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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

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

 

For the quarterly period ended July 31, 2023

or

 

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

 

For the transition period from _____ to _____

 

Commission file number: 001-32839

 

 

 

AVID BIOSERVICES, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware

(State or other jurisdiction of incorporation or organization)

95-3698422

(I.R.S. Employer Identification No.)

 

14191 Myford Road, Tustin, California, 92780

(Address of principal executive offices, Zip Code)  

 

(714) 508-6100

(Registrant’s telephone number, including area code)

 

 

 

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

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock, $0.001 par value per share CDMO The NASDAQ Stock Market LLC

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes     No 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

 

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

 

Large accelerated filer        Accelerated filer    
Non-accelerated filer        Smaller reporting company   
      Emerging growth company   

 

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

 

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

 

63,112,934 shares of registrant’s common stock were outstanding as of August 18, 2023.

 

   

 

 

AVID BIOSERVICES, INC.

 

Form 10-Q

 

For the Fiscal Quarter Ended July 31, 2023

 

TABLE OF CONTENTS

 

Page

 

PART I - FINANCIAL INFORMATION 3
   
Item 1.   Condensed Consolidated Financial Statements (Unaudited) 3
   
Item 2.   Management’s Discussion and Analysis of Financial Condition And Results of Operations 19
   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk 25
   
Item 4.   Controls And Procedures 25
   
PART II - OTHER INFORMATION 26
   
Item 1.   Legal Proceedings 26
   
Item 1A.   Risk Factors 26
   
Item 5.   Other Information 26
   
Item 6.   Exhibits 26
   
SIGNATURES 27

 

As used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, the terms “we,” “us,” “our,” and the “Company” refer to Avid Bioservices, Inc. and its subsidiary.

 

 

 

 2 

 

 

PART I—FINANCIAL INFORMATION

 

Item 1.Condensed Consolidated Financial Statements

 

avid bioservices, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands, except par value)

 

         
   July 31, 2023   April 30, 2023 
ASSETS          
Current assets:          
Cash and cash equivalents  $24,898   $38,542 
Accounts receivable, net   16,209    18,298 
Contract assets   14,454    9,609 
Inventory   40,866    43,908 
Prepaid expenses and other current assets   1,892    2,094 
Total current assets   98,319    112,451 
Property and equipment, net   182,299    177,369 
Operating lease right-of-use assets   42,374    42,772 
Deferred tax assets   114,238    113,639 
Other assets   4,757    4,473 
Restricted cash   350    350 
Total assets  $442,337   $451,054 
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Current liabilities:          
Accounts payable  $22,813   $24,593 
Accrued compensation and benefits   4,667    8,780 
Contract liabilities   33,019    37,352 
Current portion of operating lease liabilities   1,262    1,358 
Other current liabilities   2,296    1,626 
Total current liabilities   64,057    73,709 
Convertible senior notes, net   140,888    140,623 
Operating lease liabilities, less current portion   45,370    45,690 
Finance lease liabilities, less current portion   1,424    1,562 
Total liabilities   251,739    261,584 
           
Commitments and contingencies        
           
Stockholders’ equity:          
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding at respective dates        
Common stock, $0.001 par value; 150,000 shares authorized; 63,111 and 62,692 shares issued and outstanding at respective dates   63    63 
Additional paid-in capital   623,445    620,224 
Accumulated deficit   (432,910)   (430,817)
Total stockholders’ equity   190,598    189,470 
Total liabilities and stockholders’ equity  $442,337   $451,054 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 3 

 

 

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (Unaudited)

(In thousands, except per share information)

 

         
   Three Months Ended   July 31, 
   2023   2022 
         
Revenues  $37,726   $36,692 
Cost of revenues   33,626    27,575 
Gross profit   4,100    9,117 
Operating expenses:          
Selling, general and administrative   6,263    6,382 
Total operating expenses   6,263    6,382 
Operating income (loss)   (2,163)   2,735 
Interest expense   (775)   (518)
Other income (expense), net   258    50 
Net income (loss) before income taxes   (2,680)   2,267 
Income tax expense (benefit)   (587)   703 
Net income (loss)  $(2,093)  $1,564 
Comprehensive income (loss)  $(2,093)  $1,564 
           
Net income (loss) per share:          
Basic  $(0.03)  $0.03 
Diluted  $(0.03)  $0.02 
           
Weighted average common shares outstanding:             
Basic   62,838    61,905 
Diluted   62,838    63,333 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 4 

 

 

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited)

(In thousands)

 

 

                                         
   Three Months Ended July 31, 2023 
           Additional       Total 
   Common Stock   Paid-In   Accumulated   Stockholders’ 
   Shares   Amount   Capital   Deficit   Equity 
Balance at April 30, 2023   62,692   $63   $620,224   $(430,817)  $189,470 
Common stock issued under equity compensation plans   419        878        878 
Stock-based compensation expense           2,343        2,343 
Net loss               (2,093)   (2,093)
Balance at July 31, 2023   63,111   $63   $623,445   $(432,910)  $190,598 

 

    Three Months Ended July 31, 2022  
     Common Stock       Additional Paid-In     Accumulated     Total Stockholders’  
    Shares     Amount     Capital     Deficit     Equity  
Balance at April 30, 2022     61,807     $ 62     $ 605,841     $ (431,377 )   $ 174,526  
Common stock issued under equity compensation plans     358             1,012             1,012  
Stock-based compensation expense                 1,897             1,897  
Net income                       1,564       1,564  
Balance at July 31, 2022     62,165     $ 62     $ 608,750     $ (429,813 )   $ 178,999  

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 5 

 

 

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)

 

         
   Three Months Ended   July 31, 
   2023   2022 
         
Cash flows from operating activities:          
Net income (loss)  $(2,093)  $1,564 
Adjustments to reconcile net income (loss) to net cash used in operating activities:          
Stock-based compensation   2,343    1,897 
Depreciation and amortization   2,649    1,590 
Amortization of debt issuance costs   339    260 
Deferred income taxes   (599)   610 
Loss on disposal of property and equipment   46    34 
Changes in operating assets and liabilities:          
Accounts receivable, net   2,089    (5,398)
Contract assets   (4,845)   (1,709)
Inventory   3,042    (4,292)
Prepaid expenses and other assets   (131)   (355)
Accounts payable   4,684    4,242 
Accrued compensation and benefits   (4,113)   (3,118)
Contract liabilities   (4,333)   (1,023)
Other accrued expenses and liabilities   644    664 
Net cash used in operating activities   (278)   (5,034)
           
Cash flows from investing activities:          
Purchase of property and equipment   (14,114)   (6,924)
Net cash used in investing activities   (14,114)   (6,924)
           
Cash flows from financing activities:          
Proceeds from issuance of common stock under equity compensation plans   878    1,012 
Principal payments on finance lease   (130)   (83)
Net cash provided by financing activities   748    929 
           
Net decrease in cash, cash equivalents and restricted cash   (13,644)   (11,029)
Cash, cash equivalents and restricted cash, beginning of period   38,892    126,516 
Cash, cash equivalents and restricted cash, end of period  $25,248   $115,487 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest  $27   $23 
Cash paid for income taxes  $12   $40 
           
Supplemental disclosures of non-cash activities:          
Unpaid purchases of property and equipment  $7,636   $16,674 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 6 

 

 

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 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 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, 2023, as filed with the SEC on June 21, 2023. 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, 2023.

 

Revenue Recognition

 

Revenue recognized from services provided under our customer contracts is 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 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.

 

 

 7 

 

 

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 revenue streams (in thousands):

          
   Three Months Ended July 31, 
   2023   2022 
Manufacturing revenues  $33,420   $31,481 
Process development revenues   4,306    5,211 
Total revenues  $37,726   $36,692 

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, contract assets (unbilled receivables), and contract liabilities (customer deposits and deferred revenue). Contract assets are recorded when our right to consideration is conditioned on something other than the passage of time. Contract assets are reclassified to accounts receivable on the consolidated balance sheet when our rights become unconditional. Contract liabilities represent customer deposits and deferred revenue billed and/or received in advance of our fulfillment of performance obligations. Contract liabilities convert to revenue as we perform our obligations under the contract.

 

During the three months ended July 31, 2023 and 2022, we recognized revenue of $16.8 million and $18.6 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. For contracts with multiple performance obligations, we allocate transaction price to each performance obligation identified in a contract on a relative standalone selling price basis. We generally determine relative standalone selling prices based on the price observed in the customer contract for each distinct performance obligation. If observable standalone selling prices are not available, we may estimate the applicable standalone selling price based on the pricing of other comparable services or on a price that we believe the market is willing to pay for the applicable service.

 

In determining the transaction price, we also 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.

 

 

 8 

 

 

During the three months ended July 31, 2023, changes in estimates for variable consideration resulted in a decrease in revenues of $1.4 million. The changes in estimates for variable consideration were a result of an insolvent customer. There were no material adjustments in estimates for variable consideration for the three months ended July 31, 2022.

 

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 July 31, 2023, we do not have any unsatisfied performance obligations for contracts greater than one year.

 

Costs incurred to obtain a contract are not material. These costs are generally employee sales commissions, which are expensed as incurred and included in selling, general and administrative expense in the unaudited condensed consolidated statements of income (loss) and comprehensive income (loss).

 

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 July 31, 2023 and April 30, 2023, 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):

                
   July 31, 2023   April 30, 2023   July 31, 2022   April 30, 2022 
Cash and cash equivalents  $24,898   $38,542   $115,137   $126,166 
Restricted cash   350    350    350    350 
Total cash, cash equivalents and restricted cash  $25,248   $38,892   $115,487   $126,516 

 

Accounts Receivable, Net

 

Accounts receivable is 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, that includes an assessment of expected credit losses, and we estimate our allowance for doubtful accounts based on various factors, including our historical collection experience, aging of our customer receivable balances, current and future economic market conditions, and the financial condition of our customers.

 

Based on our analysis of our accounts receivable balance as of July 31, 2023 and April 30, 2023, we determined an allowance for doubtful accounts of $2.2 million and $0.5 million, respectively, was deemed necessary.

 

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:

   
Description   Estimated Useful Life
Leasehold improvements   Shorter of estimated useful life or lease term
Laboratory and manufacturing equipment   5 – 15 years
Computer equipment and software   3 – 5 years
Furniture, fixtures and office equipment   5 – 10 years

 

 

 9 

 

 

Costs for property and equipment not yet placed into service have been capitalized as construction-in-progress. These costs are primarily related to equipment and leasehold improvements associated with our manufacturing facilities and will be depreciated in accordance with the above guidelines once placed into service. Interest costs incurred during construction of major capital projects are capitalized as construction-in-progress until the underlying asset is ready for its intended use, at which point the interest costs are amortized as depreciation expense over the life of the underlying asset. Interest capitalized as construction-in-progress for the three months ended July 31, 2023 and 2022 was de minimis and $0.2 million, respectively. All of our property and equipment are located in the United States. Property and equipment consist of the following (in thousands):

        
   July 31, 2023   April 30, 2023 
Leasehold improvements  $101,310   $97,514 
Laboratory and manufacturing equipment   42,369    35,501 
Computer equipment and software   5,045    5,028 
Furniture, fixtures and office equipment   1,894    1,681 
Construction-in-progress   64,573    68,013 
Total property and equipment, gross   215,191    207,737 
Less: accumulated depreciation and amortization   (32,892)   (30,368)
Total property and equipment, net  $182,299   $177,369 

 

Depreciation and amortization expense for the three months ended July 31, 2023 and 2022 was $2.6 million and $1.6 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, 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.

 

Our finance lease with a term greater than one year is included as an asset 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 is calculated using the implicit interest rate in the lease. Finance lease ROU assets are amortized on a straight-line basis over the expected useful life of the asset and the carrying amount of the lease liability is adjusted to reflect interest, which is recorded as interest expense.

 

Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheets and lease expense for these short-term leases is recognized on a straight-line basis over the lease term. 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 three months ended July 31, 2023 and 2022, there were no indicators of impairment of the value of our long-lived assets and no cumulative impairment losses were recognized as of July 31, 2023.

 

 

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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 an 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 an 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.

 

Debt Issuance Costs

 

Debt issuance costs related to convertible senior notes are recorded as a deduction that is netted against the principal value of the debt and are amortized to interest expense using the effective interest method over the contractual term of the debt (Note 3).

 

Debt issuance costs related to the revolving credit facility are included in prepaid expenses and other current assets in the consolidated balance sheet and are amortized to interest expense over the contractual term of the revolving credit facility (Note 3).

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) is equal to our net income (loss) for all periods presented.

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:

 

·Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.

 

·Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets or liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.

 

·Level 3 – Unobservable inputs that are supported by little or no market activity and significant to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation techniques and assumptions.

 

As of July 31, 2023 and April 30, 2023, we did not have any Level 2 or Level 3 financial assets and our cash equivalents of $15.6 million and $28.7 million, respectively, were invested in money market funds with no more than two commercial banks 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 (Note 3). We did not have any other Level 2 or Level 3 financial liabilities as of July 31, 2023 and April 30, 2023.

 

Recently Adopted Accounting Standard

 

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 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments. We adopted ASU 2016-13 on May 1, 2023, and the adoption of this standard did not have a material impact on our unaudited condensed consolidated financial statements.

 

 

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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. 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 principal 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 July 31, 2023, 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 unaudited condensed consolidated balance sheets at July 31, 2023 and April 30, 2023.

 

 

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The net carrying amount of the Convertible Notes is as follows (in thousands):

        
   July 31, 2023   April 30, 2023 
Principal  $143,750   $143,750 
Unamortized issuance costs   (2,862)   (3,127)
Net carrying amount  $140,888   $140,623 

 

As of July 31, 2023, the estimated fair value of the Convertible Notes was approximately $133.5 million. The fair value was determined based on the last actively traded price per $100 of the Convertible Notes for the period ended July 31, 2023 (Level 2).

 

The following table summarizes the interest expense recognized related to the Convertible Notes for the three months ended July 31, 2023 and 2022 (in thousands).

        
   Three Months Ended
July 31, 2023
   Three Months Ended
July 31, 2022
 
Contractual interest expense  $408   $224 
Amortization of issuance costs   265    260 
Total interest expense associated with Convertible Notes  $673   $484 

 

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 evaluated the Capped Calls under ASC 815-10 and determined that they 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 was recorded as a reduction to additional paid-in capital. The Capped Calls will not be subsequently remeasured as long as the conditions for equity classification continue to be met. As of July 31, 2023 and April 30, 2023, there were no conversions of our Convertible Notes, and therefore, there was no activity with respect to the Capped Calls. We believe the conditions for equity classification continue to be met as of July 31, 2023 and April 30, 2023.

 

Revolving Credit Facility

 

On March 14, 2023, we entered into a credit agreement with Bank of America, N.A., as administrative agent and letter of credit issuer (the “Credit Agreement”). The Credit Agreement provides for a revolving credit facility (the “Revolving Credit Facility”) in an amount equal to the lesser of (i) $50 million, and (ii) a borrowing base calculated as the sum of (a) 80% of the value of certain of our eligible accounts receivable, plus (b) up to 100% of the value of eligible cash collateral. The Revolving Credit Facility will mature on March 13, 2024 and is secured by substantially all of our assets. As of July 31, 2023, there were no outstanding loans under the Revolving Credit Facility.

 

Loans under the Revolving Credit Facility will bear interest at either a term Secured Overnight Financing Rate (“SOFR”) rate for a specified interest period plus a SOFR adjustment (equal to 0.10%) plus a margin of 1.40% or base rate plus a margin of 0.40% at our option. Interest on any outstanding loans is due and payable monthly and the principal balance is due at maturity. In addition, we pay a quarterly unused revolving line facility fee of 0.20% per annum on the average unused facility.

 

 

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The Credit Agreement includes certain customary affirmative and negative covenants, including limitations on mergers, consolidations and sales of assets, limitations on liens, limitations on certain restricted payments and investments, limitations on transactions with affiliates and limitations on incurring additional indebtedness. In addition, the Credit Agreement requires maintenance of a minimum consolidated EBITDA, as defined in the Credit Agreement, of $15 million for the most recently completed four fiscal quarters as measured at the end of each fiscal quarter. As of July 31, 2023, we were in compliance with the Credit Agreement’s financial covenant.

 

The Credit Agreement also provides for certain customary events of defaults, including, among others, failure to make payments, breach of representations and warranties, and default of covenants.

 

Note 4 – Leases

 

We currently lease certain office, manufacturing, laboratory and warehouse space located in Orange County, 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. Multi-year renewal options were included in determining the right-of-use asset and lease liability for three of our leases as we considered it reasonably certain that we would exercise such renewal options. In addition, certain of our leases provide for periods of free rent, lessor improvements and tenant improvement allowances, of which certain of these improvements have been classified as leasehold improvements and/or are being amortized over the shorter of the estimated useful life of the improvements or the remaining life of the lease.

 

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.

 

We also lease certain manufacturing equipment under a 5-year finance lease that commenced in the second quarter of fiscal year 2022.

 

The components of our lease costs for the three months ended July 31, 2023 and 2022 were as follows (in thousands):

          
   Three Months Ended July 31, 
   2023   2022 
Operating lease cost  $1,140   $1,083 
Variable lease cost   351    389 
Short-term lease cost   36    130 
Finance lease costs:          
Amortization of right-of-use assets   54    54 
Interest on lease liabilities   27    33 
Total lease costs  $1,608   $1,689 

 

Supplemental consolidated balance sheet and other information related to our leases as of July 31, 2023 and April 30, 2023 were as follows (in thousands, expect weighted average data):

             
Leases  Classification  July 31, 2023   April 30, 2023 
Assets             
Operating  Operating lease right-of-use assets  $42,374   $42,772 
Finance  Property and equipment, net   2,460    2,529 
Total leased assets     $44,834   $45,301 
              
Liabilities             
Current:             
Operating  Current portion of operating lease liabilities  $1,262   $1,358 
Finance  Other current liabilities   539    531 
Non-current:             
Operating  Operating lease liabilities, less current portion   45,370    45,690 
Finance  Finance lease liabilities, less current portion   1,424    1,562 
Total lease liabilities     $48,595   $49,141 
             
Weighted average remaining lease term (years):          
Operating leases     16.4    16.6 
Finance lease      3.4    3.7 
Weighted average discount rate:             
Operating leases      6.0%    6.0% 
Finance lease      5.3%    5.3% 

 

 

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Supplemental cash flow information related to our leases for the three months ended July 31, 2023 and 2022 were as follows (in thousands):

          
   Three Months Ended July 31, 
   2023   2022 
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash flows from operating leases  $1,119   $963 
Operating cash flows from finance lease   27    22 
Financing cash flows from finance lease   130    83 
Non-cash transaction:          
Unpaid finance lease obligation  $   $41 

 

As of July 31, 2023, 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):

               
Fiscal Year Ending April 30,  Operating Leases   Finance Lease   Total 
2024 (remaining period)  $3,021   $472   $3,493 
2025   4,060    629    4,689 
2026   4,167    629    4,796 
2027   4,199    419    4,618 
2028   4,036        4,036 
Thereafter   56,418        56,418 
Total lease payments  $75,901   $2,149   $78,050 
Less: imputed interest   (29,269)   (186)   (29,455)
Total lease liabilities  $46,632   $1,963   $48,595 

 

Note 5 Equity Compensation Plans

 

Stock Incentive Plans

 

As of July 31, 2023, we had an aggregate of 7,806,772 shares of our common stock reserved for issuance under our stock incentive plans, of which 4,642,661 shares were subject to outstanding stock options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) and 3,164,111 shares were available for future grants of stock-based awards.

 

Stock Options

 

The following summarizes our stock option transaction activity for the three months ended July 31, 2023:

          
   Stock Options   Grant Date Weighted Average Exercise Price 
   (in thousands)     
Outstanding at May 1, 2023   2,079   $6.76 
Granted      $ 
Exercised   (41)  $8.46 
Canceled or expired   (8)  $13.15 
Outstanding at July 31, 2023   2,030   $6.70 

 

 

 

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Restricted Stock Units

 

The following summarizes our RSUs transaction activity for the three months ended July 31, 2023:

          
   Shares   Weighted Average Grant Date Fair Value 
   (in thousands)     
Outstanding at May 1, 2023   1,006   $16.83 
Granted   661   $14.05 
Vested   (170)  $11.29 
Forfeited   (19)  $17.89 
Outstanding at July 31, 2023   1,478   $16.21 

 

Performance Stock Units

 

The Compensation Committee of the Board of Directors grants PSUs to our executives. The PSUs are subject to annual vesting over three consecutive fiscal year performance periods with the first one-third vesting on April 30 of the year following the grant date, and each successive one-third vesting on April 30 of the following two years respectively (each a “Performance Period”). Each PSU that vests represent the right to receive one share of our common stock. The number of shares that will vest for each Performance Period, if any, is based upon the attainment of certain predetermined financial metrics for each such Performance Period. 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”). If a financial metric is achieved at a rate below the Maximum Performance Target, or is not achieved, the corresponding portions of the PSUs that do not vest are forfeited.

 

The following summarizes our PSUs transaction activity for the three months ended July 31, 2023:

          
   Shares   Weighted Average Grant Date Fair Value 
   (in thousands)     
Outstanding at May 1, 2023   522   $19.70 
Granted   613   $13.92 
Vested      $ 
Forfeited      $ 
Outstanding at July 31, 2023   1,135   $16.58 

 

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 three months ended July 31, 2023, a total of 46,224 shares of our common stock were purchased under the ESPP at a purchase price of $11.46 per share. As of July 31, 2023, we had 917,092 shares of our common stock reserved for issuance under the ESPP.

 

 

 

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Stock-Based Compensation

 

Stock-based compensation expense included in our unaudited condensed consolidated statements of income (loss) and comprehensive income (loss) for the three months ended July 31, 2023 and 2022 was comprised of the following (in thousands):

          
   Three Months Ended July 31, 
   2023   2022 
Cost of revenues  $954   $687 
Selling, general and administrative   1,389    1,210 
Total  $2,343   $1,897 

 

As of July 31, 2023, the total estimated unrecognized compensation cost related to non-vested stock options and RSUs was $0.9 million and $22.6 million, respectively. These costs are expected to be recognized over weighted average vesting periods of 0.91 and 3.12 years, respectively. As of July 31, 2023, there was $10.6 million of total estimated unrecognized compensation cost related to non-vested PSUs associated with the Performance Periods ending April 30, 2024, 2025 and 2026. This cost is expected to be recognized over the weighted average vesting period of 1.47 years, however, we will assess the likelihood of achieving the predetermined financial metrics associated with each Performance Period on a quarterly basis and the expense recognized, if any, will be adjusted accordingly.

 

Note 6 – Income Taxes

 

We are subject to taxation in the United States and various states jurisdictions in which we conduct our business.

 

Our tax provision for interim periods is determined using an estimate of our annual effective tax rate, adjusted for discrete items arising in that quarter. On a quarterly basis, we update our estimate of the annual effective tax rate, and if the estimated annual tax rate changes, we make a cumulative adjustment in that quarter.

 

For the three months ended July 31, 2023 and 2022, we recorded an income tax (benefit) of $(0.6) million and an income tax expense of $0.7 million, respectively, resulting in an effective tax rate of approximately 22% and 30%, respectively.

 

The provision for income taxes recorded for the three months ended July 31, 2023 and 2022 differs from the U.S. federal statutory tax rate of 21% due primarily to the tax impact of stock-based compensation, non-deductible officers’ compensation, and transportation fringe benefits.

 

We have no material uncertain tax position liabilities as of July 31, 2023 and April 30, 2023. It is our policy to recognize interest and penalties related to income tax matters in interest expense and other income (expense), net, respectively, in our unaudited condensed consolidated statements of income (loss) and comprehensive income (loss). There was no accrued interest or penalties associated with uncertain tax positions as of July 31, 2023 and April 30, 2023.

 

Note 7 – Net Income (Loss) Per Common Share

 

Basic net income (loss) per common share is computed by dividing our net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing our net income (loss) 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, unvested PSUs, shares of common stock expected to be issued under our ESPP, and Convertible Notes.

 

The potential dilutive effect of stock options, unvested RSUs, unvested 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 is calculated using the if-converted method assuming the conversion of our Convertible Notes 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 (loss) per common share computations are as follows (in thousands, except per share amounts):

 

 

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   Three Months Ended July 31, 
   2023   2022 
Numerator:        
Net income (loss)  $(2,093)  $1,564 
Denominator:          
Weighted average basic common shares outstanding   62,838    61,905 
Effect of dilutive securities:          
Stock options       1,195 
RSUs and ESPP       233 
Weighted average dilutive common shares outstanding   62,838    63,333 
           
Net income (loss) per share:          
Basic  $(0.03)  $0.03 
Diluted  $(0.03)  $0.02 

 

The following table presents the potential dilutive securities excluded from the calculation of diluted net income (loss) per share for the periods presented as the effect of their inclusion would have been anti-dilutive (in thousands):

          
   Three Months Ended July 31, 
   2023   2022 
Stock options   1,138    55 
RSUs, PSUs and ESPP   907    466 
Convertible Notes   6,776    6,776 
Total   8,821    7,297 

 

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.

 

 

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of the financial condition and results of our operations should be read together with the unaudited condensed consolidated financial statements and related notes of Avid Bioservices, Inc. included in Part I Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2023.

 

Cautionary Statement Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results of operations to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. These forward-looking statements are subject to numerous risks and uncertainties, including the risks and uncertainties described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2023, those identified in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q, and in other filings we may make with the Securities and Exchange Commission from time to time. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. We qualify all of our forward-looking statements by these cautionary statements and, except as required by law, assume no obligation and do not intend to update these forward-looking statements.

 

Overview

 

We are a 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 of biologics for the biotechnology and biopharmaceutical industries. With 30 years of experience producing biologics, our services include clinical and commercial product manufacturing, bulk packaging, release and stability testing and regulatory submissions support. We also provide a variety of process development services, including upstream and downstream development and optimization, analytical methods development, cell line development, testing and characterization.

 

Strategic Objectives

 

We have a growth strategy that seeks to align with the growth of the biopharmaceutical drug substance contract services market. That strategy encompasses the following objectives:

 

·Invest in additional manufacturing capacity, capabilities and resources required for us to achieve our long-term growth strategy and meet the growth-demand of our customers’ programs, moving from development through to commercial manufacturing;
·Broaden our market awareness through a diversified yet flexible marketing strategy;
·Continue to expand our customer base and programs with existing customers for both process development and manufacturing service offerings;
·Explore strategic opportunities both within our core business as well as in adjacent and/or synergistic service offerings in order to enhance and/or broaden our capabilities; and
·Increase our operating profit margin to best in class industry standards.

 

 

 

 19 

 

 

First Quarter Highlights

 

The following summarizes select highlights from our first quarter ended July 31, 2023:

 

·Reported revenues of $37.7 million, an increase of 3%, or $1.0 million, compared to the same prior year period;
·Expanded programs with existing customers and ended the quarter with a backlog of approximately $189 million; and
·Continued to advance the build-out of CGMP manufacturing suites in our cell and gene therapy facility, which remains expected to be online by the end of the third quarter of calendar 2023.

 

Facility Expansion

 

During fiscal year 2022, we announced plans to expand our CDMO service offerings into viral vector development and manufacturing services for the rapidly growing cell and gene therapy (“CGT”) market. This expansion consists of a two-phased approach to the construction of a world-class, single purpose-built CGT development and CGMP manufacturing facility in Costa Mesa, California (the “CGT Facility”). In June 2022, we completed the first phase with the opening of our new analytical and process development laboratories. The second phase of construction is the build out of CGMP manufacturing suites, which is expected to be online by the end of the third quarter of calendar 2023. We estimate that as of July 31, 2023, the remaining cost to complete our CGT Facility construction is approximately $8 million.

 

Upon completion of this expansion project, we estimate that our combined facilities will have the potential to bring our total revenue generating capacity to up to approximately $400 million annually, depending on the mix of future customer projects.

 

Performance and Financial Measures

 

In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenues, gross profit, selling, general and administrative expenses, operating income, interest expense, other income (expense), net, and income tax expense (benefit).

 

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

 

Revenues 

 

Revenues are derived from services provided under our customer contracts and are disaggregated into manufacturing and process development revenue streams. Manufacturing revenue generally represents revenue from the manufacturing of customer products derived from mammalian cell culture covering clinical through commercial manufacturing runs. 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.

 

Gross Profit 

 

Gross profit is equal to revenues less cost of revenues. Cost of revenues reflects the direct cost of labor, overhead and material costs. Direct labor costs include compensation, benefits, recruiting fees, and stock-based compensation within the manufacturing, process and analytical development, quality assurance, quality control, validation, supply chain, project management and facilities functions. Overhead costs primarily include the rent, common area maintenance, utilities, property taxes, security, materials and supplies, software, small equipment and deprecation costs incurred at all of our manufacturing and laboratory locations. 

 

Selling, General and Administrative Expenses 

 

Selling, general and administrative (“SG&A”) expenses are composed of corporate-level expenses, including compensation, benefits, recruiting fees, and stock-based compensation of corporate functions such as executive management, finance and accounting, business development, legal, human resources, information technology, and other centralized services. SG&A expenses also include corporate legal fees, audit and accounting fees, investor relation expenses, non-employee director fees, corporate facility related expenses, and other expenses relating to our general management, administration, and business development activities.

 

Interest Expense

 

Interest expense consists of interest costs related to our outstanding convertible senior notes, revolving credit facility and finance lease, including amortization of debt issuance costs.

 

 

 

 20 

 

 

Other Income (Expense), Net 

 

Other income (expense), net primarily consists of interest earned on our cash and cash equivalents, net of gains (losses) from the disposal of long-live assets.

 

Income Tax Expense (Benefit)

 

We are subject to taxation in the United States and various states jurisdictions in which we conduct our business. We prepare our income tax provision based on our interpretation of the income tax accounting rules and each jurisdiction’s enacted tax laws and regulations. For additional information refer to Note 6, Income Taxes, of the notes to unaudited condensed consolidated financial statements.

 

Results of Operations

 

The following table compares the results of our operations for the three months ended July 31, 2023 and 2022 (in thousands):

 

   Three Months Ended July 31, 
   2023   2022   $ Change 
Revenues  $37,726   $36,692   $1,034 
Cost of revenues   33,626    27,575    6,051 
Gross profit   4,100    9,117    (5,017)
Operating expenses:               
Selling, general and administrative   6,263    6,382    (119)
Total operating expenses   6,263    6,382    (119)
Operating income (loss)   (2,163)   2,735    (4,898)
Interest expense   (775)   (518)   (257)
Other income (expense), net   258    50    208 
Net income (loss) before income taxes   (2,680)   2,267    (4,947)
Income tax expense (benefit)   (587)   703    (1,290)
Net income (loss)  $(2,093)  $1,564   $(3,657)

 

Three Months Ended July 31, 2023 Compared to Three Months Ended July 31, 2022

 

Revenues

 

Revenues for the three months ended July 31, 2023 were $37.7 million compared to $36.7 million for the same period in the prior year, an increase of $1.0 million, or 3%. The increase was primarily attributed to an increase in manufacturing revenues from late-stage programs. The following table compares revenues by revenue stream for the three months ended July 31, 2023 and 2022 (in thousands):

 

   Three Months Ended July 31, 
   2023   2022   Change 
Manufacturing revenues  $33,420   $31,481   $1,939 
Process development revenues   4,306    5,211    (905)
     Total revenues  $37,726   $36,692   $1,034 

 

Gross Profit

 

Gross profit for the three months ended July 31, 2023 was $4.1 million (11% gross margin) compared to a gross profit of $9.1 million (25% gross margin) for the same period in the prior year. The decrease in gross margin during the three months ended July 31, 2023, as compared to the same prior year period was primarily driven by costs related to ongoing expansions of both our capacity and our technological capabilities. This included adding staff and associated overhead, including depreciation expense, that will provide critical capacity for near and medium-term growth. Margins during the current quarter were also impacted by a terminated project relating to the insolvency of one of our smaller customers and a delay in our ability to recognize the revenues of one product pending the implementation of a process change.

 

 

 

 21 

 

 

We expect our gross profit will continue to be impacted in the near-term due to our increased fixed cost base related to the additional personnel, additional facility and equipment related costs, and increased depreciation expense from our expansions of both our capacity and our technological capabilities.

 

Selling, General and Administrative Expenses

 

SG&A expenses were $6.3 million for the three months ended July 31, 2023 compared to $6.4 million for the same period in the prior year, a decrease of approximately $0.1 million, or 2%. The net decrease in SG&A expenses was attributed to the following components:

 

   $ millions 
Increase in compensation and benefit related expenses  $0.3 
Decrease in consulting and other professional fees   (0.2)
Net decrease in all other SG&A expenses   (0.2)
Total decrease in SG&A expenses  $(0.1)

 

As a percentage of revenues, SG&A expenses for the three months ended July 31, 2023 and 2022 were both 17%. SG&A expenses are generally not directly proportional to revenues, but we expect such expenses to increase over time to support the needs of our growing company.

 

Operating Income (Loss)

 

Operating loss was $2.2 million for the three months ended July 31, 2023 compared to operating income of $2.7 million for the same period in the prior year. This $4.9 million decrease in year-over-year operating income (loss) can be attributed to the $5.0 million decrease in gross profit described above, offset by the $0.1 million decrease in SG&A expenses described above.

 

Interest Expense

 

Interest expense was $0.8 million for the three months ended July 31, 2023 compared to $0.5 million for the same period in the prior year. This $0.3 million increase can primarily be attributed to a de minimis amount of interest expense capitalized as construction-in-progress during the current year period compared to $0.2 million of interest capitalized during the same prior year period, combined with an increase of $0.1 million of interest expense associated with the revolving credit facility we entered into in March 2023.

 

Other Income (Expense), net

 

Other income (expense), net (“OI&E”) was $0.3 million for the three months ended July 31, 2023 compared to $0.1 million for the same period in the prior year, an increase of $0.2 million. This year-over-year increase in OI&E can primarily be attributed to an increase in interest income of $0.2 million.

 

Income Tax Expense (Benefit)

 

Income tax benefit was $0.6 million for the three months ended July 31, 2023 compared to income tax expense of $0.7 million for the same period in the prior year. This $1.3 million decrease in our provision for income taxes can primarily be attributed to our pre-tax net loss for the current year period. Our effective tax rate for the current year period was approximately 22% and was computed based on the U.S. federal statutory rate of 21% adjusted primarily for the tax impact of stock-based compensation, non-deductible officers’ compensation, and transportation fringe benefits.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity are our existing cash and cash equivalents on hand. As of July 31, 2023, we had cash and cash equivalents of $24.9 million. We believe that our existing cash on hand and our anticipated cash flows from operating activities will be sufficient to fund our operations for at least the next 12 months from the date of this Quarterly Report.

 

 

 

 22 

 

 

If our existing cash on hand and our anticipated cash flows from operations are not sufficient to support our operations or capital requirements, including our cell and gene therapy facility expansion, then we may, in the future, draw on our existing revolving credit facility, which is subject to covenant compliance and availability (as described in Note 3 of the notes to unaudited condensed consolidated financial statements) and/or obtain additional debt or equity financing to fund our future operations and/or such expansion. We may raise these funds at the appropriate time, accessing the form of capital that we determine is most appropriate considering the markets available to us and their respective costs of capital, such as through the issuance of debt or through the public offering of securities. These financings may not be available on acceptable terms, or at all. Our ability to raise additional capital in the equity and debt markets is dependent on several 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, economic and market conditions, and global financial crises and economic downturns, which may cause extreme volatility and disruptions in capital and credit markets. 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, or it may contain restrictions on the operations of our business.

 

Cash Flows

 

The following table compares our cash flow activities for the three months ended July 31, 2023 and 2022 (in thousands):

 

   Three Months Ended July 31,     
   2023   2022   $ Change 
Net cash used in operating activities  $(278)  $(5,034)  $4,756 
Net cash used in investing activities  $(14,114)  $(6,924)  $(7,190)
Net cash provided by financing activities  $748   $929   $(181)

 

Net Cash Used in Operating Activities

 

Net cash used in operating activities for the three months ended July 31, 2023 was a result of a $2.1 million net loss combined with a reduction in working capital as a result of a net change in operating assets and liabilities of $3.0 million, offset by non-cash adjustments to net loss of $4.8 million primarily related to stock-based compensation, depreciation and amortization expense, amortization of debt issuance costs, and deferred income taxes.

 

Net cash used in operating activities for the three months ended July 31, 2022 was a result of a net change in operating assets and liabilities of $11.0 million, offset by $1.6 million of net income and non-cash adjustments to net income of $4.4 million primarily related to stock-based compensation and depreciation and amortization expense.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities for the three months ended July 31, 2023 and 2022 consisted of $14.1 million and $6.9 million, respectively, used to acquire property and equipment primarily related to the expansion of our mammalian facilities and the construction of our cell and gene therapy facility.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities for the three months ended July 31, 2023 consisted of $0.9 million in net proceeds from the issuance of common stock under our equity compensation plans, offset by $0.1 million in principal payments on a finance lease.

 

Net cash provided by financing activities for the three months ended July 31, 2022 consisted of $1.0 million in net proceeds from the issuance of common stock under our equity compensation plans, offset by $0.1 million in principal payments on a finance lease.

 

Cash Requirements

 

Our material cash requirements include the following contractual and other obligations:

 

Convertible Senior Notes

 

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.

 

 

 23 

 

 

The Convertible Notes are senior unsecured obligations and accrue at a rate of 1.25% per annum, payable semi-annually in arrears on March 15 and September 15 of each year. 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 governing the Convertible Notes.

 

As of July 31, 2023, the aggregate principal amount outstanding on our Convertible Notes was $143.8 million. For additional information regarding the Convertible Notes, see Note 3 of the notes to unaudited condensed consolidated financial statements.

 

Leases

 

We lease certain office, manufacturing, laboratory, and warehouse space located in Orange County, 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. We also lease certain manufacturing equipment under a 5-year finance lease that expires in December 2026. As of July 31, 2023, we had outstanding lease payment obligations of approximately $78.0 million, of which $3.5 million is payable in the remainder of fiscal 2024, $4.7 million is payable in fiscal 2025, $4.8 million is payable in fiscal 2026, $4.6 million is payable in fiscal 2027, $4.0 million is payable in fiscal 2028, and $56.4 million is payable thereafter.

 

Capital Expenditures

 

Our fiscal year 2024 capital expenditures primarily relate to the facility expansions. During the three months ended July 31, 2023, our capital expenditures were $14.1 million, and $7.6 million were incurred and accrued as of July 31, 2023, for a total of $21.7 million. We currently anticipate that our total capital expenditures for fiscal year 2024 will be approximately $30 million.

 

Revolving Credit Facility

 

In March 2023, we entered into a credit agreement with Bank of America, N.A., as administrative agent and letter of credit issuer (the “Credit Agreement”). The Credit Agreement provides for a revolving credit facility (the “Revolving Credit Facility”) in an amount equal to the lesser of (i) $50 million, and (ii) a borrowing base calculated as the sum of (a) 80% of the value of certain of our eligible accounts receivable, plus (b) up to 100% of the value of eligible cash collateral. The Revolving Credit Facility will mature on March 13, 2024, and is secured by substantially all of our assets. As of July 31, 2023, there were no outstanding loans under the Revolving Credit Facility.

 

Loans under the Revolving Credit Facility will bear interest at either a term Secured Overnight Financing Rate (“SOFR”) rate for a specified interest period plus a SOFR adjustment (equal to 0.10%) plus a margin of 1.40% or base rate plus a margin of 0.40% at our option. Interest on any outstanding loans is due and payable monthly and the principal balance is due at maturity. In addition, we pay a quarterly unused revolving line facility fee of 0.20% per annum on the average unused facility.

 

The Credit Agreement includes certain customary affirmative and negative covenants, including limitations on mergers, consolidations and sales of assets, limitations on liens, limitations on certain restricted payments and investments, limitations on transactions with affiliates and limitations on incurring additional indebtedness. In addition, the Credit Agreement requires maintenance of a minimum consolidated EBITDA, as defined in the Credit Agreement, of $15 million for the most recently completed four fiscal quarters as measured at the end of each fiscal quarter. As of July 31, 2023, we were in compliance with the Credit Agreement’s financial covenant.

 

The Credit Agreement also provides for certain customary events of defaults, including, among others, failure to make payments, breach of representations and warranties, and default of covenants.

 

 

 24 

 

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We review our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. During the three months ended July 31, 2023, there were no significant changes in our critical accounting policies as previously disclosed by us in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2023.

 

Recent Accounting Pronouncements

 

For a discussion of recent accounting pronouncements applicable to us, please refer to Note 2, Summary of Significant Accounting Policies, in the accompanying notes to our unaudited condensed consolidated financial statements.

 

Backlog

 

Our backlog represents, as of a point in time, expected future revenue from contracted work not yet completed. As of July 31, 2023, our backlog was approximately $189 million, as compared to approximately $191 million as of April 30, 2023. While we anticipate a significant amount of our backlog will be recognized as revenue over the next five fiscal quarters, our backlog is subject to a number of risks and uncertainties, including but not limited to: (i) the risk that a customer timely cancels its commitments prior to our initiation of services, in which case we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments; (ii) the risk that a customer may experience delays in its program(s) or otherwise, which could result in the postponement of anticipated services; (iii) the risk that we may not successfully execute on all customer projects; and (iv) the risk that commencement of customer projects may be postponed due to supply chain delays, any of which could have a negative impact on our liquidity, reported backlog and future revenues and profitability.

 

Item 3.Quantitative and Qualitative Disclosures about Market Risk

 

During the three months ended July 31, 2023, there were no material changes in the market risks described in the “Quantitative and Qualitative Disclosures About Market Risk” section of our Annual Report on Form 10-K for the fiscal year ended April 30, 2023.

 

Item 4.Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

We carried out an evaluation, under the supervision and with the participation of management, including our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2023, the end of the period covered by this Quarterly Report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of July 31, 2023.

 

Changes in Internal Control over Financial Reporting

 

There were no significant changes in our internal control over financial reporting, during the quarter ended July 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 25 

 

 

PART II—OTHER INFORMATION

 

Item 1.Legal Proceedings

 

In the ordinary course of business, we are at times subject to various legal proceedings and disputes. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  Such provisions, if any, are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated financial condition or results of operations.

 

Item 1A.Risk Factors

 

We operate in a rapidly changing environment that involves a number of risks that could materially and adversely affect our business, financial condition, results of operations and cash flows. For a detailed discussion of the risks that affect our business, please refer to Part I, Item IA, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2023. There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K.

 

Item 5.Other Information

 

During the three months ended July 31, 2023, none of our directors or officers adopted, modified or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement, as such terms are defined under Item 408(a) of Regulation S-K.

 

Item 6.Exhibits

 

(a)Exhibits:

 

3.2Amended and Restated Bylaws of Avid Bioservices, Inc. adopted on June 19, 2023. (1)
10.1Avid Bioservices, Inc. Deferred Compensation Plan. (2)(†)
10.2Form of Notice of Grant of Performance Stock Unit Award. (3)(†)
31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended.*
32Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INSInline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).*
101.SCHInline XBRL Taxonomy Extension Schema Document.*
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.*
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.*
101.LABInline XBRL Taxonomy Extension Label Linkbase Document.*
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.*
104Cover Page Interactive Data File (formatted in iXBRL, and included in exhibit 101).*

__________________

(1)Incorporated by reference to Exhibit 3.2 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 23, 2023.
(2)Incorporated by reference to Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13, 2023.
(3)Incorporated by reference to Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 13, 2023.
Indicates management contract or compensatory plan.
*Filed herewith.

 

 

 

 26 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  AVID BIOSERVICES, INC.
   
   
   
Date:  September 7, 2023 By: /s/ Nicholas S. Green                     
  Nicholas S. Green
  President and Chief Executive Officer
  (Principal Executive Officer)
   
   
Date:  September 7, 2023 By: /s/ Daniel R. Hart                            
  Daniel R. Hart
  Chief Financial Officer
  (signed both as an officer duly authorized to sign on behalf of the Registrant and Principal Financial Officer and Principal Accounting Officer)

 

 

 

 

 27 

 

Exhibit 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

 

I, Nicholas S. Green, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Avid Bioservices, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periods covered by this report based on such evaluation; and

 

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

 

Dated:   September 7, 2023 Signed: /s/ Nicholas S. Green               

Nicholas S. Green 

President and Chief Executive Officer 

(Principal Executive Officer)

 

 

 

Exhibit 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

 

I, Daniel R. Hart, certify that:

 

1. I have reviewed this Quarterly Report on Form 10-Q of Avid Bioservices, Inc.;

 

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periods covered by this report based on such evaluation; and

 

d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Dated:   September 7, 2023 Signed: /s/ Daniel R. Hart                

Daniel R. Hart

Chief Financial Officer

(Principal Financial Officer)

 

Exhibit 32

 

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

 

I, Nicholas S. Green, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Avid Bioservices, Inc. on Form 10-Q for the quarter ended July 31, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report of Avid Bioservices, Inc. on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Avid Bioservices, Inc. at the dates and for the periods indicated.

 

Dated:   September 7, 2023 Signed: /s/ Nicholas S. Green                     

Nicholas S. Green

President and Chief Executive Officer

(Principal Executive Officer)

 

 

I, Daniel R. Hart, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Avid Bioservices, Inc. on Form 10-Q for the quarter ended July 31, 2023 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report of Avid Bioservices, Inc. on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Avid Bioservices, Inc. at the dates and for the periods indicated.

 

Dated:   September 7, 2023 Signed: /s/ Daniel R. Hart                              

Daniel R. Hart

Chief Financial Officer

(Principal Financial Officer)

 

 

A signed original of this written statement required by Section 906 has been provided to Avid Bioservices, Inc. and will be retained by Avid Bioservices, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

 

v3.23.2
Cover - shares
3 Months Ended
Jul. 31, 2023
Aug. 18, 2023
Cover [Abstract]    
Document Type 10-Q  
Amendment Flag false  
Document Quarterly Report true  
Document Transition Report false  
Document Period End Date Jul. 31, 2023  
Document Fiscal Period Focus Q1  
Document Fiscal Year Focus 2024  
Current Fiscal Year End Date --04-30  
Entity File Number 001-32839  
Entity Registrant Name AVID BIOSERVICES, INC.  
Entity Central Index Key 0000704562  
Entity Tax Identification Number 95-3698422  
Entity Incorporation, State or Country Code DE  
Entity Address, Address Line One 14191 Myford Road  
Entity Address, City or Town Tustin  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 92780  
City Area Code (714)  
Local Phone Number 508-6100  
Title of 12(b) Security Common Stock, $0.001 par value per share  
Trading Symbol CDMO  
Security Exchange Name NASDAQ  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   63,112,934
v3.23.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) - USD ($)
$ in Thousands
Jul. 31, 2023
Apr. 30, 2023
Current assets:    
Cash and cash equivalents $ 24,898 $ 38,542
Accounts receivable, net 16,209 18,298
Contract assets 14,454 9,609
Inventory 40,866 43,908
Prepaid expenses and other current assets 1,892 2,094
Total current assets 98,319 112,451
Property and equipment, net 182,299 177,369
Operating lease right-of-use assets 42,374 42,772
Deferred tax assets 114,238 113,639
Other assets 4,757 4,473
Restricted cash 350 350
Total assets 442,337 451,054
Current liabilities:    
Accounts payable 22,813 24,593
Accrued compensation and benefits 4,667 8,780
Contract liabilities 33,019 37,352
Current portion of operating lease liabilities 1,262 1,358
Other current liabilities 2,296 1,626
Total current liabilities 64,057 73,709
Convertible senior notes, net 140,888 140,623
Operating lease liabilities, less current portion 45,370 45,690
Finance lease liabilities, less current portion 1,424 1,562
Total liabilities 251,739 261,584
Commitments and contingencies
Stockholders’ equity:    
Preferred stock, $0.001 par value; 5,000 shares authorized; no shares issued and outstanding at respective dates 0 0
Common stock, $0.001 par value; 150,000 shares authorized; 63,111 and 62,692 shares issued and outstanding at respective dates 63 63
Additional paid-in capital 623,445 620,224
Accumulated deficit (432,910) (430,817)
Total stockholders’ equity 190,598 189,470
Total liabilities and stockholders’ equity $ 442,337 $ 451,054
v3.23.2
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) - $ / shares
shares in Thousands
Jul. 31, 2023
Apr. 30, 2023
Statement of Financial Position [Abstract]    
Preferred stock par value (in Dollars per share) $ 0.001 $ 0.001
Preferred stock, shares authorized 5,000 5,000
Preferred stock, shares issued 0 0
Preferred stock, shares outstanding 0 0
Common stock par value (in Dollars per share) $ 0.001 $ 0.001
Common stock, shares authorized 150,000 150,000
Common stock, shares issued 63,111 62,692
Common stock, shares outstanding 63,111 62,692
v3.23.2
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) AND COMPREHENSIVE INCOME (LOSS) (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended
Jul. 31, 2023
Jul. 31, 2022
Income Statement [Abstract]    
Revenues $ 37,726 $ 36,692
Cost of revenues 33,626 27,575
Gross profit 4,100 9,117
Operating expenses:    
Selling, general and administrative 6,263 6,382
Total operating expenses 6,263 6,382
Operating income (loss) (2,163) 2,735
Interest expense (775) (518)
Other income (expense), net 258 50
Net income (loss) before income taxes (2,680) 2,267
Income tax expense (benefit) (587) 703
Net income (loss) (2,093) 1,564
Comprehensive income (loss) $ (2,093) $ 1,564
Net income (loss) per share:    
Basic $ (0.03) $ 0.03
Diluted $ (0.03) $ 0.02
Weighted average common shares outstanding:      
Basic 62,838 61,905
Diluted 62,838 63,333
v3.23.2
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Unaudited) - USD ($)
shares in Thousands, $ in Thousands
Common Stock [Member]
Additional Paid-in Capital [Member]
Retained Earnings [Member]
Total
Beginning balance, value at Apr. 30, 2022 $ 62 $ 605,841 $ (431,377) $ 174,526
Beginning balance, shares at Apr. 30, 2022 61,807      
Common stock issued under equity compensation plans 1,012 1,012
Common stock issued under equity compensation plans, shares 358      
Stock-based compensation expense 1,897 1,897
Net income 1,564 1,564
Ending balance, value at Jul. 31, 2022 $ 62 608,750 (429,813) 178,999
Ending balance, shares at Jul. 31, 2022 62,165      
Beginning balance, value at Apr. 30, 2023 $ 63 620,224 (430,817) 189,470
Beginning balance, shares at Apr. 30, 2023 62,692      
Common stock issued under equity compensation plans 878 878
Common stock issued under equity compensation plans, shares 419      
Stock-based compensation expense 2,343 2,343
Net income (2,093) (2,093)
Ending balance, value at Jul. 31, 2023 $ 63 $ 623,445 $ (432,910) $ 190,598
Ending balance, shares at Jul. 31, 2023 63,111      
v3.23.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) - USD ($)
$ in Thousands
3 Months Ended
Jul. 31, 2023
Jul. 31, 2022
Cash flows from operating activities:    
Net income (loss) $ (2,093) $ 1,564
Adjustments to reconcile net income (loss) to net cash used in operating activities:    
Stock-based compensation 2,343 1,897
Depreciation and amortization 2,649 1,590
Amortization of debt issuance costs 339 260
Deferred income taxes (599) 610
Loss on disposal of property and equipment 46 34
Changes in operating assets and liabilities:    
Accounts receivable, net 2,089 (5,398)
Contract assets (4,845) (1,709)
Inventory 3,042 (4,292)
Prepaid expenses and other assets (131) (355)
Accounts payable 4,684 4,242
Accrued compensation and benefits (4,113) (3,118)
Contract liabilities (4,333) (1,023)
Other accrued expenses and liabilities 644 664
Net cash used in operating activities (278) (5,034)
Cash flows from investing activities:    
Purchase of property and equipment (14,114) (6,924)
Net cash used in investing activities (14,114) (6,924)
Cash flows from financing activities:    
Proceeds from issuance of common stock under equity compensation plans 878 1,012
Principal payments on finance lease (130) (83)
Net cash provided by financing activities 748 929
Net decrease in cash, cash equivalents and restricted cash (13,644) (11,029)
Cash, cash equivalents and restricted cash, beginning of period 38,892 126,516
Cash, cash equivalents and restricted cash, end of period 25,248 115,487
Supplemental disclosures of cash flow information:    
Cash paid for interest 27 23
Cash paid for income taxes 12 40
Supplemental disclosures of non-cash activities:    
Unpaid purchases of property and equipment $ 7,636 $ 16,674
v3.23.2
Description of Company and Basis of Presentation
3 Months Ended
Jul. 31, 2023
Accounting Policies [Abstract]  
Description of Company and Basis of Presentation

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 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 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, 2023, as filed with the SEC on June 21, 2023. 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.

 

v3.23.2
Summary of Significant Accounting Policies
3 Months Ended
Jul. 31, 2023
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies

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, 2023.

 

Revenue Recognition

 

Revenue recognized from services provided under our customer contracts is 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 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 revenue streams (in thousands):

          
   Three Months Ended July 31, 
   2023   2022 
Manufacturing revenues  $33,420   $31,481 
Process development revenues   4,306    5,211 
Total revenues  $37,726   $36,692 

 

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, contract assets (unbilled receivables), and contract liabilities (customer deposits and deferred revenue). Contract assets are recorded when our right to consideration is conditioned on something other than the passage of time. Contract assets are reclassified to accounts receivable on the consolidated balance sheet when our rights become unconditional. Contract liabilities represent customer deposits and deferred revenue billed and/or received in advance of our fulfillment of performance obligations. Contract liabilities convert to revenue as we perform our obligations under the contract.

 

During the three months ended July 31, 2023 and 2022, we recognized revenue of $16.8 million and $18.6 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. For contracts with multiple performance obligations, we allocate transaction price to each performance obligation identified in a contract on a relative standalone selling price basis. We generally determine relative standalone selling prices based on the price observed in the customer contract for each distinct performance obligation. If observable standalone selling prices are not available, we may estimate the applicable standalone selling price based on the pricing of other comparable services or on a price that we believe the market is willing to pay for the applicable service.

 

In determining the transaction price, we also 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 months ended July 31, 2023, changes in estimates for variable consideration resulted in a decrease in revenues of $1.4 million. The changes in estimates for variable consideration were a result of an insolvent customer. There were no material adjustments in estimates for variable consideration for the three months ended July 31, 2022.

 

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 July 31, 2023, we do not have any unsatisfied performance obligations for contracts greater than one year.

 

Costs incurred to obtain a contract are not material. These costs are generally employee sales commissions, which are expensed as incurred and included in selling, general and administrative expense in the unaudited condensed consolidated statements of income (loss) and comprehensive income (loss).

 

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 July 31, 2023 and April 30, 2023, 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):

                
   July 31, 2023   April 30, 2023   July 31, 2022   April 30, 2022 
Cash and cash equivalents  $24,898   $38,542   $115,137   $126,166 
Restricted cash   350    350    350    350 
Total cash, cash equivalents and restricted cash  $25,248   $38,892   $115,487   $126,516 

 

Accounts Receivable, Net

 

Accounts receivable is 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, that includes an assessment of expected credit losses, and we estimate our allowance for doubtful accounts based on various factors, including our historical collection experience, aging of our customer receivable balances, current and future economic market conditions, and the financial condition of our customers.

 

Based on our analysis of our accounts receivable balance as of July 31, 2023 and April 30, 2023, we determined an allowance for doubtful accounts of $2.2 million and $0.5 million, respectively, was deemed necessary.

 

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:

   
Description   Estimated Useful Life
Leasehold improvements   Shorter of estimated useful life or lease term
Laboratory and manufacturing equipment   5 – 15 years
Computer equipment and software   3 – 5 years
Furniture, fixtures and office equipment   5 – 10 years

 

Costs for property and equipment not yet placed into service have been capitalized as construction-in-progress. These costs are primarily related to equipment and leasehold improvements associated with our manufacturing facilities and will be depreciated in accordance with the above guidelines once placed into service. Interest costs incurred during construction of major capital projects are capitalized as construction-in-progress until the underlying asset is ready for its intended use, at which point the interest costs are amortized as depreciation expense over the life of the underlying asset. Interest capitalized as construction-in-progress for the three months ended July 31, 2023 and 2022 was de minimis and $0.2 million, respectively. All of our property and equipment are located in the United States. Property and equipment consist of the following (in thousands):

        
   July 31, 2023   April 30, 2023 
Leasehold improvements  $101,310   $97,514 
Laboratory and manufacturing equipment   42,369    35,501 
Computer equipment and software   5,045    5,028 
Furniture, fixtures and office equipment   1,894    1,681 
Construction-in-progress   64,573    68,013 
Total property and equipment, gross   215,191    207,737 
Less: accumulated depreciation and amortization   (32,892)   (30,368)
Total property and equipment, net  $182,299   $177,369 

 

Depreciation and amortization expense for the three months ended July 31, 2023 and 2022 was $2.6 million and $1.6 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, 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.

 

Our finance lease with a term greater than one year is included as an asset 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 is calculated using the implicit interest rate in the lease. Finance lease ROU assets are amortized on a straight-line basis over the expected useful life of the asset and the carrying amount of the lease liability is adjusted to reflect interest, which is recorded as interest expense.

 

Leases with an initial term of 12 months or less are not recorded on our consolidated balance sheets and lease expense for these short-term leases is recognized on a straight-line basis over the lease term. 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 three months ended July 31, 2023 and 2022, there were no indicators of impairment of the value of our long-lived assets and no cumulative impairment losses were recognized as of July 31, 2023.

 

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 an 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 an 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.

 

Debt Issuance Costs

 

Debt issuance costs related to convertible senior notes are recorded as a deduction that is netted against the principal value of the debt and are amortized to interest expense using the effective interest method over the contractual term of the debt (Note 3).

 

Debt issuance costs related to the revolving credit facility are included in prepaid expenses and other current assets in the consolidated balance sheet and are amortized to interest expense over the contractual term of the revolving credit facility (Note 3).

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) is the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) is equal to our net income (loss) for all periods presented.

 

Fair Value Measurements

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:

 

·Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.

 

·Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets or liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.

 

·Level 3 – Unobservable inputs that are supported by little or no market activity and significant to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation techniques and assumptions.

 

As of July 31, 2023 and April 30, 2023, we did not have any Level 2 or Level 3 financial assets and our cash equivalents of $15.6 million and $28.7 million, respectively, were invested in money market funds with no more than two commercial banks 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 (Note 3). We did not have any other Level 2 or Level 3 financial liabilities as of July 31, 2023 and April 30, 2023.

 

Recently Adopted Accounting Standard

 

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 amends the impairment model by requiring entities to use a forward-looking approach based on expected losses to estimate credit losses for most financial assets and certain other instruments. We adopted ASU 2016-13 on May 1, 2023, and the adoption of this standard did not have a material impact on our unaudited condensed consolidated financial statements.

 

v3.23.2
Debt
3 Months Ended
Jul. 31, 2023
Debt Disclosure [Abstract]  
Debt

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. 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 principal 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 July 31, 2023, 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 unaudited condensed consolidated balance sheets at July 31, 2023 and April 30, 2023.<