avid bioservices,
INC.
See accompanying notes to condensed consolidated
financial statements.
avid bioservices,
INC.
See accompanying notes to condensed consolidated
financial statements.
avid bioservices,
INC.
See accompanying notes to condensed consolidated
financial statements.
See accompanying notes to condensed consolidated
financial statements.
avid bioservices,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited)
Note 1 – Description of Company and Basis
of Presentation
We are a dedicated contract development and manufacturing
organization (“CDMO”) that provides a comprehensive range of services from process development to Current Good Manufacturing
Practices (“CGMP”) clinical and commercial manufacturing, focused on development and CGMP manufacturing of biologics for the
biotechnology and biopharmaceutical industries.
Basis of Presentation
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States
(“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related
to quarterly reports on Form 10-Q, and accordingly, they do not include all of the information and disclosures required by U.S. GAAP for
annual financial statements. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction
with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended
April 30, 2021, as filed with the SEC on June 29, 2021. The unaudited financial information for the interim periods presented herein reflects
all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations
for the periods presented, with such adjustments consisting only of normal recurring adjustments. Results of operations for interim periods
covered by this Quarterly Report on Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or any
other interim period.
The unaudited condensed consolidated
financial statements include the accounts of Avid Bioservices, Inc. and its subsidiary. 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.
Note 2 – Summary of Significant Accounting Policies
Information regarding our significant accounting
policies is contained in Note 2, “Summary of Significant Accounting Policies”, of the consolidated financial statements in
our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.
Revenue Recognition
Revenue recognized from services provided under
our customer contracts are disaggregated into manufacturing and process development revenue streams.
Manufacturing revenue
Manufacturing revenue generally represents revenue
from the manufacturing of customer products recognized over time utilizing an input method that compares the cost of cumulative work-in-process
to date to the most current estimates for the entire cost of the performance obligation. Under a manufacturing contract, a quantity of
manufacturing runs are ordered at a specified scale with prescribed delivery dates, where the product is manufactured according to the
customer’s specifications and typically includes only one performance obligation. Each manufacturing run represents a distinct service
that is sold separately and has stand-alone value to the customer. The products are manufactured exclusively for a specific customer and
have no alternative use. The customer retains control of its product during the entire manufacturing process and can make changes to the
process or specifications at its request. Under these agreements, we are entitled to consideration for progress to date that includes
an element of profit margin.
Process development revenue
Process development revenue generally represents
revenue from services associated with the custom development of a manufacturing process and analytical methods for a customer’s
product. Process development revenue is recognized over time utilizing an input method that compares the cost of cumulative work-in-process
to date to the most current estimates for the entire cost of the performance obligation. Under a process development contract, the customer
owns the product details and process, which has no alternative use. These process development projects are customized to each customer
to meet its specifications and typically includes only one performance obligation. Each process represents a distinct service that is
sold separately and has stand-alone value to the customer. The customer also retains control of its product as the product is being created
or enhanced by our services and can make changes to its process or specifications upon request. Under these agreements, we are entitled
to consideration for progress to date that includes an element of profit margin.
The following table summarizes our manufacturing
and process development revenue streams (in thousands):
Schedule of revenues | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended January 31, | |
Nine Months Ended January 31, |
| |
2022 | |
2021 | |
2022 | |
2021 |
Manufacturing revenues | |
$ | 26,170 | | |
$ | 17,895 | | |
$ | 73,858 | | |
$ | 60,407 | |
Process development revenues | |
| 5,338 | | |
| 3,911 | | |
| 14,513 | | |
| 7,855 | |
Total revenues | |
$ | 31,508 | | |
$ | 21,806 | | |
$ | 88,371 | | |
$ | 68,262 | |
The timing of revenue recognition, billings and
cash collections results in billed accounts receivable, contract assets (unbilled receivables) and contract liabilities (customer deposits
and deferred revenue). Contract assets are recorded when our right to consideration is conditioned on something other than the passage
of time. Contract assets are reclassified to accounts receivable on the balance sheet when our rights become unconditional. Contract liabilities
represent customer deposits and deferred revenue billed and/or received in advance of our fulfillment of performance obligations. Contract
liabilities convert to revenue as we perform our obligations under the contract.
During the three and nine months ended January
31, 2022, we recognized revenue of $6.9 million and $31.7 million, respectively, for which the contract liability was recorded in a prior
period.
During the three and nine months ended January
31, 2021, we recognized revenue of $3.5 million and $26.3 million, respectively, for which the contract liability was recorded in a prior
period.
The transaction price for services provided under
our customer contracts reflects our best estimates of the amount of consideration to which we are entitled in exchange for providing goods
and services to our customers. In determining the transaction price, we considered the different sources of variable consideration including,
but not limited to, discounts, credits, refunds, price concessions or other similar items. We have included in the transaction price some
or all of an amount of variable consideration, utilizing the most likely method, only to the extent that it is probable that a significant
reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration
is subsequently resolved. The actual amount of consideration ultimately received may differ.
In addition, our customer contracts generally
include provisions entitling us to a cancellation or postponement fee when a customer cancels or postpones its commitments prior to our
initiation of services, therefore not utilizing their reserved capacity. The determination of such cancellation and postponement fees
are based on the terms stated in the related customer contract but are generally considered substantive for accounting purposes and create
an enforceable right and obligation due to us when the cancellation or postponement occurs. Accordingly, we recognize such fees, subject
to variable consideration, as revenue upon the cancellation or postponement date utilizing the most likely method.
Management may be required to exercise judgement
in estimating revenue to be recognized. Judgement is required in identifying performance obligations, estimating the transaction price,
estimating the stand-alone selling prices of identified performance obligations, estimating variable consideration, and estimating the
progress towards the satisfaction of performance obligations. If actual results in the future vary from our estimates, the estimates will
be adjusted, which will affect revenues in the period that such variances become known.
During the three and nine months ended
January 31, 2022, changes in estimates for variable consideration resulted in a decrease in revenues of $1.2
million and $12.4 million,
respectively. These changes in estimates for variable consideration can primarily be attributed to a dispute with a customer over
the payment of certain cancellation fees due to us under the terms of the related customer contract which resulted in a decrease in
revenues of $0.3
million and $11.5
million, for the current year three and nine-month periods, respectively. We believe we have a contractual right to the disputed amount, but as this contractual right is being disputed
and therefore may be uncollectible, we have not recorded revenue associated with the disputed amount.
There were no material adjustments
in estimates for variable consideration for the three months ended January 31, 2021. During the nine months ended January 31, 2021,
changes in estimates for variable consideration resulted in an increase in revenues of $1.1
million.
We apply the practical expedient available under
ASC 606 that permits us not to disclose the value of unsatisfied performance obligations for contracts with an original expected length
of one year or less. As of January 31, 2022, we do not have any unsatisfied performance obligations for contracts greater than one year.
Restricted Cash
Under the terms of an operating lease related
to one of our facilities (Note 4), we are required to maintain a letter of credit as collateral. Accordingly, at January 31, 2022 and
April 30, 2021, restricted cash of $0.4 million was pledged as collateral under the letter of credit.
The following table provides a reconciliation
of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total
of the same amounts shown in the unaudited condensed consolidated statements of cash flows (in thousands):
Schedule of cash | |
| | | |
| | | |
| | | |
| | |
| |
January 31,
2022 | |
April 30, 2021 | |
January 31,
2021 | |
April 30, 2020 |
Cash and cash equivalents | |
$ | 149,957 | | |
$ | 169,915 | | |
$ | 70,894 | | |
$ | 36,262 | |
Restricted cash | |
| 350 | | |
| 350 | | |
| 350 | | |
| 350 | |
Total cash, cash equivalents and restricted cash | |
$ | 150,307 | | |
$ | 170,265 | | |
$ | 71,244 | | |
$ | 36,612 | |
Accounts Receivable
Accounts receivable are primarily comprised of
amounts owed to us for services provided under our customer contracts and are recorded at the invoiced amount net of an allowance for
doubtful accounts, if necessary. We apply judgement 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 our receivables, historical experience, and the financial condition
of our customers.
Based on our analysis of our accounts receivable
balance as of April 30, 2021, we determined no allowance for doubtful accounts was deemed necessary.
Based on our analysis of our accounts receivable
balance as of January 31, 2022, we determined an allowance for doubtful accounts of $11.5 million was deemed necessary due to a dispute
with a customer over the payment of certain cancellation fees due to us under the terms of the related customer contract. The corresponding
amount of revenue was reserved in the current year period. We believe we have a contractual right to this amount, but as this contractual
right is being disputed and therefore may be uncollectible, we have chosen to reserve the disputed amount.
Inventory
Inventory consists of raw materials inventory
and is valued at the lower of cost, determined by the first-in, first-out method, or net realizable value. We periodically review raw
materials inventory for potential impairment and adjust inventory to its net realizable value based on the estimate of future use and
reduce the carrying value of inventory as deemed necessary.
Property and Equipment
Property and equipment is recorded
at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the related asset, which are generally as follows:
Schedule of estimated useful lives of property |
|
|
Description |
|
Estimated Useful Life |
Leasehold improvements |
|
Shorter of estimated useful life or lease term |
Laboratory and manufacturing equipment |
|
5 – 10 years |
Computer equipment and software |
|
3 – 5 years |
Furniture, fixtures and office equipment |
|
5 – 10 years |
Construction-in-progress, which
represents direct costs related to the construction of various equipment and leasehold improvements primarily associated with our manufacturing
facilities, is not depreciated until the asset is completed and placed into service. No interest was incurred or capitalized as construction-in-progress
as of January 31, 2022 and April 30, 2021. All of our property and equipment are located in the United States. Property and equipment
consist of the following (in thousands):
Schedule of property and equipment | |
| | | |
| | |
| |
January 31, 2022 | |
April 30, 2021 |
Leasehold improvements | |
$ | 36,870 | | |
$ | 23,000 | |
Laboratory and manufacturing equipment | |
| 25,192 | | |
| 20,793 | |
Computer equipment and software | |
| 5,562 | | |
| 5,541 | |
Furniture, fixtures and office equipment | |
| 843 | | |
| 843 | |
Construction-in-progress | |
| 24,676 | | |
| 8,372 | |
Total property and equipment, gross | |
| 93,143 | | |
| 58,549 | |
Less: accumulated depreciation and amortization | |
| (23,748 | ) | |
| (21,094 | ) |
Total property and equipment, net | |
$ | 69,395 | | |
$ | 37,455 | |
Depreciation and amortization
expense for the three and nine months ended January 31, 2022 was $1.0 million and $3.1 million, respectively.
Depreciation and amortization
expense for the three and nine months ended January 31, 2021 was $0.9 million and $2.5 million, respectively.
Leases
We determine if an arrangement is or contains
a lease at inception. Our operating leases with a term greater than one year are included in operating lease right-of-use (“ROU”)
assets, current portion of operating lease liabilities and operating lease liabilities, less current portion in our consolidated balance
sheets. ROU assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation
to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at the lease commencement date,
based on the present value of lease payments over the lease term. In determining the net present value of lease payments, we use our incremental
borrowing rate which represents an estimated rate of interest that we would have to pay to borrow equivalent funds on a collateralized
basis at the lease commencement date.
Our operating leases may include options to extend
the lease which are included in the lease term when it is reasonably certain that we will exercise a renewal option. Operating lease expense
is recognized on a straight-line basis over the expected lease term.
For our finance lease, which has a term greater
than one year, an asset is included within property and equipment, net and a lease liability equal to the present value of the minimum
lease payments is included in other current liabilities and finance lease liabilities, less current portion in our consolidated balance
sheets. The present value of the finance lease payments are calculated using the implicit interest rate in the lease.
We have elected not to apply
the recognition requirements of ASC 842 for short-term leases. We have also elected the practical expedient to not separate lease components
from non-lease components.
Impairment
Long-lived assets are reviewed
for impairment in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed
for events or changes in circumstances that indicate that their carrying value may not be recoverable. If such events or changes in circumstances
arise, we compare the carrying amount of the long-lived assets to the estimated future undiscounted cash flows expected to be generated
by the long-lived assets. If the long-lived assets are determined to be impaired, any excess of the carrying value of the long-lived assets
over its estimated fair value is recognized as an impairment loss. For the nine months ended January 31, 2022 and 2021, there were no
indicators of impairment of the value of our long-lived assets and no cumulative impairment losses recognized as of January 31, 2022.
Stock-Based Compensation
We account for stock options,
restricted stock units, performance stock units and other stock-based awards granted under our equity compensation plans in accordance
with the authoritative guidance of ASC 718, Compensation – Stock Compensation. The estimated fair value of stock options
granted to employees in exchange for services is measured at the grant date, using a fair value based method, such as a Black-Scholes
option valuation model, and is recognized as expense on a straight-line basis over the requisite service periods. The fair value of restricted
stock units and performance stock units is measured at the grant date based on the closing market price of our common stock on the date
of grant. For restricted stock units, the fair value is recognized as expense on a straight-line basis over the requisite service periods.
For performance stock units, which are subject to performance conditions, the fair value is recognized as expense on a straight-line basis
over the requisite service periods when the achievement of such performance condition is determined to be probable. If a performance condition
is not determined to be probable or is not met, no stock-based compensation expense is recognized, and any previously recognized expense
is reversed. Forfeitures are recognized as a reduction of stock-based compensation expense as they occur.
Comprehensive Income
Comprehensive income is the
change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income is
equal to our net income for all periods presented.
Fair Value Measurements
Fair value is defined as the
price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:
| · | Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities. |
| · | Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets or liabilities
whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices
of instruments with similar attributes in active markets. |
| · | Level 3 – Unobservable inputs that are supported by little or no market activity and significant
to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation techniques
and assumptions. |
As of January 31, 2022 and April
30, 2021, we did not have any Level 2 or Level 3 financial assets and our cash equivalents of $138.2 million and $158.8 million, respectively,
were invested in money market funds with one and two major commercial banks, respectively, and carried at fair value based on quoted market
prices for identical securities (Level 1 input). We consider the fair value of our convertible senior notes to be a Level 2 financial
liability due to limited trading activity of the senior convertible notes. Refer to Note 3, Debt, of the notes to unaudited condensed
consolidated financial statements for further details. We did not have any other Level 2 or Level 3 financial liabilities as of January
31, 2022 and April 30, 2021.
Recent Accounting Pronouncements
In June 2016, the Financial Accounting Standards
Board (“FASB”) issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses
of Financial Instruments (“ASU 2016-13”). The standard changes the methodology for measuring credit losses on financial
instruments and the timing of when such losses are recorded. As a smaller reporting company as defined by the SEC, ASU 2016-13 and its
subsequent updates are effective for fiscal years beginning after December 15, 2022, which will be our fiscal year 2024 beginning May
1, 2023; however, early adoption is permitted. We are currently evaluating the timing and the impact this standard will have on our unaudited
condensed consolidated financial statements.
In December 2019, the FASB issued ASU No. 2019-12,
Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting
for income taxes by removing certain exceptions and improving consistent application in certain areas of Topic 740. ASU 2019-12 is effective
for fiscal years, and interim periods within those years, beginning after December 15, 2020, which will be our fiscal year 2022 beginning
May 1, 2021. Early adoption is permitted. We adopted ASU 2019-12 on May 1, 2021 and the adoption of this standard did not have a material
impact on our condensed consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06,
Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic
815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The
amendments in this ASU will eliminate the beneficial conversion and cash conversion accounting models for convertible instruments, as
well as, amend the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because
of specific settlement provisions. The ASU will also modify how particular convertible instruments and certain contracts that may be settled
in cash or shares impact the diluted earnings per share calculation. As a smaller reporting company as defined by the SEC, ASU 2020-06
is effective for fiscal years, and interim periods within those years, beginning after December 15, 2023, which will be our fiscal year
2025 beginning May 1, 2024. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.
We elected to early adopt ASU 2020-06 on May 1,
2021 using a modified retrospective transition method. Under this transition method, prior period financial information and disclosures
are not adjusted and continue to be reported under the accounting standards that were in effect prior to our adoption of ASU 2020-06.
The adoption of ASU 2020-06 resulted in the re-combination
of the debt and equity components of our convertible senior notes (Note 3) into a single debt instrument, which resulted in a $42.4 million
decrease in additional paid-in capital from the derecognition of the bifurcated equity component, a $41.6 million increase in convertible
senior notes from the derecognition of the discount associated with the bifurcated equity component, or debt discount, and $0.8 million
decrease to the opening balance of accumulated deficit, representing the cumulative non-cash interest expense recognized related to the
amortization of the debt discount associated with the bifurcated equity component of our convertible senior notes. The adoption of this
standard also reduces the non-cash interest expense recognized in future periods due to the derecognition of the debt discount associated
with the bifurcated equity component of our convertible senior notes. When calculating net income per share of common stock attributable
to common stockholders, we use the if-converted method as required under ASU 2020-06 to determine the dilutive effect of our convertible
senior notes.
Note 3 – Debt
Convertible Senior Notes
Due 2026
In March 2021, we issued $143.8 million
in aggregate principal amount of 1.25% exchangeable senior notes due 2026 (“Convertible Notes”) in a private offering to
qualified institutional buyers pursuant to Rule 144A under the Securities Act. The net proceeds we received from the issuance of
Convertible Notes was $138.5 million,
after deducting initial purchaser discounts and other debt issuance related expenses of $5.3 million.
The Convertible Notes are senior unsecured obligations
and accrue interest at a rate of 1.25% per annum, payable semi-annually in arrears on March 15 and September 15 of each year, beginning
on September 15, 2021. The Convertible Notes mature on March 15, 2026, unless earlier redeemed or repurchased by us or converted at the
option of the holders. The Convertible Notes are convertible into cash, shares of our common stock or a combination of cash and shares
of our common stock, at our election in the manner and subject to the terms and conditions provided in the indenture (the “Indenture”)
governing the Convertible Notes.
The initial conversion
rate for the Convertible Notes is approximately 47.1403 shares of our common stock per $1,000 principal amount, which represents an
initial conversion price of approximately $21.21 per share of our common stock. The conversion rate is subject to adjustments upon
the occurrence of certain events in accordance with the terms of the Indenture. In addition, following certain corporate events that
occur prior to the maturity date, we will, in certain circumstances, increase the conversion rate for a holder who elects to convert
their Convertible Notes in connection with such a fundamental change, as defined in the Indenture.
Holders of the Convertible Notes may convert their
Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding September 15, 2025,
only under the following circumstances: (1) During any fiscal quarter commencing after the fiscal quarter ending July 31, 2021, if the
last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading
days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the
conversion price on each applicable trading day; (2) During the five business day period after any five consecutive trading day period
(the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the Convertible
Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock
and the exchange rate on each such trading day; (3) If we call any or all of the Convertible Notes for redemption, at any time prior to
the close of business on the second scheduled trading day immediately preceding the redemption date; and (4) Upon the occurrence of specified
corporate events as described in the Indenture.
On or after September 15, 2025 until the close
of business on the second scheduled trading day immediately preceding the maturity date, holders at their option may convert their Convertible
Notes at any time, regardless of the foregoing circumstances.
We may not redeem the Convertible Notes prior
to March 20, 2024. On or after March 20, 2024, the Convertible Notes are redeemable for cash, whole or in part, at our option, if the
last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days
(whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and
including, the trading day immediately preceding the date on which we provide notice of redemption at a redemption price equal to 100%
of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
If we undergo a fundamental change (as defined
in the Indenture), holders may require us to repurchase for cash all or any portion of their Convertible Notes at a fundamental change
repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to,
but excluding the redemption date.
The Indenture contains customary terms and covenants,
including that upon certain events of default occurring and continuing, the trustee or the holders of at least 25% in aggregate principle
amount of the outstanding Convertible Notes may declare the entire principal of all the Convertible Notes plus accrued and unpaid interest
to be immediately due and payable.
As of January 31, 2022, the conditions allowing
holders of the Convertible Notes to convert had not been met and, therefore, the Convertible Notes are classified as a long-term liability
on the condensed consolidated balance sheets at January 31, 2022 and April 30, 2021.
In accounting for the issuance of the Convertible
Notes, prior to the adoption of ASU 2020-06, we separated the Convertible Notes into debt and equity components. The carrying amount of
the debt component on the date of the issuance was $99.7 million and was determined based on a binomial lattice model, which yielded an
effective discount rate of 8.78% and was derived with the assistance of a third-party valuation. The equity component was allocated a
value of $44.1 million, representing the difference between the par value of the Convertible Notes and the fair value of the debt component.
The equity component was not remeasured as long as it continued to meet the conditions for equity classification, and the equity component
was recorded as additional paid-in capital within stockholders’ equity on the condensed consolidated balance sheet at April 30,
2021. The difference between the principal amount of the Convertible Notes and the debt component, or the debt discount, was amortized
to interest expense using the effective interest method over the contractual term of the Convertible Notes.
In accounting for the issuance costs related to
the Convertible Notes, prior to the adoption of ASU 2020-06, we allocated the total amount incurred to the debt and equity components
of the Convertible Notes based on their relative values. Issuance costs attributable to the debt component were $3.7 million and are being
amortized to interest expense using the effective interest method over the contractual term of the Convertible Notes. Issuance costs attributable
to the equity component were $1.6 million and were netted with the equity component in additional paid-in capital within stockholders’
equity on the condensed consolidated balance sheet at April 30, 2021.
On May 1, 2021, we elected to early adopt ASU
2020-06 using the modified retrospective transition method. Under such transition method, prior period financial information and disclosures
are not adjusted and continue to be reported under the accounting standards that were in effect prior to our adoption of ASU 2020-06.
The adoption of ASU 2020-06 resulted in the re-combination
of the debt and equity components of the Convertible Notes into a single debt instrument, which resulted in a $42.4 million decrease in
additional paid-in capital from the derecognition of the bifurcated equity component, a $41.6 million increase in convertible senior notes,
net from the derecognition of the discount associated with the bifurcated equity component, or debt discount, and $0.8 million decrease
to the May 1, 2021 opening balance of accumulated deficit, representing the cumulative non-cash interest expense recognized related to
the amortization of the debt discount associated with the bifurcated equity component of the Convertible Notes. Additionally, we derecognized
the allocation of the issuance costs to the equity component and all issuance costs related to the Convertible Notes are being amortized
to interest expense using the effective interest method over the contractual term of the Convertible Notes which is included in the cumulative
adjustment to the opening balance of accumulated deficit.
The net carrying amount of the Convertible Notes
is as follows (in thousands):
Schedule of net carrying amount of the debt component | |
| | | |
| | |
| |
January 31, 2022 | |
April 30, 2021 |
Principal | |
$ | 143,750 | | |
$ | 143,750 | |
Unamortized debt discount (1) | |
| – | | |
| (43,189 | ) |
Unamortized issuance costs | |
| (4,437 | ) | |
| (3,612 | ) |
Net carrying amount | |
$ | 139,313 | | |
$ | 96,949 | |
The net carrying amount of the equity component
of the Convertible Notes is as follows (in thousands):
Schedule of net carrying amount of the equity component | |
| | | |
| | |
| |
January 31, 2022 | |
April 30, 2021 |
Equity component (debt discount) | |
$ | – | | |
$ | 44,051 | |
Issuance costs | |
| – | | |
| (1,620 | ) |
Net carrying amount (1) | |
$ | – | | |
$ | 42,431 | |
________________
| (1) | As
discussed above, the adoption of ASU 2020-06 on May 1, 2021 resulted in the re-combination
of the debt and equity components of the Convertible Notes into a single debt instrument.
Accordingly, the unamortized debt discount balance and the net carrying amount of the equity
component were derecognized. |
As of January 31, 2022, the estimated fair value
of the Convertible Notes was approximately $197.7 million. The fair value was determined based on the last actively traded price per $100
of the Convertible Notes for the period ended January 31, 2022 (Level 2).
The following table summarizes the interest expense
recognized related to the Convertible Notes for the three and nine months ended January 31, 2022 (in thousands). There were no Convertible
Notes outstanding for the three and nine months ended January 31, 2021.
Schedule of interest expense | |
| | | |
| | |
| |
Three Months Ended January 31, 2022 | |
Nine Months Ended January 31, 2022 |
Contractual interest expense | |
$ | 449 | | |
$ | 1,347 | |
Amortization of issuance costs | |
| 257 | | |
| 766 | |
Total interest expense | |
$ | 706 | | |
$ | 2,113 | |
Capped Call Transactions
In connection with the issuance of the Convertible
Notes, we entered into privately negotiated capped call transactions (the “Capped Calls”) with certain financial institution
counterparties (the “Option Counterparties”). We used $12.8 million of the net proceeds from the issuance of the Convertible
Notes to pay the cost of the Capped Calls. The Capped Calls cover, subject to customary anti-dilution adjustments, the aggregate number
of shares of our common stock that initially underlie the Convertible Notes, and are generally expected to reduce the potential dilution
of our common stock upon any conversion of the Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap,
based on the cap price of the Capped Calls. The cap share price of the Capped Calls is approximately $28.02 per share, which represents
a premium of 75% over the last reported sale price of our common stock on March 9, 2021 and is subject to certain adjustments under the
terms of the Capped Calls. However, there would nevertheless be dilution upon conversion of the Convertible Notes to the extent that such
market price exceeds the capped share price as measured under the terms of the Capped Calls.
We determined that the Capped Calls should be
accounted for as a separate transaction from the Convertible Notes and that the Capped Calls met the criteria for equity classification.
Therefore, the cost of $12.8 million to purchase the Capped Calls were recorded as a reduction to additional paid-in capital in the condensed
consolidated balance sheet at April 30, 2021. The Capped Calls will not be subsequently remeasured as long as the conditions for equity
classification continue to be met.
Note 4 – Leases
We currently lease certain office, manufacturing,
laboratory and warehouse space located in southern California under operating lease agreements. Our leased facilities have original lease
terms ranging from 7 to 12 years, contain multi-year renewal options, and scheduled rent increases of 3% on either an annual or biennial
basis. A multi-year renewal option was included in determining the right-of-use asset and lease liability for one of our leases as we
considered it reasonably certain that we would exercise such renewal option. In addition, three of our leases provide for periods of free
rent, lessor improvements and/or tenant improvement allowances, of which certain of these improvements have been classified as leasehold
improvements and are being amortized over the shorter of the estimated useful life of the improvements or the remaining life of the lease.
The operating lease ROU assets and liabilities on our accompanying condensed consolidated balance sheets primarily relate to these facility
leases.
Certain of our operating facility leases require
us to pay property taxes, insurance and common area maintenance. While these payments are not included as part of our lease liabilities,
they are recognized as variable lease cost in the period they are incurred.
The components of operating lease cost for the
three and nine months ended January 31, 2022 and 2021 were as follows (in thousands):
Schedule of lease costs | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended January 31, | |
Nine Months Ended January 31, |
| |
2022 | |
2021 | |
2022 | |
2021 |
Operating lease cost | |
$ | 1,051 | | |
$ | 788 | | |
$ | 2,828 | | |
$ | 2,364 | |
Variable lease cost | |
| 221 | | |
| 112 | | |
| 620 | | |
| 433 | |
Short-term lease cost | |
| 163 | | |
| 99 | | |
| 379 | | |
| 289 | |
Total operating lease cost | |
$ | 1,435 | | |
$ | 999 | | |
$ | 3,827 | | |
$ | 3,086 | |
We also lease certain manufacturing equipment under a 5 year finance
lease that commenced in October 2021. Finance lease costs were immaterial for the three and nine months ended January 31, 2022 and 2021.
Supplemental consolidated balance sheet and other
information related to our operating and finance leases as of January 31, 2022 and April 30, 2021 were as follows (in thousands, expect
weighted average data):
Balance sheet classification of leases | |
| |
| | | |
| | |
Leases | |
Classification | |
January 31, 2022 | |
April 30, 2021 |
Assets | |
| |
| | | |
| | |
Operating | |
Operating lease right-of-use assets | |
$ | 37,508 | | |
$ | 18,691 | |
Finance | |
Property and equipment, net | |
| 2,760 | | |
| – | |
Total leased assets | |
| |
$ | 40,268 | | |
$ | 18,691 | |
| |
| |
| | | |
| | |
Liabilities | |
| |
| | | |
| | |
Current: | |
| |
| | | |
| | |
Operating | |
Current portion of operating lease liabilities | |
$ | 2,624 | | |
$ | 1,355 | |
Finance | |
Other current liabilities | |
| 498 | | |
| – | |
Non-current: | |
| |
| | | |
| | |
Operating | |
Operating lease liabilities, less current portion | |
| 38,683 | | |
| 19,889 | |
Finance | |
Finance lease liabilities, less current portion | |
| 2,222 | | |
| – | |
Total lease liabilities | |
| |
$ | 44,027 | | |
$ | 21,244 | |
Operating and finance leases | |
| | | |
| | |
Weighted average remaining lease term (years): | |
| |
|
Operating leases | |
| 12.6 | | |
| 9.6 | |
Finance lease | |
| 4.9 | | |
| – | |
Weighted average discount rate | |
| | | |
| | |
Operating leases | |
| 3.3 | % | |
| 8.0 | % |
Finance lease | |
| 5.3 | % | |
| – | |
Cash paid for amounts included in the measurement
of our operating lease liabilities was $1.6
million and $2.2 million
for the nine months ended January 31, 2022 and 2021, respectively, and included in net cash used in operating activities in our accompanying
unaudited condensed consolidated statements of cash flows. We did not have any cash payments associated with our finance lease liability
as of January 31, 2022. As of January 31, 2022, the maturities of our lease liabilities, which includes those derived from lease renewal
options that we considered it reasonably certain that we would exercise, were as follows (in thousands):
Schedule of maturities of operating lease liabilities | |
| | | |
| | | |
| | |
Fiscal Year Ending April 30, | |
Operating Leases | |
Finance Lease | |
Total |
2022 (remaining period) | |
$ | 794 | | |
$ | 157 | | |
$ | 951 | |
2023 | |
| 4,279 | | |
| 629 | | |
| 4,908 | |
2024 | |
| 4,140 | | |
| 629 | | |
| 4,769 | |
2025 | |
| 4,060 | | |
| 629 | | |
| 4,689 | |
2026 | |
| 4,167 | | |
| 629 | | |
| 4,796 | |
Thereafter | |
| 32,908 | | |
| 419 | | |
| 33,327 | |
Total lease payments | |
$ | 50,348 | | |
$ | 3,092 | | |
$ | 53,440 | |
Less: imputed interest | |
| (9,041 | ) | |
| (372 | ) | |
| (9,413 | ) |
Total lease liabilities | |
$ | 41,307 | | |
$ | 2,720 | | |
$ | 44,027 | |
Note
5 – Stockholders’ Equity
Series E Preferred Stock
On April 12, 2021 (the “Redemption Date”),
we redeemed all then current outstanding shares of our 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”)
at a per share price equal to the $25.00 liquidation amount plus accrued and unpaid dividends up to, but excluding, the Redemption Date.
In connection with the completed redemption, we incurred a charge of $3.4 million during the quarter ended April 30, 2021 related to the
excess of the redemption value paid upon redemption over the carrying value of our Series E Preferred Stock. As a result of the completed
redemption, our Series E Preferred Stock is no longer issued and outstanding.
Holders of our Series E Preferred
Stock were entitled to receive cumulative dividends at the rate of 10.50% per annum based on the liquidation preference of $25.00 per
share, or $2.625 per annum per share, and were payable quarterly in cash, on or about the first day of each January, April, July and October.
For the three and nine months ended January 31, 2021, we paid aggregate cash dividends of $1.1 million and $3.2 million, respectively,
for issued and outstanding shares of our Series E Preferred Stock. No amounts were paid for the three and nine months ended January 31,
2022.
Note
6 – Equity Compensation Plans
Stock Incentive Plans
As of January 31, 2022, we had
an aggregate of 9,077,276 shares of our common stock reserved for issuance under our stock incentive plans, of which 3,578,469 shares
were subject to outstanding stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”)
and 5,498,807 shares were available for future grants of stock-based awards.
Stock Options
The following summarizes our
stock option transaction activity for the nine months ended January 31, 2022:
Schedule of stock option activity | |
| |
|
| |
Stock Options | |
Grant Date Weighted Average Exercise Price |
| |
(in thousands) | |
|
Outstanding at May 1, 2021 | |
3,130 | |
$6.56 |
Granted | |
36 | |
$24.42 |
Exercised | |
(403) | |
$5.95 |
Canceled or expired | |
(170) | |
$7.47 |
Outstanding at January 31, 2022 | |
2,593 | |
$6.84 |
Restricted Stock Units
The following summarizes our
RSUs transaction activity for the nine months ended January 31, 2022:
Schedule of RSU activity | |
| |
|
| |
Shares | |
Weighted Average Grant Date Fair Value |
| |
(in thousands) | |
|
Outstanding at May 1, 2021 | |
560 | |
$6.52 |
Granted | |
334 | |
$25.59 |
Vested | |
(209) | |
$9.23 |
Forfeited | |
(49) | |
$15.17 |
Outstanding at January 31, 2022 | |
636 | |
$14.98 |
Performance Stock Units
During the nine months ended
January 31, 2022, the Compensation Committee of the Board of Directors granted performance stock units (“PSUs”) to our officers.
The PSUs are subject to annual vesting, as to one-third of the PSUs, over our three fiscal years ending April 30, 2022, 2023 and 2024
(each a “Performance Period”) based upon our attainment of certain predetermined financial metrics for each such Performance
Period. Each PSU that vests represents the right to receive one share of our common stock. Depending on the actual financial metrics achieved
relative to the target financial metrics for such Performance Periods, the number of PSUs issued could range from 0% to 200% of the target
amount. The number of granted shares included in the table below is based on a maximum 200% achievement of each financial metric during
each Performance Period (the “Maximum Performance Target”). In the event that a financial metric is achieved at a rate below
the Maximum Performance Target, or is not achieved, the corresponding portion of the PSUs that do not vest will be forfeited.
The following summarizes our
PSUs transaction activity for the nine months ended January 31, 2022:
Schedule of PSU activity | |
| |
|
| |
Shares | |
Weighted Average Grant Date Fair Value |
| |
(in thousands) | |
|
Outstanding at May 1, 2021 | |
– | |
$– |
Granted | |
380 | |
$25.36 |
Vested | |
– | |
$– |
Forfeited | |
(30) | |
$26.03 |
Outstanding at January 31, 2022 | |
350 | |
$25.31 |
Employee Stock Purchase Plan
The Avid Bioservices, Inc. 2010
Employee Stock Purchase Plan (the “ESPP”) is a stockholder-approved plan under which employees can purchase shares of our
common stock, based on a percentage of their compensation, subject to certain limits. The purchase price per share is equal to the lower
of 85% of the fair market value of our common stock on the first trading day of the six-month offering period or on the last trading day
of the six-month offering period. During the nine months ended January 31, 2022, a total of 44,364 shares of our common stock were purchased
under the ESPP at a weighted average purchase price per share of $14.50. As of January 31, 2022, we had 1,031,962 shares of our common
stock reserved for issuance under the ESPP.
Stock-Based Compensation
Stock-based compensation expense for the three
and nine months ended January 31, 2022 and 2021 was comprised of the following (in thousands):
Share-based compensation expense | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended January 31, | |
Nine Months Ended January 31, |
| |
2022 | |
2021 | |
2022 | |
2021 |
Cost of revenues | |
$ | 694 | | |
$ | 386 | | |
$ | 1,855 | | |
$ | 1,035 | |
Selling, general and administrative | |
| 1,417 | | |
| 613 | | |
| 3,497 | | |
| 1,719 | |
Total stock-based compensation | |
$ | 2,111 | | |
$ | 999 | | |
$ | 5,352 | | |
$ | 2,754 | |
As of January 31, 2022, the total estimated unrecognized
compensation cost related to non-vested stock options and RSUs was $3.6 million and $8.8 million, respectively. These costs are expected
to be recognized over weighted average vesting periods of 2.0 and 2.6 years, respectively.
As of January 31, 2022, there was $0.7 million
of total estimated unrecognized compensation cost related to unvested PSUs associated with the Performance Period ending April 30, 2022.
These costs are expected to be recognized over the weighted average vesting period of 0.3 years.
Note 7 – Net Income Per Common Share
Basic net income per common share is computed
by dividing our net income attributable to common stockholders by the weighted average number of shares of common stock outstanding during
the period. Diluted net income per common share is computed by dividing our net income attributable to common stockholders by the sum
of the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effects of stock options,
unvested RSUs and PSUs, shares of common stock expected to be issued under our ESPP, Convertible Notes and Series E Preferred Stock outstanding
during the period.
Net income attributable to common stockholders
represents our net income less Series E Preferred Stock accumulated dividends. Series E Preferred Stock accumulated dividends include
dividends declared for the period (regardless of whether or not the dividends have been paid) and dividends accumulated for the period
(regardless of whether or not the dividends have been declared).
The potential dilutive effect
of stock options, unvested RSUs and PSUs, and shares of common stock expected to be issued under our ESPP 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
Convertible Notes and Series E Preferred Stock outstanding during the period are calculated using the if-converted method assuming the
conversion of Convertible Notes and Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later,
but are excluded if their effect is anti-dilutive. A reconciliation of the numerators and the denominators of the basic and dilutive
net income per common share computations are as follows (in thousands, expect per share amounts):
Reconciliation of earnings per share | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended January 31, | |
Nine Months Ended January 31, |
| |
2022 | |
2021 | |
2022 | |
2021 |
Numerator:
| |
| |
| |
| |
|
Net income | |
$ | 2,248 | | |
$ | 2,207 | | |
$ | 12,074 | | |
$ | 9,221 | |
Series E preferred stock accumulated dividends | |
| – | | |
| (1,442 | ) | |
| – | | |
| (3,604 | ) |
Net income attributable to common stockholders | |
$ | 2,248 | | |
$ | 765 | | |
$ | 12,074 | | |
$ | 5,617 | |
| |
| | | |
| | | |
| | | |
| | |
Denominator: | |
| | | |
| | | |
| | | |
| | |
Weighted average basic common shares outstanding | |
| 61,631 | | |
| 58,865 | | |
| 61,394 | | |
| 57,349 | |
Effect of dilutive securities: | |
| | | |
| | | |
| | | |
| | |
Stock options | |
| 1,862 | | |
| 937 | | |
| 1,926 | | |
| 507 | |
RSUs, PSUs and ESPP | |
| 379 | | |
| 295 | | |
| 391 | | |
| 202 | |
Weighted average dilutive common shares outstanding | |
| 63,872 | | |
| 60,097 | | |
| 63,711 | | |
| 58,058 | |
| |
| | | |
| | | |
| | | |
| | |
Net income per share attributable to common stockholders | |
| | | |
| | | |
| | | |
| | |
Basic | |
$ | 0.04 | | |
$ | 0.01 | | |
$ | 0.20 | | |
$ | 0.10 | |
Diluted | |
$ | 0.04 | | |
$ | 0.01 | | |
$ | 0.19 | | |
$ | 0.10 | |
The following table presents
the potential dilutive securities excluded from the calculation of diluted net income per share for the periods presented as the effect
of their inclusion would have been anti-dilutive (in thousands):
Schedule of antidilutive shares | |
| | | |
| | | |
| | | |
| | |
| |
Three Months Ended January 31, | |
Nine Months Ended January 31, |
| |
2022 | |
2021 | |
2022 | |
2021 |
Stock options | |
| 40 | | |
| 325 | | |
| 37 | | |
| 1,665 | |
RSUs, PSUs and ESPP | |
| 3 | | |
| – | | |
| 5 | | |
| 6 | |
Convertible Notes | |
| 6,776 | | |
| – | | |
| 6,776 | | |
| – | |
Series E Preferred Stock | |
| – | | |
| 1,979 | | |
| – | | |
| 1,979 | |
Total | |
| 6,819 | | |
| 2,304 | | |
| 6,818 | | |
| 3,650 | |
Note 8 – Commitments and Contingencies
In the ordinary course of business, we are at
times subject to various legal proceedings and disputes. We make provisions for liabilities when it is both probable that a liability
has been incurred and the amount of the loss can be reasonably estimated. Such provisions, if any, are reviewed at least quarterly
and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other
information and events pertaining to a particular case. We currently are not a party to any legal proceedings, the adverse outcome of
which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated financial
condition or results of operations.
In March 2020, the World Health Organization declared
the global novel coronavirus disease (“COVID-19”) outbreak a pandemic and recommended containment and mitigation measures
worldwide. Since the announcement we have been monitoring this closely, and although the COVID-19 pandemic has not had a significant impact
on our operations to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and our business
is highly uncertain. Accordingly, we cannot provide any assurance that the COVID-19 pandemic will not have a material adverse impact on
our operations or future results. The extent to which the COVID-19 pandemic may impact our future business, strategic initiatives, results
of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including,
but not limited to the duration, spread, severity and resurgence of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our
customers, vendors, and employees and the remedial actions and stimulus measures adopted by local and federal governments, and the extent
to which normal economic and operating conditions can resume.