497 | $ 3.63 | 439,647 | $ | 5.05 | |||||||||||
| Exercised | (32,471 | ) | $ 3.46 | (334,556 | ) | $ | 3.47 | |||||||||
| Canceled or expired | (253,520 | ) | $ 7.51 | (679,366 | ) | $ | 11.26 | |||||||||
| Outstanding, October 31, 2017 | 4,123,054 | $ 8.96 | ||||||||||||||
| Outstanding, October 31, 2018 | 3,023,463 | $ | 8.22 | |||||||||||||
Restricted Stock Rights
On June 15, 2018, the Compensation Committee of the Board of Directors granted an aggregate of 128,050 restricted stock right (“RSR”) awards to substantially all of our employees, excluding executive officers, which entitles the employee the right to be issued a share of our common stock upon vesting of the RSR. The RSR’s were granted under our 2011 Stock Incentive Plan and vest annually in equal installments over a four-year period. The RSR’s have an aggregate grant date fair value of $464, based on the closing market price of our common stock on the date of grant, which is amortized as stock-based compensation expense on a straight-line basis over the period of vesting.
PEREGRINE PHARMACEUTICALS,
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER (UNAUDITED)
(in thousands, except share and per share information)
The following summarizes our restricted stock right transaction activity for the six months ended October 31, 2017 (unaudited)(continued)2018:
| Restricted Stock Rights | Shares | Weighted Average Grant Date Fair Value | ||||||
| Outstanding, May 1, 2018 | – | $ | – | |||||
| Granted | 128,050 | 3.62 | ||||||
| Vested | – | – | ||||||
| Forfeited | (4,800 | ) | 3.62 | |||||
| Outstanding, October 31, 2018 | 123,250 | $ | 3.62 | |||||
Employee Stock Purchase Plan (ESPP)
We have reserved a total of 2,142,857 shares of our common stock to be purchased under our ESPP,Employee Stock Purchase Plan (“ESPP”), of which 1,303,7701,231,699 shares remained available to purchase at October 31, 2017,2018, and are subject to adjustment as provided in the ESPP for stock splits, stock dividends, recapitalizations and other similar events. Under the ESPP, we sell shares to participants at a price equal to the lesser of 85% of the fair market value of our common stock at the (i) beginning of a six-month offering period, or (ii) end of the six-month offering period. The ESPP provides for two six-month offering periods each year; the first offering period begins on the first trading day on or after each May 1; the second offering period begins on the first trading day on or after each November 1. During the six months ended October 31, 2017, 55,9662018, 39,710 shares of our common stock were purchased under the ESPP at a purchase price of $3.87$2.87 per share.
Share-BasedStock-Based Compensation
Total share-basedstock-based compensation expense related to share-basedstock-based awards issued under our equity compensation plans is included in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss as follows:
Three Months Ended October 31, | Six Months Ended October 31, | Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||||||||||||||||
| 2017 | 2016 | 2017 | 2016 | 2018 | 2017 | 2018 | 2017 | |||||||||||||||||||||||||
| Cost of contract manufacturing | $ | 138,000 | $ | 24,000 | $ | 138,000 | $ | 66,000 | $ | 85 | $ | 138 | $ | 170 | $ | 138 | ||||||||||||||||
| Selling, general and administrative | 135,000 | 415,000 | 351,000 | 840,000 | 240 | 125 | 452 | 330 | ||||||||||||||||||||||||
| Research and development | 36,000 | 446,000 | 305,000 | 816,000 | ||||||||||||||||||||||||||||
| Discontinued operations | – | 46 | – | 326 | ||||||||||||||||||||||||||||
| Total | $ | 309,000 | $ | 885,000 | $ | 794,000 | $ | 1,722,000 | $ | 325 | $ | 309 | $ | 622 | $ | 794 | ||||||||||||||||
| Share-based compensation from: | ||||||||||||||||||||||||||||||||
| Stock options | $ | 287,000 | $ | 823,000 | $ | 696,000 | $ | 1,554,000 | $ | 275 | $ | 287 | $ | 529 | $ | 696 | ||||||||||||||||
| Restricted stock rights | 27 | – | 42 | – | ||||||||||||||||||||||||||||
| ESPP | 22,000 | 62,000 | 98,000 | 168,000 | 23 | 22 | 51 | 98 | ||||||||||||||||||||||||
| $ | 309,000 | $ | 885,000 | $ | 794,000 | $ | 1,722,000 | |||||||||||||||||||||||||
| Total | $ | 325 | $ | 309 | $ | 622 | $ | 794 | ||||||||||||||||||||||||
| 17 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
As of October 31, 2017,2018, the total estimated unrecognized compensation cost related to non-vested employee stock options and non-vested restricted stock rights was $1,875,000. This cost is$3,118 and $404, respectively. These costs are expected to be recognized over a weighted average vesting periods of 2.93 years and 3.62 years, respectively.
| 9. | 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 2.24 years based on current assumptions.stock options, unvested RSRs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Diluted net loss 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 RSRs, 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).
8. WARRANTS
NoThe potential dilutive effect of stock options, unvested RSRs, shares of common stock expected to be issued under our ESPP, and warrants wereoutstanding during the period are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive effect of our Series E Preferred Stock outstanding during the period was calculated using the if-converted method assuming the conversion of Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but are excluded if their effect is anti-dilutive. However, because the impact of stock options, unvested RSRs, shares of common stock expected to be issued or exercisedunder our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per common share amounts for the three and six months ended October 31, 2018 and 2017. As
The calculation of weighted average diluted shares outstanding for the three and six months ended October 31, 2018 and 2017 excludes the dilutive effect of the following weighted average outstanding stock options, unvested RSRs and shares of common stock expected to be issued under our ESPP as their impact is anti-dilutive during periods of net loss:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Stock Options | 234,763 | 31,877 | 185,996 | 69,065 | ||||||||||||
| RSRs | 55,963 | – | 30,645 | – | ||||||||||||
| ESPP | 16,401 | – | 9,090 | 133 | ||||||||||||
| Total | 307,127 | 31,877 | 225,731 | 69,198 | ||||||||||||
| 18 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
The calculation of weighted average diluted shares outstanding for the three and six months ended October 31, 2018 and 2017 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:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Stock Options | 2,238,986 | 3,600,478 | 2,599,877 | 3,608,917 | ||||||||||||
| ESPP | – | 43,332 | – | – | ||||||||||||
| Warrants | 12,306 | 39,040 | 25,673 | 39,040 | ||||||||||||
| Series E Preferred Stock | 1,978,783 | 1,978,783 | 1,978,783 | 1,978,783 | ||||||||||||
| Total | 4,230,075 | 5,661,633 | 4,604,333 | 5,626,740 | ||||||||||||
| 10. | WARRANTS |
During the three and six months ended October 31, 2018, warrants to purchase 39,040 shares of our common stock at an exercise priceexpired unexercised. As of $17.29 were outstandingOctober 31, 2018, we had no warrants issued and are exercisable through August 30, 2018.outstanding.
| 11. | Sale of research and development assets |
February 2018 Asset Assignment and Purchase Agreement
9. RESTRUCTURING
On August 9, 2017, our BoardFebruary 12, 2018, we entered into an Asset Assignment and Purchase Agreement (the “February 2018 Purchase Agreement”) with Oncologie, Inc. (“Oncologie”) pursuant to which we sold to Oncologie the majority of Directors approved, and our management implemented, a restructuring plan intended to reduce operating costs and improve cost efficiencies while we pursue strategic options for our research and development assets, which included the assignment of certain exclusive licenses related to our former phosphatidylserine (PS)-targeting program, as well as certain other licenses and focusassets useful and/or necessary for the potential commercialization of bavituximab.
Pursuant to the February 2018 Purchase Agreement, we received an aggregate of $8,000 from Oncologie, paid over three installments, of which $3,000 was received in March 2018 (first installment), $3,000 was received in June 2018 (second installment) and $2,000 was received in September 2018 (third installment). We are also eligible to receive up to an additional $95,000 in the event that Oncologie achieves certain development, regulatory and commercialization milestones with respect to bavituximab. In addition, we are eligible to receive royalties on net sales that are upward tiering into the mid-teens in the event that Oncologie commercializes and sells products utilizing bavituximab or the other transferred assets. As of October 31, 2018, no development, regulatory and commercialization milestones as defined in the February 2018 Purchase Agreement have been achieved by Oncologie. Oncologie is responsible for all future research, development and commercialization of bavituximab, including all related intellectual property costs and all other future liabilities and obligations arising out of the ownership of the transferred assets (i.e., we remain obligated for all liabilities associated with the research and development assets associated with the February 2018 Purchase Agreement incurred or arising prior to February 13, 2018). In addition, during May 2018, we entered into a separate services agreement with Oncologie to provide contract development and manufacturing services, at our efforts on growing our CDMO business. Under this restructuring plan,commercial rates, in support of the research and development assets sold under the February 2018 Purchase Agreement.
| 19 |
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except share and per share information)
September2018 Asset Assignment and Purchase Agreement
On September 13, 2018, we entered into a separate Asset Assignment and Purchase Agreement (the “September 2018 Purchase Agreement”) with Oncologie pursuant to which we completedsold to Oncologie our r84 technology, which included the assignment of certain licenses, patents and other assets useful and/or necessary for the potential commercialization of the r84 technology.
Pursuant to the September 2018 Purchase Agreement, we received $1,000 from Oncologie, which amount was paid to us in October 2017,2018. We are also eligible to receive up to an additional $21,000 in the event that Oncologie achieves certain development, regulatory and commercialization milestones with respect to r84. In addition, we reduced our overall workforceare 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 October 31, 2018, no development, regulatory and commercialization milestones as defined in the September 2018 Purchase Agreement have been achieved by 57 employees. Oncologie. Oncologie is responsible for all future research, development and commercialization of r84, including all related intellectual property costs and all other future liabilities and obligations arising out of the ownership of the transferred assets (i.e., we remain obligated for all liabilities associated with the research and development assets associated with the September 2018 Purchase Agreement incurred or arising prior to September 13, 2018).
Discontinued Operations
As a result duringof the three months ended October 31, 2017, we incurred an aggregatesale of $1,588,000our PS-targeting program and our r84 technology, the abandonment of our remaining research and development assets, and the strategic shift in restructuring costs consisting of one-time termination benefits, including severance, and other employee-related costs, of which $330,000 relatedour corporate direction to focus solely on our CDMO business, the operating results from our former research and development segment and $1,258,000the related to our contract manufacturing services segment. Restructuring costs are included in operating expensesassets and liabilities have been presented as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 1). The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the former research and development segment. The allocations do not include amounts related to general corporate administrative expenses or interest expense. Therefore, the results of operations from the former research and development segment do not necessarily reflect what the results of operations would have been had the former research and development segment operated as a stand-alone segment.
The following table summarizes the results of discontinued operations for the three and six months ended October 31, 2017. In addition, of the total aggregate restructuring costs, $51,000 was unpaid as of October 31, 20172018 and is included in accrued payroll and related costs in the accompanying unaudited condensed balance sheet at October 31, 2017.2017:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| Research and development | $ | – | $ | 3,650 | $ | – | $ | 7,216 | ||||||||
| Selling, general and administrative | – | 343 | – | 782 | ||||||||||||
| Restructuring charges | – | 330 | – | 330 | ||||||||||||
| Total operating expenses | $ | – | $ | 4,323 | $ | – | $ | 8,328 | ||||||||
| Gain on sale of research and development assets before income taxes | $ | 1,000 | – | $ | 1,000 | – | ||||||||||
| Income tax expense | (261 | ) | – | (261 | ) | – | ||||||||||
| Income (loss) from discontinued operations, net of tax | $ | 739 | $ | (4,323 | ) | $ | 739 | $ | (8,328 | ) | ||||||
PEREGRINE PHARMACEUTICALS,
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (unaudited)(continued) (UNAUDITED)
10. SEGMENT REPORTING
While our business currently is organized into two reportable operating segments, we are pursuing strategic options to license or divest the assets under our research(in thousands, except share and development segment as we transition to a dedicated CDMO. Historically, our research and development segment engaged in the research and development of monoclonal antibodies for the treatment of cancer. Our contract manufacturing services segment provides contract development and manufacturing services for third-party customers on a fee-for-service basis. Both segments operate in the U.S.per share information)
The accounting policies of the operating segments are the same as those described in Note 2. We evaluate the performance of our contract manufacturing services segment based on gross profit or loss from third-party customers and our evaluation of the performance of our research and development segment was based on scientific progress. Our performance evaluation does not include segment assets. All revenues shown below are derived from transactions with third-party customers.
Segment information is summarized as follows:
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Contract manufacturing services revenue | $ | 12,782,000 | $ | 23,370,000 | $ | 39,859,000 | $ | 28,979,000 | ||||||||
| Cost of contract manufacturing services | 16,242,000 | 15,441,000 | 36,690,000 | 18,503,000 | ||||||||||||
| Gross profit (loss) | (3,460,000 | ) | 7,929,000 | 3,169,000 | 10,476,000 | |||||||||||
| Selling, general and administrative expense | 3,867,000 | 4,984,000 | 8,080,000 | 10,044,000 | ||||||||||||
| Research and development expense | 3,722,000 | 7,022,000 | 7,367,000 | 15,591,000 | ||||||||||||
| Restructuring charges | 1,588,000 | – | 1,588,000 | – | ||||||||||||
| Interest and other income (expense), net | 13,000 | 21,000 | 37,000 | 46,000 | ||||||||||||
| Net loss | $ | (12,624,000 | ) | $ | (4,056,000 | ) | $ | (13,829,000 | ) | $ | (15,113,000 | ) | ||||
PEREGRINE PHARMACEUTICALS, INC.The following table summarizes the assets and liabilities of discontinued operations as of October 31, 2018 and April 30, 2018:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSFOR THE SIX MONTHS ENDED OCTOBER 31, 2017 (unaudited)(continued)
| October 31, 2018 | April 30, 2018 | |||||||
| Assets: | ||||||||
| Other receivables | $ | – | $ | 5,000 | ||||
| Total assets of discontinued operations | $ | – | $ | 5,000 | ||||
| Liabilities: | ||||||||
| Accounts payable | $ | – | $ | 32 | ||||
| Accrued clinical trial and related fees | 117 | 3,613 | ||||||
| Accrued payroll and related costs | 174 | 614 | ||||||
| Other liabilities | 125 | 291 | ||||||
| Total liabilities of discontinued operations | $ | 416 | $ | 4,550 | ||||
11. commitments and contingencies
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 amountThe carrying value of the loss can be reasonably estimated. Such provisions are reviewed at least quarterlyassets and adjusted to reflect the impactliabilities deemed a component of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case.
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 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 board of directors during the past four fiscal years ended April 30, 2015 and that our directors breached their fiduciary duty of candor by filing and seeking stockholder action on the basis of an allegedly materially false and misleading proxy statementdiscontinued operations were not classified as “held 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 provides, 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 expensesale” in the accompanying unaudited condensed consolidated financial statements for the six months endedbalance sheet at October 31, 2017. The Company received such payment in full in August 2017.2018 and the accompanying condensed consolidated balance sheet at April 30, 2018, as Oncologie did not purchase or assume any of the reported assets or liabilities under the aforementioned February 2018 Purchase Agreement and September 2018 Purchase Agreement.
12. SUBSEQUENT EVENTS
Series E Preferred Stock Dividend
| 12. | SUBSEQUENT EVENTS |
On December 7, 2017,5, 2018, our Board of Directors declared a quarterly cash dividend of $0.65625 per share on our Series E Preferred Stock. The dividend payment is equivalent to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference, accruing from October 1, 20172018 through December 31, 2017.2018. The cash dividend is payable on January 2, 20182019 to holders of the Series E Preferred Stock of record on December 18, 2017.
17, 2018.
| Item 2. | Management’s Discussion and Analysis of Financial Condition And Results of Operations. |
The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Avid Bioservices, Inc. included in Part I, Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements”forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results of operations to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which represent our projections, estimates, expectations or beliefs concerning among other things, financial items that relate to management’s future plans or objectives or to our future economic and financial performance. In some cases, you can identify these. Forward-looking statements are often identified by terminologythe use of words such as, “may”, “should”, “plans”but not limited to, “anticipate”, “believe”, “will”“can”, “anticipate”“continue”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “project”, “seek”, “should”, “target”, “will”, “would” and similar expressions or “intend”, including their opposites or similar phrases or expressions. You should be aware that thesevariations intended to identify forward-looking statements. These statements are projections or estimates asbased on the beliefs and assumptions of our management based on information currently available to future events andmanagement. These forward-looking statements are subject to a number of factors that may tend to influencenumerous risks and uncertainties, including the accuracy ofrisks and uncertainties described under the statements. These forward-looking statements should not be regarded as a representation by us or any other person that our events or plans will be achieved. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describesection titled “Risk Factors” in Part II, Section 1A of this Quarterly Report on Form 10-Q, Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2017,2018, those identified in this “Management’s Discussion and the reportsAnalysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q, and in other filings we file from time to timemay make with the Securities and Exchange Commission (“SEC”) afterfrom time to time. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the dateimpact of this Quarterly Report. Actualall factors on our business or the extent to which any factor, or combination of factors, may cause actual results mayto differ materially from those contained in any forward lookingforward-looking statement. We qualify all of our forward-looking statements by these cautionary statements and, except as required by law, assume no obligation and do not intend to update these forward-looking statements.
Overview
We are a company committed to improving the lives of patients by manufacturing and delivering high quality pharmaceutical products through ourdedicated contract development and manufacturing organization (“CDMO”), Avid Bioservices, Inc. that provides a comprehensive range of services from process development to current Good Manufacturing Practices (“Avid”cGMP”). We are currently transitioning from a research and development company to a dedicated CDMO business commercial manufacturing focused on development and manufacturing of biopharmaceutical products derived from mammalian cell culture. As partWith 25 years of our transition, we have taken steps including, but not limited to:
As we continue to fully transition the company to a dedicated CDMO, we plan to take additional steps over the near term, including but not limited to:
Avid—Our CDMO Business
Avid, a wholly-owned subsidiary of Peregrine Pharmaceuticals, Inc. (“Peregrine”), was formed in 2002 from existing manufacturing infrastructure. Avid provides fully-integrated cGMP services from cell line development to commercial biomanufacturing of large molecules, such asexperience producing monoclonal antibodies and recombinant proteins for third-party customers.in batch, fed-batch and perfusion modes, our services include cGMP clinical and commercial product manufacturing, purification, bulk packaging, stability testing and regulatory submissions and support. We also provide a variety of process development services, including cell line development and optimization, cell culture and feed optimization, analytical methods development and product characterization.
Our initialWe have experience in performing process development and manufacturing of biologics since 1993 in our Franklin biomanufacturing facility (the “Franklin(“Franklin Facility”) is, located at our current headquarters in Tustin, California. In March 2016, we expanded our manufacturing capacity through the launchcommissioning of our secondMyford biomanufacturing facility (the “Myford(“Myford Facility”), which significantly increasedmore than doubled our manufacturing capacity. The 42,000 square foot facility, employswhich is our second biomanufacturing facility, includes multiple single-use bioreactors at up to the 2,000-liter manufacturing scale. OurThe 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.
In Februarythe fall of 2017, we leased an additional 42,000 square feet of vacant warehouse space within the same building asannounced our existing Myford Facility. The proximity of this space will allow usintent to utilize existing manufacturing infrastructure that we believe should enhancecease our manufacturing efficienciesresearch and reduce the overall costdevelopment activities and timeframe to construct a third biomanufacturing facility. We currently do not expect to commence construction of the new facility until existing manufacturing capacity is close to full utilization, which we do not expect prior to April 30, 2018.
To date, Avid has been audited and qualified by large and small, domestic and foreign, biotechnology companies interested in the production of biologic material for clinical and commercial use. Additionally, Avid has been audited by several regulatory agencies, including the U.S. FDA, the European Medicines Agency, the Brazilian Health Surveillance Agency (ANVISA), the Canadian Health Authority and the California Department of Health.
For fiscal year 2018, we established as two key objectives fortransition our CDMO business (i) the expansion of our manufacturing capacity through the installation and validation of two 2,000 liter single use bioreactors in our Myford Facility, which was completed in August 2017, and (ii) continuing to diversify our customer base by securing additional customers to support our future revenue growth and minimizing our historical reliance on a small customer base, which efforts have resulted in our securing of four new customers since January 2017. However, as previously disclosed, during the first quarter of fiscal year 2018 we experienced unanticipated decreases in manufacturing demand from our largest customer and a regulatory filing delay from our second largest customer, both of which will impact our ability to increase revenue from our CDMO business during the remainder of fiscal year 2018 and potentially beyond.
Peregrine—Our Research and Development Business
As we transition to a dedicated CDMO, which we continue to wind down researchcompleted at the beginning of calendar 2018. During our transition, we established and development expenses and we plan to reduce research and development costs to zero overbegan executing on the next sixty days in connection with such transition. As discussed above, we are seeking to license or divest our research and development assets and focus our efforts on growing our CDMO business. As a result, we expect to reduce research and development expenses by 50% or more in fiscal year 2018 compared to fiscal year 2017.following near-term strategic objectives:
Results of Operations
| · | Expand and diversify our customer base by securing additional customers to support our future potential revenue growth; and |
The following table compares the unaudited condensed consolidated statements of operations for the three and six months ended October 31, 2017 and 2016. This table provides you with an overview of the changes in the condensed consolidated statements of operations for the comparative periods, which are further discussed below.
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||||||||||
| 2017 | 2016 | $ Change | 2017 | 2016 | $ Change | |||||||||||||||||||
| Contract manufacturing revenue | $ | 12,782,000 | $ | 23,370,000 | $ | (10,588,000 | ) | $ | 39,859,000 | $ | 28,979,000 | $ | 10,880,000 | |||||||||||
| Cost of contract manufacturing | 16,242,000 | 15,441,000 | 801,000 | 36,690,000 | 18,503,000 | 18,187,000 | ||||||||||||||||||
| Gross profit (loss) | (3,460,000 | ) | 7,929,000 | (11,389,000 | ) | 3,169,000 | 10,476,000 | (7,307,000 | ) | |||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling, general & administrative | 3,867,000 | 4,984,000 | (1,117,000 | ) | 8,080,000 | 10,044,000 | (1,964,000 | ) | ||||||||||||||||
| Research and development | 3,722,000 | 7,022,000 | (3,300,000 | ) | 7,367,000 | 15,591,000 | (8,224,000 | ) | ||||||||||||||||
| Restructuring charges | 1,588,000 | – | 1,588,000 | 1,588,000 | – | 1,588,000 | ||||||||||||||||||
| Total operating expenses | 9,177,000 | 12,006,000 | (2,829,000 | ) | 17,035,000 | 25,635,000 | (8,600,000 | ) | ||||||||||||||||
| Operating loss | (12,637,000 | ) | (4,077,000 | ) | (8,560,000 | ) | (13,866,000 | ) | (15,159,000 | ) | 1,293,000 | |||||||||||||
| Other income (expense) | ||||||||||||||||||||||||
| Interest and other income | 14,000 | 21,000 | (7,000 | ) | 41,000 | 46,000 | (5,000 | ) | ||||||||||||||||
| Interest and other expense | (1,000 | ) | – | (1,000 | ) | (4,000 | ) | – | (4,000 | ) | ||||||||||||||
| Net loss | $ | (12,624,000 | ) | $ | (4,056,000 | ) | $ | (8,568,000 | ) | $ | (13,829,000 | ) | $ | (15,113,000 | ) | $ | 1,284,000 | |||||||
| · | Continue to invest in manufacturing facilities and infrastructure to maximize our facility utilization and support our customers’ clinical and commercial development and manufacturing requirements. |
ResultsWe are currently in the process of operationsexpanding 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.
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 contract manufacturing revenue, gross profit, selling, general and administrative expenses and operating income.
We intend for interim periods covered by this Quarterly Report on Form 10-Q may not necessarily be indicative of results of operationsdiscussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for the full fiscal year or for any other period.those changes.
Contract Manufacturing Revenue
Three Months: The decrease in contractContract manufacturing revenue of $10,588,000 (45%) during the three months ended October 31, 2017 compared to the same period in the prior year was primarily due to a decrease in the number ofis derived from services provided under our customer contracts and are disaggregated into manufacturing runs completed and shipped in the current year period compared to the same period in the prior year, which can primarily be attributed to a decrease in manufacturing demand from Halozyme, Inc., our largest customer.
Six Months:process development revenue streams. The increase in contract manufacturing revenue stream represents revenue from the manufacturing of $10,880,000 (38%) duringcustomer product(s) derived from mammalian cell culture covering clinical through commercial manufacturing runs. The process development revenue stream represents revenue from non-manufacturing related services associated with the six months ended October 31, 2017 compared to the same period in the prior year was primarily due to an increase in the number of manufacturing runs completed and shipped in the current year period compared to the prior year period. This current period increase in the number of runs included several manufacturing runs in the aggregate amount of $9,924,000 used to support the process validationcustom development of a customer product, which product was ready for shipment in fiscal year 2017, but was deferred to fiscal year 2018 due to a shipping delay. Excluding any future potential new business, we expect contract manufacturing revenue for the full fiscal year ending April 30, 2018 to decline in comparison to fiscal year 2017. Part of this decline is due to lower anticipated commitments from Halozyme, Inc., our largest customer, based on their most recent committed forecast (covering the three quarters ending June 30, 2018). As we seek to diversify our customer base, we have secured four new customers since January 2017. These new customers are predominately in an earlier stage of development and, therefore, we expect that contract manufacturing revenue from these new customers during fiscal year 2018 will only partially offset the anticipated decrease in revenue from our other existing customers.
Therefore, based on our current commitments for manufacturing services and the anticipated completion of in-process third-party customer manufacturing runs, we continue to expect contract manufacturing for the fiscal year ending April 30, 2018 to range from $50 to $55 million.customer’s product.
Gross Profit (Loss)
Three Months: During the three months ended October 31, 2017, gross margins declinedGross profit is equal to a negative 27% primarily driven by idle capacity costs in the current period, compared to gross margins of 34% for the same prior year three-month period, during which we incurred no idle capacity costs. Included withincontract manufacturing revenue less cost of contract manufacturing are idle capacity costs of $4,938,000, which negatively impacted gross margin by 39 percentage points for the three months ended October 31, 2017. This current period decline was further impacted by higher manufacturing costs associated with lower facility utilization in addition to the variability of manufacturing costs from product to product.
Six Months: During the six months ended October 31, 2017, gross margins declined to 8%, primarily driven by idle capacity costs in the current period compared to 36% for the same prior year six-month period, during which we incurred no idle capacity costs. Included within costmanufacturing. Cost of contract manufacturing arereflects the direct cost of labor, overhead and material costs. Direct labor costs include personnel costs within the manufacturing, process 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.
We regularly analyze the components of gross profit as well as gross profit as a percentage of contract manufacturing revenue. Specifically we look at the gross profit margins of our manufacturing revenue and process development revenues, and the effects of idle capacity, costs of $5,838,000 which negatively impacted gross margin by 15 percentage points for the six months ended October 31, 2017. This current period decline was further impacted by higher manufacturing costs associated with lower facility utilization in addition to the variability of manufacturing costs from product to product.
In addition, we are actively evaluating our operating expenses and cost structure as a dedicated CDMO and we plan to align our cost structure to match the future needs of the CDMO business.if any, on these revenue streams.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses consist primarilyare composed of payrollcorporate-level expenses including personnel and related expenses and share-based compensation expense (non-cash), for personnel insupport costs of corporate functions such as executive finance,management, legal, accounting, business development, legal, human resources, information technology, and other internal support functions. In addition,centralized services. SG&A expenses include corporate and patent 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. SG&A expenses are generally not directly proportional to revenues, but we expect such expenses increase over time to support the needs of our growing company.
Results of Operations(in thousands)
On May 1, 2018, we adopted ASU 2014-09, Revenue from Contracts (Topic 606):Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method applied to all contracts not completed as of May 1, 2018. Under the modified retrospective method, results for reporting periods beginning after May 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under the accounting standards in effect for the prior period. Refer to Note 2, “Summary of Significant Accounting Policies” for details regarding the adoption of ASC 606.
Three Months: The decrease in SG&A expenses of $1,117,000 (22%) duringfollowing table compares the three months ended October 31, 2017 compared to the same prior year period was primarily due to a current year three-month period decrease in payroll and related costs, offset by incremental increases in facility related expenses, legal fees, and other general corporate expenses.
Six Months: The decrease in SG&A expenses of $1,964,000 (20%) during the six months ended October 31, 2017 compared to the same prior year period was primarily due to current six-month period decreases in payroll and related costs and non-employee director fees. The current period decrease in non-employee directors 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 to which our former non-employee directors agreed to pay or cause to be paid $1,500,000 to the Company (as described in Note 11 to the accompanying unaudited condensed consolidated financial statements), which non-recurring amount was applied against non-employee director fees during the quarter ended July 31, 2017. This decrease during the six months ended October 31, 2017 was offset by current year period increases in facility related expenses, legal fees, investor relation fees, audit and accounting fees and other general corporate expenses.
In addition, we are actively evaluatingstatements of operations from our SG&A expenses and cost structure as a dedicated CDMO and we plan to align our cost structure to match the future needs of the CDMO business.
Research and Development Expenses
Research and development expenses primarily include (i) payroll and related costs and share-based compensation expense (non-cash), associated with research and development personnel, (ii) costs related to clinical trials and preclinical testing, (iii) costs to develop and manufacture our product candidates, including raw materials and supplies, product testing, depreciation, and facility related expenses, (iv) expenses for research services provided by universities and contract laboratories, including sponsored research funding, and (v) other research and development expenses. Research and development expenses are charged to expense as incurred when these expenditures relate to our research and development efforts and have no alternative future uses.
Three and Six Months: In August 2017, we announced plans to pursue strategic options for our research and development assets and focus our efforts on growing our CDMO business. As we executed on this strategy, research and development expensescontinuing operations for the three and six months ended October 31, 2018 and 2017, decreased $3,300,000 (47%) and $8,224,000 (53%), respectively. These decreases duringwhich are further discussed below.
Three Months Ended October 31, | Six Months Ended October 31, | |||||||||||||||||||||||
| 2018 | 2017 | $ Change | 2018 | 2017 | $ Change | |||||||||||||||||||
| Contract manufacturing revenue | $ | 10,178 | $ | 12,782 | $ | (2,604 | ) | $ | 22,767 | $ | 39,859 | $ | (17,092 | ) | ||||||||||
| Cost of contract manufacturing | 9,844 | 16,242 | (6,398 | ) | 21,241 | 36,690 | (15,449 | ) | ||||||||||||||||
| Gross profit (loss) | 334 | (3,460 | ) | 3,794 | 1,526 | 3,169 | (1,643 | ) | ||||||||||||||||
| Operating expenses: | ||||||||||||||||||||||||
| Selling, general and administrative | 2,816 | 3,596 | (780 | ) | 6,031 | 7,449 | (1,418 | ) | ||||||||||||||||
| Restructuring charges | – | 1,258 | (1,258 | ) | – | 1,258 | (1,258 | ) | ||||||||||||||||
| Total operating expenses | 2,816 | 4,854 | (2,038 | ) | 6,031 | 8,707 | (2,676 | ) | ||||||||||||||||
| Operating loss | (2,482 | ) | (8,314 | ) | 5,832 | (4,505 | ) | (5,538 | ) | 1,033 | ||||||||||||||
| Interest and other income, net | 119 | 13 | 106 | 181 | 37 | 144 | ||||||||||||||||||
| Loss from continuing operations before income taxes | $ | (2,363 | ) | $ | (8,301 | ) | $ | 5,938 | $ | (4,324 | ) | $ | (5,501 | ) | $ | 1,177 | ||||||||
| Income tax benefit | 173 | – | 173 | 173 | – | 173 | ||||||||||||||||||
| Loss from continuing operations | $ | (2,190 | ) | $ | (8,301 | ) | $ | 6,111 | $ | (4,151 | ) | $ | (5,501 | ) | $ | 1,350 | ||||||||
Three Months Ended October 31, 2018 Compared to the Three Months Ended October 31, 2017
Contract Manufacturing Revenue
Contract manufacturing revenue for the three and six months ended October 31, 2017 were primarily driven by decreases2018 was $10,178 compared to $12,782 for the same period in (i) third-party clinical trial costs associated with our discontinued Phase III SUNRISE trial, (ii) manufacturing costs associated with the prior year, validationa decrease of bavituximab$2,604 or 20%. The decline in revenue can primarily be attributed to fewer manufacturing runs completed in the current period compared to the prior period as a result of a decrease in the current manufacturing demand from our two largest customers. Revenue for the quarter was also impacted by our planned sequential shutdown of our Franklin and Myford Facility,manufacturing facilities, which halted manufacturing at each facility for several weeks in order to conduct both routine and (iii) payrollnon-routine maintenance and related costs associated with a reduction in research and development personnel pursuant to our August 2017 restructuring plan. These current year period decreases wereupgrades. The quarterly revenue decline was offset by a $757,000 charge$1,215 favorable impact from the adoption of ASC 606. Refer to researchNote 2 “Summary of Significant Accounting Policies” in the accompanying notes to the unaudited condensed consolidated financial statements for details regarding the adoption of ASC 606.
Gross Profit
Gross profit for the three months ended October 31, 2018 was $334 compared to a loss of $3,460 for the same period in the prior year, an increase of $3,794, where gross margins were 3% and a negative 27%, respectively. The $3,794 increase in gross profit was primarily due to an improvement from manufacturing and process development expenseproject profit of $1,790 combined with a $2,004 decrease in idle capacity costs.
Selling, General and Administrative Expenses
SG&A decreased $780, or 22%, during the three months ended October 31, 2017, which2018 compared to the same prior year period. The decrease in SG&A was associated withprimarily due to decreases in facility-related expenses of $484 and legal, accounting and other professional fees of $334. As a percentage of revenue, SG&A expenses remained consistent at 28% for both the write-off prepaid expenses under researchcurrent year and development contracts, as we believe they no longer provided a probable future economic benefit based on our transition to a dedicated CDMO company.prior year periods.
As we continue to pursue this strategic plan, we currently expect research and development expenses for the full fiscal year 2018 to decrease by at least 50% or more in comparison to fiscal year 2017.
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Restructuring Charges
Three and Six Months: Restructuring charges of $1,588,000 incurred duringDuring the three and six months ended October 31, 2017, werewe incurred restructuring charges of $1,588 directly related to a restructuring plan we implemented 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 pursuepursued the license or sale of our research and development assets and focus our efforts on growing our CDMO business (as described in Note 98 of the Notes to the accompanying unaudited condensed consolidated financial statements)Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018). The costs incurred under this restructuring plan, which was completed in October 2017, consisted of one-time termination benefits, including severance, and other employee related costs. Of the total restructuring charges incurred, $1,258 was related to our contract manufacturing services segment and $330 was related to our discontinued research and development segment. The restructuring charges associated with our discontinued research and development segment are included in income (loss) from discontinued operations in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for the three and six months ended October 31, 2017. We did not incur any restructuring charges during the three and six months ended October 31, 2016.2018.
Operating Loss
Operating loss was $2,482, or a negative 24% of revenue, for the three months ended October 31, 2018 compared to an operating loss of $8,314, or a negative 65% of revenue, for the same period in the prior year. Of this $5,832 improvement in year-over-year operating loss, approximately $3,794 was attributable to gross profit margin improvement, an SG&A decrease of $780 and the absence of restructuring charges in 2018 that resulted in a decrease of $1,258.
Income Tax Benefit
In September 2018, we recognized a $1,000 gain in discontinued operations, before taxes, for the sale of our r84 technology (as described in Note 11 to the accompanying unaudited condensed consolidated financial statements). In accordance with the “Intraperiod Tax Allocation” rules under ASC 740:Income Taxes, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in our case, discontinued operations, for the three months ended October 31, 2018, we recorded a tax benefit in continuing operations of $173 with an offsetting tax expense of $261 recorded in discontinued operations. The remaining deferred tax benefit of $88 will be allocated proportionally to continuing operations throughout the remainder of the fiscal year.
Six Months Ended October 31, 2018 Compared to the Six Months Ended October 31, 2017
Contract Manufacturing Revenue
Contract manufacturing revenue for the six months ended October 31, 2018 was $22,767 compared to $39,859 for the same period in the prior year, a decrease of $17,092 or 43%. Included in the $39,859 prior year revenue was $9,924 of revenue associated with several manufacturing runs that were completed in fiscal year 2017, but recognized in the first quarter of fiscal year 2018 due to a client-requested delay in shipment. The comparable period decline in revenue can primarily be attributed to fewer manufacturing runs completed in the current period compared to the prior period as a result of a decrease in the current manufacturing demand from our two largest customers. Revenue for the current period was also impacted by our planned sequential shutdown of our Franklin and Myford manufacturing facilities, which halted manufacturing at each facility for several weeks in order to conduct both routine and non-routine maintenance and upgrades. Finally, the current year decline in revenue as compared to the prior year period was offset by an $11,831 favorable impact from the adoption of ASC 606. Refer to Note 2 “Summary of Significant Accounting Policies” in the accompanying notes to the unaudited condensed consolidated financial statements for details regarding the adoption of ASC 606.
Gross Profit
Gross profit for the six months ended October 31, 2018 was $1,526 compared to $3,169 for the same period in the prior year, a decrease of $1,643, where gross margins were 7% and 8%, respectively. The $1,643 decrease in gross profit was comprised of a $2,818 decrease in manufacturing and process development project profit, offset by a favorable reduction to idle capacity costs of $1,175.
Selling, General and Administrative Expenses
SG&A expense decreased $1,418, or 19%, during the six months ended October 31, 2018 compared to the same prior year period. The decrease in SG&A was attributed to the current year period decreases in payroll and related costs of $767, facility-related expenses of $1,232 and legal, accounting and other professional fees of $926. These current year period decrease in SG&A was offset by the July 2017 settlement of a derivative and class action lawsuit, pursuant to which our former non-employee directors agreed to pay or cause to be paid $1,500 to us (as described in Note 3 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018), which non-recurring amount was applied against non-employee director fees during the fiscal quarter ended July 31, 2017. As a percentage of revenue, SG&A expenses for the six months ended October 31, 2018 and 2017 were 26% and 19%, respectively.
Restructuring Charges
During the six months ended October 31, 2017, we incurred restructuring charges of $1,588 related to a restructuring plan we implemented in August 2017, as further described above. We did not incur any restructuring charges during the six months ended October 31, 2018.
Operating Loss
Operating loss was $4,505, or a negative 20% of revenue, for the six months ended October 31, 2018 compared to an operating loss of $5,538, or a negative 14% of revenue, for the same period in the prior year. Of this $1,033 improvement in year-over-year operating loss, approximately $1,643 was attributable to a gross profit decrease offset by a favorable SG&A expense reduction of $1,418 and the absence of restructuring charges in 2018 that resulted in a decrease of $1,258.
Income Tax Benefit
In September 2018, we recognized a $1,000 gain in discontinued operations, before taxes, for the sale of our r84 technology (as described in Note 11 to the accompanying unaudited condensed consolidated financial statements). In accordance with the “Intraperiod Tax Allocation” rules under ASC 740:Income Taxes, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in our case, discontinued operations, for the six months ended October 31, 2018, we recorded a tax benefit in continuing operations of $173 with an offsetting tax expense of $261 recorded in discontinued operations. The remaining deferred tax benefit of $88 will be allocated proportionally to continuing operations throughout the remainder of the fiscal year.
Discontinued Operations
As a result of the sale of our PS-targeting and r84 technologies in February 2018 and September 2018, respectively (as described in Note 11 to the accompanying unaudited condensed consolidated financial statements), the abandonment of our remaining research and development assets, and the strategic shift in our corporate direction to focus solely on our CDMO business, the operating results of our former research and development segment have been excluded from continuing operations and reported as income (loss) from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. The gain of $1,000 that was recorded in connection with the sale of our r84 technology in September 2018 is included in income from discontinued operations, net of tax, in the accompanying unaudited condensed consolidated statements and operations and comprehensive loss for the three and six months ended October 31, 2018.
Critical Accounting Policies and Estimates
Our discussion and analysis of our consolidated financial position 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. During the three and six months ended October 31, 2017,2018, there were no significant changes in our critical accounting policies as previously disclosed by us in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2017.2018, except for our critical accounting policies and estimates on revenue recognition as a result of our adoption of ASC 606, as described in Note 2, “Summary of Significant Accounting Policies” in the accompanying notes to the unaudited condensed consolidated financial statements.
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Liquidity and Capital Resources
At October 31, 2017, we had $27,727,000 in cash and cash equivalents. We have expended substantial funds on our legacy research and development of pharmaceutical product candidates (which we are seeking to license or divest)(discontinued operations) and funding the operations of Avid.our contract manufacturing business (continuing operations). As a result, we have historically experienced losses and negative cash flows from operations since our inceptioninception.
During fiscal year 2018, we refocused our corporate strategy, whereby we transitioned our business to operate solely as a dedicated CDMO and discontinued our research and development segment (as described in Note 1 to the accompanying consolidated financial statements). Now that we expect negativehave commenced our first full fiscal year as a dedicated CDMO, our ability to continue as a going concern depends on the amount of cash on hand and our ability to generate positive cash flows from operations, to continue for the foreseeable future untilprimarily through securing new customers and diversifying our customer base, and thereby reducing our reliance on a small customer base, increasing revenues, improving gross margins and managing our operating expenses.
At October 31, 2018 we can generate sufficient revenue from Avid’s contract manufacturing services to achieve profitability. Therefore, unlesshad $32,694 in cash and until we are able to generate sufficient revenue from Avid’s contract manufacturing services, we expect such losses to continuecash equivalents. In addition, as of October 31, 2018, our current backlog was approximately $36 million (as further discussed in the foreseeable future, and“Backlog” section below). While we anticipate the majority of our backlog will be recognized as a result, we must raise additional capitalrevenue during the remainder of fiscal year 2019, our backlog is subject to a number of risks and uncertainties, including the risk that a customer may experience delays in its program(s) or otherwise, which could result in the postponement of anticipated manufacturing services; 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; 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 October 31, 2018, in ordertogether with our projected cash receipts under our current backlog, may not be sufficient to fund our operations and to execute onbeyond one year after the date our business plans.financial statements are issued.
Historically,In the event we have funded a significant portion ofare unable to secure sufficient business to support our operations, through the issuance of equity; however, during the three months ended October 31, 2017, we did notmay need to raise any additional capital throughin the issuancefuture. Additional funding may include the financing or leasing of equity. Duringcapital equipment or raising capital in the three months ended July 31, 2017, we raised $4,304,000 in aggregate gross proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement (as described in Note 6 to the accompanying unaudited condensed consolidated financial statements). In addition, as of July 31, 2017, we had raised the full amount of gross proceeds available to us under the At Market Issuance Sales Agreement. As of October 31, 2017, $67,674,000 remained available to us under our effective shelf registration statement (which shelf expires in mid-January 2018), which allows us from time to time to offer and sell shares of our common stock, in one or more offerings, either individually or in combination.
equity markets. Our ability to raise additional capital in the equity markets to fund our obligations in future periods is dependentdepends 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.
With respect to our ability to generate additional contract manufacturing revenue, Avid currently has a revenue backlog of $33 million under signed contracts from existing customers, which is significantly less than the revenue backlog of $73 million we reported as of October 31, 2016. As such, we expect our current backlog to be insufficient to cover our operating costs over the near term unless we are able to generate new business or further restructure our operations.
Although it is difficult to predict all of our future liquidity requirements, we believe that our cash and cash equivalents as of October 31, 2017 and the remaining projected cash receipts from manufacturing services provided by Avid for its third-party customers under our backlog will only be sufficient to fund our operations through May 2018, which estimate assumes we raise no additional capital from the capital markets or other potential sources. In addition, in the event a customer timely cancels its commitments prior to the initiation of manufacturing services, we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments, which would have a negative impact on our liquidity, our reported backlog and revenue guidance.
If we are unable to either raise sufficient capital in the equity markets or generate additional revenue, from Avid, we may need to further restructure, or cease, our operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.
As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that our accompanying unaudited condensed consolidated financial statements are issued.
Significant components of the changes in cash flows from operating, investing, and financing activities for the six months ended October 31, 20172018 compared to the same prior year period are as follows:follows (in thousands):
Net Cash Used In Operating Activities. Net cash used in operating activities represents our (i) net loss, as reported, (ii) less non-cashadjustments to reconcile net loss to net cash used in operating expenses,activities and (iii) net changes in the timing of cash flows as reflected by the changes in operating assets and liabilities, as described in the below table:
| Six Months Ended October 31, | ||||||||
| 2017 | 2016 | |||||||
| Net loss, as reported | $ | (13,829,000 | ) | $ | (15,113,000 | ) | ||
| Less non-cash operating expenses: | ||||||||
| Share-based compensation | 794,000 | 1,722,000 | ||||||
| Depreciation and amortization | 1,300,000 | 1,219,000 | ||||||
| Net cash used in operating activities before changes in operating assets and liabilities | $ | (11,735,000 | ) | $ | (12,172,000 | ) | ||
| Net change in operating assets and liabilities | $ | (7,733,000 | ) | $ | (4,615,000 | ) | ||
| Net cash used in operating activities | $ | (19,468,000 | ) | $ | (16,787,000 | ) | ||
| Six Months Ended October 31, | ||||||||
| 2018 | 2017 | |||||||
| Net loss, as reported | $ | (3,412 | ) | $ | (13,829 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | 1,325 | 1.300 | ||||||
| Stock-based compensation | 622 | 794 | ||||||
| Gain on sale of research and development ass | (1,000 | ) | – | |||||
| Net cash used in operating activities before changes in operating assets and liabilities | $ | (2,465 | ) | $ | (11,735 | ) | ||
| Net change in operating assets and liabilities from: | ||||||||
| Continuing operations | $ | (7,562 | ) | $ | (6,851 | ) | ||
| Discontinued operations | (4,134 | ) | (882 | ) | ||||
| Net cash used in operating activities | $ | (14,161 | ) | $ | (19,468 | ) | ||
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Net cash used in operating activities increased $2,681,000decreased $5,307 to $19,468,000$14,161 for the six months ended October 31, 20172018 compared to net cash used in operating activities of $16,787,000$19,468 for the six months ended October 31, 2016.2017. This increasedecrease in net cash used in operating activities was due to a net change in operating assets and liabilities of $3,118,000 primarily due to the timing of cash receipts and expenditures primarily associated with deferred revenue, customer deposits, inventories, trade and other receivables, accounts payable, and accrued clinical trial and related fees offset by a decrease of $437,000$9,270 in our net loss reported for the current six-month period after deductingadjustments for non-cash operating expenses and gain on sale of research and development assets, as described in the above table.table, offset by a net change in operating assets and liabilities of $711 and $3,252 from continuing and discontinued operations, respectively. The net change in operating assets and liabilities from continuing operations was primarily due to decreases in inventories and contract liabilities (customer deposits and deferred revenue) associated with the application of ASC 606, which we adopted on May 1, 2018. The net change in operating assets and liabilities from discontinued operations was primarily due to decreases in accrued payroll and related costs and accrued clinical trial and related fees.
Net Cash Used InProvided By (Used In) Investing Activities. Net cash provided by (used in) investing activities for the six months ended October 31, 2018 and 2017 was $5,554 and ($1,809), respectively.
Net cash provided by investing activities for the six months ended October 31, 2018 consisted of proceeds of $6,000 related to the sale of certain research and development assets associated with our discontinued research and development segment (as described in Note 11 to the accompanying condensed consolidated financial statements), offset by the purchase of property and equipment of $446.
Net cash used in investing activities for the six months ended October 31, 2017 and 2016, was $1,809,000 and $1,066,000, respectively, which amounts primarily consisteddirectly related to the purchase of property and equipment acquisitions related to our manufacturing operations.equipment.
Net Cash (Used In) Provided By Financing Activities. Net cash (used in) provided by financing activities for the six months ended October 31, 2018 and 2017 was ($964) and 2016, was $2,205,000$2,205, respectively.
Net cash used in financing activities during the six months ended October 31, 2018 consisted of $2,162 in dividends paid on our issued and $5,496,000, respectively.outstanding Series E Preferred Stock and $74 in principal payments on a capital lease obligation, which amounts were offset by $1,158 in net proceeds from stock option exercises and $114 in net proceeds from the purchase of shares of our common stock under our Employee Stock Purchase Plan.
Net cash provided by financing activities during the six months ended October 31, 2017 consisted of (i) $4,193,000$4,193 in net proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement (ii) $216,000(as of July 31, 2017 we had raised the full amount of gross proceeds available to us under this At Market Issuance Sales Agreement), $216 in net proceeds from the purchase of shares of our common stock under our Employee Stock Purchase Plan, (“ESPP”), and (iii) $112,000$112 in net proceeds from stock option exercises, which amounts were offset by dividends paid on our issued and outstanding Series E Preferred Stock of $2,162,000$2,162 and principal payments on a capital lease obligation of $154,000.$154.
Net cash provided by financing activitiesBacklog
Our backlog represents, as of a point in time, future contract manufacturing revenue from work not yet completed under signed contracts. As of October 31, 2018, our backlog was approximately $36 million (ASC 606) as compared to approximately $33 million (ASC 605) as of October 31, 2017. While we anticipate the majority of our backlog will be recognized as revenue during the six months ended October 31, 2016 consistedremainder of (i) $3,342,000fiscal year 2019, our backlog is subject to a number of risks and uncertainties, including the risk that a customer may experience delays in net proceeds fromits program(s) or otherwise, which could result in the salepostponement of sharesanticipated manufacturing services; the risk that a customer timely cancels its commitments prior to our initiation of our common stockmanufacturing services, in which case we may be required to refund some or all of the amounts paid to us in advance under an At Market Issuance Sales Agreement, (ii) $2,439,000 in net proceeds fromthose canceled commitments; and the salerisk that we may not successfully execute on all customer projects, any of shares of our common stock under an Equity Distribution Agreement, (iii) $1,577,000 in net proceeds from the sale of shares of our Series E Preferred Stock underwhich could have a separate At Market Issuance Sales Agreement, and (iv) $254,000 in net proceeds from the purchase of shares of our common stock under our ESPP, which amounts were offset by dividends paidnegative impact on our issuedliquidity, reported backlog and outstanding Series E Preferred Stock of $2,116,000.future revenue.
| Item 3. | 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 October 31, 2017,2018, such changes would not have a material adverse effect on our financial position or results of operations based on historical movements in interest rates.
| 28 |
| Item 4. | Controls And Procedures. |
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our PrincipalChief Executive Officer and PrincipalChief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We carried out an evaluation, under the supervision and with the participation of management, including our PrincipalChief Executive Officer and PrincipalChief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of October 31, 2017,2018, the end of the period covered by this Quarterly Report. Based on that evaluation, our PrincipalChief Executive Officer and PrincipalChief Financial Officer concluded that our disclosure controls and procedures were effective as of October 31, 2017.2018.
There were no significant changes in our internal control over financial reporting, during the quarter ended October 31, 2017,2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - II—OTHER INFORMATION
| Item 1. | Legal Proceedings. |
TheIn 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 required by this Item is incorporated by referenceand events pertaining to Note 11, “Commitments and Contingencies,”a particular case. We currently are not a party to any legal proceedings, the adverse outcome of which, in Part I, Item 1, “Financial Information.”management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations or financial position
| Item 1A. | Risk Factors. |
There have been no material changes to the risk factors included in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended April 30, 2017, except for the following risk factors:
If we cannot obtain additional funding, we may have to further restructure or cease our operations.
At October 31, 2017, we had $27,727,000 in cash and cash equivalents. We have expended substantial funds on research and development of product candidates (which we are seeking to license or divest) and funding the operations of Avid. As a result, we have historically experienced losses and negative cash flows from operations since our inception and we expect negative cash flows from operations to continue for the foreseeable future until we can generate sufficient revenue from Avid’s contract manufacturing services to achieve profitability. Therefore, unless and until we are able to generate sufficient revenue from Avid’s contract manufacturing services, we expect such losses to continue through the foreseeable future, and as a result, we must raise additional capital during the remainder of fiscal year 2018 in order to fund our operations and to execute on our business plans beyond May 2018.
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 from Avid, we may need to further restructure or cease our operations.
As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that our accompanying unaudited condensed consolidated financial statements are issued.
Our operating results will be adversely affected if we are unable to maximize our facility capacity utilization.
We have recently experienced and could continue to experience idle manufacturing capacity based on our existing customer commitments or potential changes to these commitments combined with our ability to secure new customers.Our operating results are significantly influenced by our capacity utilization. In March 2016, we announced the commissioning of our new Myford facility, the construction of which had been commenced in anticipation of the potential commercial launch of bavituximab and in recognition of potential demand from certain of Avid’s existing customers who anticipated a need for larger scale late stage manufacturing capacity. While the discontinuation of our SUNRISE Phase III trial announced in February 2016 impacted the projected manufacturing demand for our Myford facility, we none-the-less completed process validation campaigns for three different customer products during fiscal year 2017, which we anticipated could lead to the initiation of commercial production for these clients during fiscal year 2019. However, due to lower than anticipated commitments from Halozyme, Inc., our largest customer, based on their most recent committed forecast (covering the three quarters ended June 30, 2018) and the regulatory filing delay from our second largest customer, we experienced idle capacity in our Myford facility during the first and second quarters of fiscal year 2018 ended July 31, 2017 and October 31, 2017, respectively, and we expect such idle capacity and underutilization of our manufacturing facilities to continue for the remainder of fiscal year 2018 based on current customer commitments. If we are unable to maximize the capacity utilization of our facilities, our results of operations and financial condition will continue to be adversely affected.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
NoneNone.
| Item 3. | Defaults Upon Senior Securities. |
NoneNone.
| Item 4. | MINE SAFETY DISCLOSURES. |
Not applicable
| Item 5. | Other Information. |
NoneNone.
| Item 6. | Exhibits. |
| (a) | Exhibits: |
| 31.2 | Certification of |
| 101.INS | XBRL Taxonomy Extension Instance Document. * |
| 101.SCH | XBRL Taxonomy Extension Schema Document. * |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. * |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. * |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document. * |
| 101.PRE | XBRL Presentation Extension Linkbase Document. * |
__________________
* Filed herewith.
Pursuant to the requirements 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.
| Date:December | By: /s/ Roger J. Lias, Ph.D. | ||
| Date: December 10, 2018 | By: /s/ Daniel R. Hart | ||
| Daniel R. Hart | |||
| Chief Financial Officer | |||
| (signed both as an officer duly authorized to sign on behalf of the Registrant and principal financial officer and chief accounting officer) | |||