You should carefully
consider the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report
on Form 10-Q, including our condensed consolidated financial statements and the related notes thereto, before making a decision
to invest in our securities. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties
not presently known to us, or that we currently believe are not material, also may become important factors that affect us and
impair our business operations. The occurrence of any of the events or developments discussed in the risk factors below could have
a material and adverse impact on our business, financial condition, results of operations and cash flows and, in such case, our
future prospects would likely be materially and adversely affected.
Risks Related to the COVID-19 Pandemic
Our business, financial condition,
and results of operations may be adversely affected by global health epidemics, including the COVID-19 pandemic.
In March 2020, the World Health Organization
declared the novel coronavirus disease (“COVID-19”) outbreak a global pandemic. COVID-19 has spread across the globe
and is affecting worldwide economic activity. Any public health epidemic, including the COVID-19 pandemic, may affect our operations
and those of third parties on which we rely, including our customers and suppliers. Our business, financial condition, and results
of operations may be affected by: disruptions in our customers’ abilities to fund, develop, or bring to market products as
anticipated; delays in or disruptions to the conduct of clinical trials by our customers; cancellations of contracts or confirmed
orders from our customers; customers’ inability to maintain agreed upon payment terms; and the inability, difficulty, or
additional cost or delays in obtaining key raw materials, components, and other supplies from our existing supply chain; among
other factors caused by the COVID-19 pandemic. Our operations could be disrupted if some of our employees become ill or are otherwise
absent from work as a result of the COVID-19 pandemic. Additionally, governmental restrictions, including travel restrictions,
quarantines, shelter-in-place orders, curfews, business closures, new safety requirements or regulations, or restrictions on the
import or export of certain materials, or other operational issues related to the COVID-19 pandemic may have an adverse effect
on our business and results of operations. We continue to monitor our operations and governmental recommendations and have made
modifications for an indefinite period to our normal operations because of the COVID-19 pandemic, including requiring most non-production
related employees to work remotely which may increase cyber security risks or create data accessibility concerns.
Risks Related to Our Business
We have a history of losses and may
have future losses.
We have incurred net losses in most fiscal
years since we began operations in 1981, including net losses of $10.5 million and $4.2 million for the fiscal years ended April
30, 2020 and 2019, respectively. As of October 31, 2020, we had an accumulated deficit of $564 million. We have only recently begun
generating positive cash flows from operations. However, if we fail to continue generating sufficient revenue, we may not continue
to generate positive cash flows from operations.
Our ability to fund our operations is
dependent on the amount of cash on hand and our ability to generate positive cash flow to sustain our current operations. At
October 31, 2020, we had $35.7 million in cash and cash equivalents. Although it is difficult to forecast all of our future
liquidity requirements, we believe that our cash and cash equivalents on hand, combined with our projected cash flows from
operations will be sufficient to fund our operations beyond one year after the date our unaudited condensed consolidated
financial statements are issued.
In the event a customer timely cancels
its commitments prior to our initiation of manufacturing services, we may be required to refund some or all of the advance payments
made to us under those canceled commitments, which would have a negative impact on our liquidity, reported backlog and future revenue.
Further, in the event we are unable to secure sufficient business to support our current operations, we may need to raise additional
capital in the equity markets in order to fund our future operations. We may raise funds through the issuance of debt or equity.
These financings may not be available to us on acceptable terms, or at all. Our ability to raise additional capital in the equity
and debt markets is dependent on a number of factors including, but not limited to, the market demand for our common stock. The
market demand or liquidity of our common stock is subject to a number of risks and uncertainties including, but not limited to,
our financial results and economic and market conditions. Further, global financial crises and economic downturns, including those
caused by widespread public health crises such as the global novel coronavirus disease, may cause extreme volatility and disruptions
in capital and credit markets, and may impact our ability to raise additional capital when needed on acceptable terms, if at all.
If we are unable to fund our continuing operations through these sources, we may need to restructure, or cease, our operations.
In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us. Any
of these actions could materially harm our business, financial condition, results of operations, and future prospects.
A significant portion of our revenue
comes from a limited number of customers.
Our revenue has historically been derived
from a small number of customers. For example, for the fiscal years ended April 30, 2020, 2019 and 2018, we derived approximately
63%, 64% and 86% of our revenues from our top three customers, respectively. We continue to be dependent on a limited number of
customers for a substantial majority of our revenue. The loss of, or a significant reduction of business from, any of our major
customers could have a material adverse effect on our business, financial condition, and results of operations.
We generally do not have long-term customer contracts
and our backlog cannot be relied upon as a future indicator of sales.
We generally do not have long-term contracts
with our customers, and existing contracts and purchase commitments may be canceled under certain circumstances. As a result, we
are exposed to market and competitive price pressures on every order, and our agreements with customers do not provide assurance
of future sales. Our customers are not required to make minimum purchases and, in certain circumstances, may cease using our services
at any time without penalty. Our backlog should not be relied on as a measure of anticipated demand or future revenue, because
the orders constituting our backlog may be subject to changes in delivery schedules or cancellation without significant penalty
to the customer. Any reductions, cancellations or deferrals in customer orders would negatively impact our business.
Our operating results will be adversely
affected if we are unable to maximize our facility capacity utilization.
Our operating results are significantly
influenced by our capacity utilization and, as such, if we are unable to utilize our facilities to capacity, our margins could
be adversely affected, and our financial condition and results of operations will be adversely affected.
We rely on third parties to supply
most of the necessary raw materials and supplies for the products we manufacture on behalf of our customers and our inability to
obtain such raw materials or supplies may adversely impact our business, financial condition, and results of operations.
Our operations require various raw materials,
including proprietary media, resins, buffers, and filters, in addition to numerous additional raw materials supplied primarily
by third parties. We or our customers specify the raw materials and other items required to manufacture their product and, in some
cases, specify the suppliers from whom we must purchase these raw materials. In certain instances, the raw materials and other
items can only be supplied by a limited number of suppliers and, in some cases, a single source, or in limited quantities. If third-party
suppliers do not supply raw materials or other items on a timely basis, it may cause a manufacturing run to be delayed or canceled
which would adversely impact our financial condition and results of operations. Additionally, we do not have long-term supply contracts
with any of our single source suppliers. If we experience difficulties acquiring sufficient quantities of required materials or
products from our existing suppliers, or if our suppliers are found to be non-compliant with the FDA’s quality system regulation,
CGMPs or other applicable laws or regulations, we would be required to find alternative suppliers. If our primary suppliers become
unable or unwilling to perform, any resulting delays or interruptions in the supply of raw materials required to support our manufacturing
of CGMP pharmaceutical-grade products would ultimately delay our manufacture of products for our customers, which could materially
and adversely affect our financial condition and operating results. Furthermore, third-party suppliers may fail to provide us with
raw materials and other items that meet the qualifications and specifications required by us or our customers. If third-party suppliers
are not able to provide us with raw materials that meet our or our customers’ specifications on a timely basis, we may be
unable to manufacture their product or it could prevent us from delivering products to our customers within required timeframes.
Any such delay in delivering our products may create liability for us to our customers for breach of contract or cause us to experience
order cancellations and loss of customers. In the event that we manufacture products with inferior quality components and raw materials,
we may become subject to product liability claims caused by defective raw materials or components from a third-party supplier or
from a customer, or our customer may be required to recall its products from the market.
All of our manufacturing facilities are situated in a
single location in California, which increases our exposure to significant disruption to our business as a result of unforeseeable
developments in a single geographic area.
We operate our manufacturing facilities
in Tustin, California. It is possible that we could experience prolonged periods of reduced production due to unforeseen catastrophic
events occurring in or around our facilities. It is also possible that operations could be disrupted due to other unforeseen circumstances
such as power outages, explosions, fires, floods, earthquakes or accidents. As a result, we may be unable to shift manufacturing
capabilities to alternate locations, accept materials from suppliers, meet customer shipment needs or address other severe consequences
that may be encountered, and we may suffer damage to our reputation. Our financial condition and results of our operations could
be materially adversely affected were such events to occur.
Our manufacturing services are highly
complex, and if we are unable to provide quality and timely services to our customers, our business could suffer.
The manufacturing services we offer are
highly complex, due in part to strict regulatory requirements. A failure of our quality control systems in our facilities could
cause problems to arise in connection with facility operations for a variety of reasons, including equipment malfunction, viral
contamination, failure to follow specific manufacturing instructions, protocols and standard operating procedures, problems with
raw materials or environmental factors. Such problems could affect production of a single manufacturing run or a series of runs,
requiring the destruction of products, or could halt manufacturing operations altogether. In addition, our failure to meet required
quality standards may result in our failure to timely deliver products to our customers which, in turn, could damage our reputation
for quality and service. Any such incident could, among other things, lead to increased costs, lost revenue, reimbursement to customers
for lost drug substance, damage to and possibly termination of existing customer relationships, time and expense spent investigating
the cause and, depending on the cause, similar losses with respect to other manufacturing runs. With respect to our commercial
manufacturing, if problems are not discovered before the product is released to the market, we may be subject to regulatory actions,
including product recalls, product seizures, injunctions to halt manufacture and distribution, restrictions on our operations,
civil sanctions, including monetary sanctions, and criminal actions. In addition, such issues could subject us to litigation, the
cost of which could be significant.
We may be unable to manage our future
growth effectively, which could make it difficult to execute our business strategy.
We intend to continue to grow our business
operations as demand for our services increases and increase the number of our employees to accommodate such potential growth,
which may cause us to experience periods of rapid growth and expansion. This potential future growth could create a strain on our
organizational, administrative and operational infrastructure, including manufacturing operations, quality control, technical support
and other administrative functions. Our ability to manage our growth properly will require us to continue to improve our operational,
financial and management controls.
As we expect our commercial operations
and sales volume to grow, we will need to continue to increase our capacity for manufacturing, customer service, billing and general
process improvements and expand our internal quality assurance program, among other things. We may also need to purchase additional
equipment, some of which can take several months or more to procure, install and validate, and increase our manufacturing, maintenance,
software and computing capacity to meet increased demand. We may not be able to successfully implement the increase in scale, expansion
of personnel, purchase and validation of equipment or process enhancements, which could adversely affect our ability to increase
revenues.
If we do not enhance our existing
or introduce new service offerings in a timely manner, our offerings may become obsolete or noncompetitive over time, customers
may not buy our offerings and our revenues and profitability may decline.
Demand for our manufacturing services may
change in ways that we may not anticipate due to evolving industry standards and customer needs that are increasingly sophisticated
and varied, as well as the introduction by others of new offerings and technologies that provide alternatives to our offerings.
In the event we are unable to offer or enhance our service offerings or expand our manufacturing infrastructure to accommodate
requests from our customers and potential customers, our offerings may become obsolete or noncompetitive over time, in which case
our revenue and operating results would suffer. For example, if we are unable to respond to changes in the nature or extent of
the technological or other needs of our customers through enhancing our offerings, our competition may develop offerings that are
more competitive than ours and we could find it more difficult to renew or expand existing agreements or obtain new agreements.
Potential innovations intended to facilitate enhanced or new offerings generally will require a substantial capital investment
before we can determine their commercial viability, and we may not have financial resources sufficient to fund all desired innovations.
Even if we succeed in creating enhanced or new offerings, however, they may still fail to result in commercially successful offerings
or may not produce revenue in excess of our costs of development, and they may be rendered obsolete by changing customer preferences
or the introduction by our competitors of offerings embodying new technologies or features. Finally, the marketplace may not accept
our innovations due to, among other things, existing patterns of clinical practice, the need for regulatory clearance and/or uncertainty
over market access or government or third-party reimbursement.
If we use hazardous and biological
materials in a manner that causes injury or violates applicable law, we may be liable for damages.
Our contract manufacturing operations involve
the controlled use of hazardous materials and chemicals. We are subject to federal, state and local laws and regulations in the
United States governing the use, manufacture, storage, handling and disposal of hazardous materials and chemicals. Although we
believe that our procedures for using, handling, storing and disposing of these materials comply with legally prescribed standards,
we may incur significant additional costs to comply with applicable laws in the future. Also, even if we are in compliance with
applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials or chemicals.
As a result of any such contamination or injury, we may incur liability or local, city, state or federal authorities may curtail
the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages
or penalized with fines, and the liability could exceed our resources. Compliance with applicable environmental laws and regulations
is expensive, and current or future environmental regulations may impair our contract manufacturing operations, which could materially
harm our business, financial condition and results of operations.
Potential product liability claims,
errors and omissions claims in connection with services we perform and potential liability under indemnification agreements between
us and our officers and directors could adversely affect us.
We manufacture products intended for use
in humans. These activities could expose us to risk of liability for personal injury or death to persons using such products. We
seek to reduce our potential liability through measures such as contractual indemnification provisions with customers (the scope
of which may vary by customer, and the performances of which are not secured) and insurance maintained by us and our customers.
We could be materially adversely affected if we are required to pay damages or incur defense costs in connection with a claim that
is outside the scope of the indemnification agreements, if the indemnity, although applicable, is not performed in accordance with
its terms or if our liabilities exceed the amount of applicable insurance or indemnity. In addition, we could be held liable for
errors and omissions in connection with the services we perform. We currently maintain product liability and errors and omissions
insurance with respect to these risks. Our insurance coverage may not be adequate or insurance coverage may not continue to be
available on terms acceptable to us.
We also indemnify our officers and directors
for certain events or occurrences while the officer or director is serving at our request in such capacity. The maximum potential
amount of future payments we could be required to make under these indemnification agreements is unlimited. Although we have a
director and officer insurance policy that covers a portion of any potential exposure, we could be materially and adversely affected
if we are required to pay damages or incur legal costs in connection with a claim above such insurance limits.
Any claims beyond our insurance coverage
limits, or that are otherwise not covered by our insurance, may result in substantial costs and a reduction in our available capital
resources.
We maintain property insurance, employer’s
liability insurance, product liability insurance, general liability insurance, business interruption insurance, and directors’
and officers’ liability insurance, among others. Although we maintain what we believe to be adequate insurance coverage,
potential claims may exceed the amount of insurance coverage or may be excluded under the terms of the policy, which could cause
an adverse effect on our business, financial condition and results from operations. Generally, we would be at risk for the loss
of inventory that is not within customer specifications. These amounts could be significant. In addition, in the future we may
not be able to obtain adequate insurance coverage or we may be required to pay higher premiums and accept higher deductibles in
order to secure adequate insurance coverage.
Our services and our customers’
products may infringe on or misappropriate the intellectual property rights of third parties.
Any claims that our services infringe the
rights of third parties, including claims arising from any of our customer engagements, regardless of their merit or resolution,
could be costly and may divert the efforts and attention of our management and technical personnel. We may not prevail in such
proceedings, given the complex technical issues and inherent uncertainties in intellectual property litigation. If such proceedings
result in an adverse outcome, we could be required, among other things, to pay substantial damages, discontinue the use of the
infringing technology, expend significant resources to develop non-infringing technology, license such technology from the third
party claiming infringement (which license may not be available on commercially reasonable terms or at all) and/or cease the manufacture,
use or sale of the infringing processes or offerings, any of which could have a material adverse effect on our business.
In addition, our customers’ products
may be subject to claims of intellectual property infringement and such claims could materially affect our business if their products
cease to be manufactured and they have to discontinue the use of the infringing technology which we may provide. Any of the foregoing
could affect our ability to compete or could have a material adverse effect on our business, financial condition and results of
operations.
We depend on key personnel and the
loss of key personnel could harm our business and results of operations.
We depend on our ability to attract and
retain qualified scientific and technical employees, as well as a number of key executives. These employees may voluntarily terminate
their employment with us at any time. We may not be able to retain key personnel, or attract and retain additional qualified employees.
We do not maintain key-man or similar policies covering any of our senior management or key personnel. Our inability to attract
and retain key personnel would have a material adverse effect on our business.
We have federal and state net operating
loss, or NOL, carry forwards which, if we were to become profitable, could be used to offset/defer federal and state income taxes.
Our ability to use such carry forwards to offset future taxable income may be subject to certain limitations related to changes
in ownership of our stock and decisions by California and other states to limit or suspend NOL carry forwards.
As of April 30, 2020, we had federal and
state NOL carry forwards of approximately $427 million and $277 million, respectively. These NOL carry forwards could potentially
be used to offset certain future federal and state income tax liabilities. The federal net operating loss carry forwards generated
prior to January 1, 2018 expire in fiscal years 2021 through 2038. The federal net operating loss generated after January 1, 2018
of $19.8 million can be carried forward indefinitely. Net operating losses generated after 2017 through 2020 may offset future
taxable income without limitation. Utilization of net operating losses generated subsequent to 2020 are limited to 80% of future
taxable income. However, utilization of NOL carry forwards may be subject to a substantial annual limitation pursuant to Section
382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions due to ownership changes that have occurred
previously or that could occur in the future. In general, an ownership change, as defined by Section 382, results from transactions
increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points
over a three-year period. A Section 382 analysis was completed as of the fiscal year ended April 30, 2019 and we subsequently reviewed
such activity through April 30, 2020 and determined that no such change in ownership has occurred. However, ownership changes occurring
subsequent to April 30, 2020 may impact the utilization of our NOL carry forwards and other tax attributes. Additionally, states
may impose other limitations on the use of state NOL carry forwards. We are subject to California’s recent suspension of
NOL carry forwards for the taxable years beginning in 2020 and lasting through 2022. Any limitation may result in expiration of
a portion of the carry forwards before utilization. If we were not able to utilize our carry forwards, we would be required to
use our cash resources to pay taxes that would otherwise have been offset, thereby reducing our liquidity.
We may be subject to various litigation
claims and legal proceedings.
We, as well as certain of our directors
and officers, may be subject to claims or lawsuits during the ordinary course of business. Regardless of the outcome, these lawsuits
may result in significant legal fees and expenses and could divert management’s time and other resources. If the claims contained
in these lawsuits are successfully asserted against us, we could be liable for damages and be required to alter or cease certain
of our business practices. Any of these outcomes could cause our business, financial performance and cash position to be negatively
impacted.
We have become increasingly dependent
on information technology and any breakdown, interruption or breach of our information technology systems could subject us to liability
or interrupt the operation of our business, which could have a material adverse effect on our business, financial condition, results
of operations and cash flows.
We are increasingly dependent upon sophisticated
information technology systems and infrastructure in connection with the conduct of our business. We must constantly update our
information technology infrastructure and our various current information technology systems throughout the organization may not
continue to meet our current and future business needs. Furthermore, modification, upgrade or replacement of such systems may be
costly. In addition, due to the size and complexity of these systems, any breakdown, interruption, corruption or unauthorized access
to or cyber-attack on these systems could create system disruptions, shutdowns or unauthorized disclosure of confidential information.
While we attempt to take appropriate security and cyber-security measures to protect our data and information technology systems
and to prevent such breakdowns and unauthorized breaches and cyber-attacks, these measures may not be successful and these breakdowns
and breaches in, or attacks on, our systems and data may not be prevented. Such breakdowns, breaches or attacks may cause business
interruption and could have a material adverse effect on our business, financial condition, results of operations and cash flows
and could cause the market value of our common shares to decline, and we may suffer financial damage or other loss, including fines
or criminal penalties because of lost or misappropriated information.
We may seek to grow our business
through acquisitions of complementary businesses, and the failure to manage acquisitions, or the failure to integrate them with
our existing business, could harm our financial condition and operating results.
From time to time, we may consider opportunities
to acquire other companies, products or technologies that may enhance our manufacturing capabilities, expand the breadth of our
markets or customer base, or advance our business strategies. Potential acquisitions involve numerous risks, including: problems
assimilating the acquired service offerings, products or technologies; issues maintaining uniform standards, procedures, quality
control and policies; unanticipated costs associated with acquisitions; diversion of management’s attention from our existing
business; risks associated with entering new markets in which we have limited or no experience; increased legal and accounting
costs relating to the acquisitions or compliance with regulatory matters; and unanticipated or undisclosed liabilities of any target.
We have no current commitments with respect
to any acquisition. We do not know if we will be able to identify acquisitions we deem suitable, whether we will be able to successfully
complete any such acquisitions on favorable terms or at all, or whether we will be able to successfully integrate any acquired
service offerings, products or technologies. Our potential inability to integrate any acquired service offerings, products or technologies
effectively may adversely affect our business, operating results and financial condition.
Risks Related to Our Customers
The consumers of the products we
manufacture for our customers may significantly influence our business, financial condition, and results of operations.
We depend on, and have no control over,
consumer demand for the products we manufacture for our customers. Consumer demand for our customers’ products could be adversely
affected by, among other things, delays in health regulatory approval, the inability of our customers to demonstrate the efficacy
and safety of their products, the loss of patent and other intellectual property rights protection, the emergence of competing
or alternative products, including generic drugs, the degree to which private and government payment subsidies for a particular
product offset the cost to consumers and changes in the marketing strategies for such products and the outbreak of a pandemic such
as the COVID-19 pandemic. Additionally, if the products we manufacture for our customers do not gain market acceptance, our revenues
and profitability may be adversely affected.
We believe that continued changes to the
healthcare industry, including ongoing healthcare reform, adverse changes in government or private funding of healthcare products
and services, legislation or regulations governing the privacy of patient information or patient access to care, or the delivery,
pricing or reimbursement of pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry participants
to purchase fewer services from us or influence the price that others are willing to pay for our services. Changes in the healthcare
industry’s pricing, selling, inventory, distribution or supply policies or practices could also significantly reduce our
revenue and profitability.
If production volumes of key products that
we manufacture for our customers decline, our financial condition and results of operations may be adversely affected.
Our customers’ failure to receive
or maintain regulatory approval for their product candidates could negatively impact our revenues and profitability.
Our success depends upon the regulatory
approval of the products we manufacture. As such, if our customers experience a delay in, or failure to receive, approval for any
of their product candidates or fail to maintain regulatory approval of their products and we are not able to manufacture these
products, our revenue and profitability could be adversely affected. Additionally, if the FDA or a comparable foreign regulatory
authority does not approve of our facilities for the manufacture of a customer product or if it withdraws such approval in the
future, our customers may choose to identify alternative manufacturing facilities and/or relationships, which could significantly
impact our ability to expand our manufacturing capacity and capabilities and achieve profitability.
We depend on spending and demand
from our customers for our contract manufacturing and development services and any reduction in spending or demand could have a
material adverse effect on our business.
The amount that our customers spend on
the development and manufacture of their products or product candidates, particularly the amount our customers choose to spend
on outsourcing these services to us, substantially impacts our revenue and profitability. The outcomes of our customers’
research, development and marketing also significantly influence the amount that our customers choose to spend on our services
and offerings. Our customers determine the amounts that they will spend on our services based upon, among other things, the clinical
and market success of their products, available resources, access to capital and their need to develop new products which, in turn,
depend upon a number of other factors, including their competitors’ research, development and product initiatives and the
anticipated market for any new products, as well as clinical and reimbursement scenarios for specific products and therapeutic
areas. Further, increasing consolidation in the pharmaceutical industry may impact such spending, particularly in the event that
any of our customers choose to develop or acquire integrated manufacturing operations. Any reduction in customer spending on biologics
development and related services as a result of these and other factors could have a material adverse effect on our business, financial
condition, and results of operations.
If we are unable to protect the confidentiality
of our customers’ proprietary information, we may be subject to claims.
Many of the formulations used and processes
developed by us in the manufacture of our customers’ products are subject to trade secret protection, patents or other intellectual
property protections owned or licensed by such customer. While we make significant efforts to protect our customers’ proprietary
and confidential information, including requiring our employees to enter into agreements protecting such information, if any of
our employees breaches the non-disclosure provisions in such agreements, or if our customers make claims that their proprietary
information has been disclosed, our reputation may suffer damage and we may become subject to legal proceedings that could require
us to incur significant expense and divert our management’s time, attention and resources.
Risks Related to the Industry in Which
We Operate
Failure to comply with existing and
future regulatory requirements could adversely affect our business, financial condition, and results of operations.
Our industry is highly regulated. We are
required to comply with the regulatory requirements of various local, state, provincial, national and international regulatory
bodies having jurisdiction in the countries or localities in which we manufacture products or in which our customers’ products
are distributed. In particular, we are subject to laws and regulations concerning development, testing, manufacturing processes,
equipment and facilities, including compliance with CGMPs, import and export, and product registration and listing, among other
things. As a result, most of our facilities are subject to regulation by the FDA, as well as regulatory bodies of other jurisdictions
where our customers have marketing approval for their products including, but not limited to, the EMA, ANVISA and/or Health Canada,
depending on the countries in which our customers market and sell the products we manufacture on their behalf. As we expand our
operations, we may be exposed to more complex and new regulatory and administrative requirements and legal risks, any of which
may require expertise in which we have little or no experience. It is possible that compliance with new regulatory requirements
could impose significant compliance costs on us. Such costs could have a material adverse effect on our business, financial condition
and results of operations.
These regulatory requirements impact many
aspects of our operations, including manufacturing, developing, storage, distribution, import and export and record keeping related
to customers’ products. Noncompliance with any applicable regulatory requirements can result in government refusal to approve:
(i) facilities for testing or manufacturing products or (ii) products for commercialization. The FDA and other regulatory agencies
can delay, limit or deny approval for many reasons, including:
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changes to the regulatory approval process, including new data requirements for product candidates
in those jurisdictions, including the United States, in which our customers may be seeking approval;
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that a customer’s product candidate may not be deemed to be safe or effective;
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the ability of the regulatory agency to provide timely responses as a result of its resource constraints;
and
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that the manufacturing processes or facilities may not meet the applicable requirements.
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In addition, if new legislation or regulations
are enacted or existing legislation or regulations are amended or are interpreted or enforced differently, we may be required to
obtain additional approvals or operate according to different manufacturing or operating standards. This may require a change in
our development and manufacturing techniques or additional capital investments in our facilities. Any related costs may be significant.
If we fail to comply with applicable regulatory requirements in the future, then we may be subject to warning letters and/or civil
or criminal penalties and fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, restrictions
on the import and export of our products, debarment, exclusion, disgorgement of profits, operating restrictions and criminal prosecution
and the loss of contracts and resulting revenue losses. Inspections by regulatory authorities that identify any deficiencies could
result in remedial actions, production stoppages or facility closure, which would disrupt the manufacturing process and supply
of product to our customers. In addition, such failure to comply could expose us to contractual and product liability claims, including
claims by customers for reimbursement for lost or damaged active pharmaceutical ingredients or recall or other corrective actions,
the cost of which could be significant.
In addition, certain products we manufacture
must undergo pre-clinical and clinical evaluations relating to product safety and efficacy before they are approved as commercial
therapeutic products. The regulatory authorities having jurisdiction in the countries in which our customers intend to market their
products may delay or put on hold clinical trials or delay approval of a product or determine that the product is not approvable.
The FDA or other regulatory agencies can delay approval of a drug if our manufacturing facility, including any newly commissioned
facility, is not able to demonstrate compliance with CGMPs, pass other aspects of pre-approval inspections or properly scale up
to produce commercial supplies. The FDA and comparable government authorities having jurisdiction in the countries in which we
or our customers intend to market their products have the authority to withdraw product approval or suspend manufacture if there
are significant problems with raw materials or supplies, quality control and assurance or the product we manufacture is adulterated
or misbranded. If our manufacturing facilities and services are not in compliance with FDA and comparable government authorities,
we may be unable to obtain or maintain the necessary approvals to continue manufacturing products for our customers, which would
materially adversely affect our financial condition and results of operations.
We operate in a highly competitive
market and competition may adversely affect our business.
We operate in a market that is highly competitive.
Our competition in the contract manufacturing market includes full-service contract manufacturers and large pharmaceutical companies
offering third-party manufacturing services to fill their excess capacity. We may also compete with the internal operations of
those pharmaceutical companies that choose to source their product offerings internally. In addition, most of our competitors may
have substantially greater financial, marketing, technical or other resources than we do. Moreover, additional competition may
emerge, particularly in lower-cost jurisdictions such as India and China, which could, among other things, result in a decrease
in the fees paid for our services, which may adversely affect our financial condition and results of operations.
Risks Related to the Ownership of Our
Common Stock
A significant number of shares of
our common stock are issuable pursuant to outstanding options, restricted stock units and convertible securities, and we may issue
additional shares of common stock in the future. Sales or conversions of these shares will dilute the interests of other security
holders and may depress the price of our common stock.
As of October 31, 2020, an aggregate of
6,728,623 shares of common stock were reserved for issuance under outstanding stock options and restricted stock units, or available
for future issuance under our equity incentive plans. Additionally, as of October 31, 2020, there were 1,116,538 shares of common
stock reserved for and available for issuance under our ESPP and up to 6,826,435 shares of common stock issuable upon conversion
of our outstanding Series E Preferred Stock. The issuance of additional shares of common stock upon the exercise, release or conversion,
as applicable, of any of the foregoing securities, or the perception that such issuances may occur, would have a dilutive impact
on other stockholders and could have a material negative effect on the market price of our common stock.
Our highly volatile stock price may
adversely affect the liquidity of our common stock.
The market price of our common stock has
generally been highly volatile and is likely to continue to be highly volatile. For instance, the market price of our common stock
has ranged from $2.24 to $8.44 per share over the last three fiscal years ended April 30, 2020.
The market price of our common stock may
be significantly impacted by many factors including the following:
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our loss of a significant customer;
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significant changes in our financial results or that of our competitors, including our ability to continue as a going concern;
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our ability to meet our revenue guidance;
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the offering and sale of shares of our common stock, either sold at market prices or at a discount under an equity transaction;
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significant changes in our capital structure;
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published reports by securities analysts;
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announcements of partnering transactions, joint ventures, strategic alliances, and any other transaction that involves the development, sale or use of our technologies or competitive technologies;
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regulatory developments, including possible delays in the regulatory approval of our customers’ products which we manufacture;
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outcomes of significant litigation, disputes and other legal or regulatory proceedings;
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general stock trends in the biotechnology and pharmaceutical industry sectors;
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public concerns as to the safety and effectiveness of the products we manufacture;
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economic trends and other external factors including, but not limited to, interest rate fluctuations, economic recession, inflation, foreign market trends, national crisis, and disasters; and
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healthcare reimbursement reform and cost-containment measures implemented by government agencies.
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These and other external factors have caused
and may continue to cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent
investors from readily selling their shares of common stock, and may otherwise negatively affect the liquidity of our common stock.
Anti-takeover provisions in our certificate
of incorporation and amended and restated bylaws as well as provisions of Delaware law could prevent or delay a change in control
of our company, even if such change in control would be beneficial to our stockholders.
Provisions of our certificate of incorporation
and amended and restated bylaws could discourage, delay or prevent a merger, acquisition or other change in control of our company,
even if such change in control would be beneficial to our stockholders. These include: authorizing the issuance of “blank
check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart
a takeover attempt; no provision for the use of cumulative voting for the election of directors; limiting the ability of stockholders
to call special meetings; requiring all stockholder actions to be taken at a meeting of our stockholders (i.e. no provision for
stockholder action by written consent); and establishing advance notice requirements for nominations for election to the board
of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
In addition, the Delaware General Corporation
Law prohibits us, except under specified circumstances, from engaging in any mergers, significant sales of stock or assets or business
combinations with any stockholder or group of stockholders who owns at least 15% of our common stock.
Our bylaws, as amended, provide that
the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders,
which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers
or employees.
Our bylaws, as amended, provide that, unless
we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware is the exclusive forum for any derivative
action or proceeding brought on our behalf, any action asserting a breach of a fiduciary duty owed by any of our directors, officers,
or other employees to us, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our
certificate of incorporation or our bylaws, any action to interpret, apply, enforce, or determine the validity of our certificate
of incorporation or bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice
of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes
with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers
and other employees.
We do not intend to pay dividends
on our common stock, so any returns will be limited to the value of our stock.
We have never declared or paid any cash
dividend on our common stock. We currently anticipate that we will retain future earnings, if any, for the development, operation
and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return
to stockholders will therefore be limited to the appreciation of the trading price of our common stock.
If securities or industry analysts
do not publish research reports about us, or if they issue adverse opinions about our business, our stock price and trading volume
could decline.
The research and reports that industry
or securities analysts publish about us or our business will influence the market for our common stock. If one or more analysts
who cover us issues an adverse opinion about us, our stock price would likely decline. If one or more of these analysts ceases
research coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets which, in
turn, could cause our stock price or trading volume to decline. Further, if we fail to meet the market expectations of analysts
who follow our stock, our stock price likely would decline.