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 drug substance 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 method development, cell line development, testing and characterization.
Business Strategy
We continue to execute on a growth strategy that
seeks to align with the growth of the biopharmaceutical drug substance contract services market. That strategy encompasses the following
continuing 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; |
| | |
| · | Expand our customer base and programs with existing customers for both process development and manufacturing
service offerings; |
| | |
| · | Explore and invest in 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 operating profit margin to best in class industry standards. |
Our Competitive Strengths
We believe that we are well positioned to address
the market for outsourced development and manufacturing of biopharmaceuticals derived from mammalian cell culture, due to the following
factors:
| · | Expertise in Mammalian Cell Culture Manufacturing: We believe that continued consolidation in the
CDMO industry has resulted in a limited number of qualified, agile and independent CDMOs with mammalian cell culture-based biologics development
and manufacturing capabilities. The mammalian cell culture production method is highly suitable for manufacturing complex molecules (examples
include monoclonal antibodies, next-generation antibodies and recombinant proteins), and we believe the benefits of the mammalian cell
culture production method have played a significant role in accelerating the proliferation of biologics therapies. We believe we are well
positioned in the industry, given our expertise in mammalian cell culture for biologics manufacturing. |
| · | Broad Spectrum of Services to Support Customers from Early Stage Development to Commercial: We
provide fully integrated and customized biomanufacturing services that support our customers from the early preclinical stage to commercial
launch and supply. We believe pharmaceutical companies generally prefer to engage with CDMOs that are able to work with a product throughout
its lifecycle and have long-standing track records of regulatory compliance and quality control. Our Process Development, CGMP Drug Substance
Biomanufacturing, Project Management, Quality Systems and Quality Control are all supported by modern facilities designed to meet customer
needs from early stage development to commercial supply. We differentiate our capabilities through several key criteria: (i) we employ
a customer-centric approach and collaborate with our customers to tailor customized development and manufacturing services; (ii) our agile
manufacturing and development capabilities allow for rapid responses to shifting production requirements, leading to strong customer satisfaction
and retention; and (iii) our single-use bioreactors contribute to enhanced manufacturing efficiency for our customers and reduce our
capital spending needs. |
| · | Strong Regulatory Track Record: Historically, developing the expertise to comply with stringent
regulatory audits and validation requirements has been a challenge for both pharmaceutical companies and CDMOs, and has been seen as a
significant barrier to entry for many CDMOs, as facilities can take years to construct and properly validate. We believe pharmaceutical
companies place a premium on working with CDMOs that can ensure a high degree of regulatory compliance, which decreases execution risk.
We have a strong regulatory track record, consisting of a 20-year inspection history. Since 2005 we have successfully completed eight
pre-approval inspections, including six U.S. Food and Drug Administration (“FDA”) inspections since 2013, none of which resulted
in any Form 483 observations by the FDA. Further, we routinely successfully comply with audits by large pharmaceutical companies. |
| · | Modern and Optimized Infrastructure: With the recent expansion of our Myford facility and the ongoing
construction of our single purpose-built cell and gene therapy development and CGMP manufacturing facility, as further discussed below,
we continue to position our business to capitalize on increasing demand in the biologics manufacturing industry for modular cleanroom
space, onsite analytical and process development laboratories and single-use bioreactors. These developments have driven demand among
pharmaceutical companies for facilities that can develop and produce pilot scale batches (up to 200 liters) in process development using
a process train that matches the single-use bioreactors in CGMP production. With single-use bioreactors ranging from 200 to 2,000 liters,
our CGMP Myford facility offering more than 20,000 liters of total capacity is designed to provide our customers with the desired efficiency,
flexibility and capacity. |
| · | Significant Manufacturing Experience with a Proven Track Record: We have 30 years of experience
producing monoclonal antibodies and recombinant proteins, over 18 years of CGMP commercial manufacturing experience and over 15 years
of experience with single-use bioreactor technology. We believe this experience, combined with our management team’s and board of
directors’ deep experience in the CDMO and pharmaceutical industry, positions us to take advantage of positive long-term industry
trends. |
Our Growth Strategy
We believe we have a significant opportunity to
continue to drive organic growth by leveraging our strengths, broadening our capabilities, increasing our capacity and improving our market
visibility through the following strategies:
| · | Diversify Customer Base: We have diversified and expanded our customer base and have
developed marketing and sales strategies designed to further diversify our customer base and drive new customer acquisitions, while
also continuing to leverage our existing relationships to support new programs with our existing customers. |
| | |
| · | Expand Service Offerings: We have invested in strategic opportunities to expand our service
offerings. During fiscal 2022, we expanded our CDMO service offering into viral vector development and
manufacturing services for the rapidly growing cell and gene therapy (“CGT”) market. In addition, during fiscal 2023, we
added in-house cell line development services, further rounding out our mammalian cell offering. |
| | |
| · | Expand Process Development Capabilities: We have expanded our process development
capabilities in order to make our operations more attractive to emerging, mid-sized and large pharmaceutical companies. For example,
during calendar year 2019 we expanded our total available process development and laboratory space, upgrading the infrastructure and
equipment within our existing process development laboratories, and implementing new state-of-the-art technologies and equipment
(including benchtop bioreactors and pilot scale manufacturing up to 200 liters) designed to facilitate efficient, high-throughput
development of innovative upstream and downstream manufacturing processes that transfer directly into our CGMP manufacturing
facility. In the fourth quarter of fiscal 2023, we further expanded the process development capacity of our mammalian cell culture
services by adding new suites within our existing process development laboratory space that have the potential to increase our
revenue generating capabilities by approximately $25 million. We will continue to explore the addition of capabilities and services
that bring value to our customers, enhancing their processing design, speeding their time to market and supporting these activities
with state-of-the-art analytics. |
| | |
| · | Expand Manufacturing Footprint and Enhance Efficiencies: During fiscal 2021, we initiated a
two-phased expansion of our Myford facility. The first phase, which expanded the production capacity of our
Myford facility by adding an additional downstream processing suite, was completed in January 2022. The second
phase, which was completed in March 2023, further expanded our capacity with the addition of a second manufacturing train,
including both upstream and downstream processing suites. During fiscal 2022, we initiated the construction of a world-class, single
purpose-built CGT development and CGMP manufacturing facility in Costa Mesa, California. In June 2022, we completed the first phase
of our two-phase construction plan 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 third quarter of calendar 2023.
Upon completion of the entire build out of our CGT facility, we estimate that this expansion, combined with our existing facilities,
which includes the recently completed Myford facility expansion, has the potential to bring our total annual revenue generating
capacity to approximately $400 million, depending on the mix of projects. |
| | |
| · | Increase Operating Margins: We believe we have the opportunity to drive operating margin expansion
by utilizing our available capacity, and implementing continuous process efficiencies. We believe increased facility capacity utilization
resulting from the growth strategies described herein will improve operating margins. |
| | |
| · | Reinvest in Equipment and Facilities: We believe that re-investing in our laboratory and manufacturing
equipment and facilities is strategically important to meet future customer demand. For example, as discussed above, we recently completed
two mammalian cell capacity expansion projects and continue to advance the build-out of our CGT facility, which we believe will allow
us to meet the demands of our growing backlog of customer projects. |
| · | Explore & Invest in Strategic Opportunities: We will evaluate potential synergistic strategic
opportunities, that we believe would add: |
| o | Capabilities/services to our existing biologics development and manufacturing offerings that enhance our
ability to provide our customers with more tailored and better solutions; and/or |
| o | Adjacent capabilities/services to service other segments of the biologic’s development and manufacturing
segment of the market, that we feel would value our experience, in particular our technical, commercial and regulatory experience, all
combined with a high touch, flexible and customer-centric level of service. |
Our Facilities
Mammalian Cell Facilities
Our 84,000 square foot Myford facility, located
in Orange County, California, utilizes single-use equipment up to the 2,000-liter manufacturing scale to accommodate a fully disposable
biomanufacturing process for products from clinical development to commercial supply. In April 2023, we announced the completion of our
newly expanded manufacturing capacity within the Myford facility which included the addition of both upstream and downstream CGMP manufacturing
suites. Our Myford facility includes single-use bioreactors (200-liter to 2,000-liter), four downstream processing suites, quality control
labs for environmental and analytical testing, and cell bank cryofreezers, warehousing and material storage (including walk-in cold rooms),
offering more than 20,000 liters of total capacity.
Following the recent completion of our newly expanded
Myford facility, we transitioned customer products previously manufactured in our Franklin facility to our Myford facility. As a result,
our manufacturing services have fully transition to a single-use disposable platform.
Our state-of-the art upstream, downstream and
pilot-scale development space is located on the same campus as our Myford facility. During the fourth quarter of fiscal 2023, we further
expanded the process development capacity of our mammalian cell culture services by adding new suites within our existing process development
laboratory space, which has doubled our total process development capacity.
Cell and Gene Therapy Facility
We have taken and continue to take steps to explore
and invest in strategic opportunities to expand our service offerings. During fiscal 2022, we commenced the expansion of our CDMO service
offering into viral vector development and manufacturing services for the rapidly growing 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 includes the build-out of CGMP manufacturing suites, which are expected to be online by
the end of the third quarter of calendar 2023.
Manufacturing and Raw Materials
We manufacture CGMP pharmaceutical-grade products
for our customers. The process for manufacturing generally uses commercially available raw materials from multiple suppliers, and in some
instances, from a single source supplier. We rely on third parties to supply most of the necessary raw materials and supplies for the
products we manufacture on behalf of our customers and our inability to obtain such raw materials or supplies may adversely impact our
business, financial condition, and results of operations. See “Risk Factors—Risks Related to Our Business” for additional
discussion of raw materials supplied by third party vendors for the products we manufacture for our customers.
Regulatory Matters
We have a strong and proven regulatory track
record, including 20 years of inspection history. To date, we have been audited and qualified by large and small domestic and
foreign biotechnology companies interested in the production of biologic material for clinical and commercial use. Additionally, we
have been audited by several regulatory agencies, including the FDA, the European Medicines Agency (“EMA”), the
Brazilian Health Surveillance Agency (“ANVISA”), the Canadian Health Authority (“Health Canada”), the
California Department of Health and the Australian Department of Health.
We are required to comply with the regulatory
requirements of various local, state, national and international regulatory bodies having jurisdiction in the countries or localities
where we manufacture products or where our customers’ products are distributed. In particular, we are subject to laws and regulations
concerning research and development, testing, manufacturing processes, equipment and facilities, including compliance with CGMPs, labeling
and distribution, import and export, and product registration and listing. As a result, our facilities are subject to regulation by the
FDA, as well as regulatory bodies of other jurisdictions where our customers have marketing approval for their products including, but
not limited to, the EMA, ANVISA, Health Canada, and the Australian Department of Health. We are also required to comply with environmental,
health and safety laws and regulations, as discussed in “Environmental and Safety Matters” below. These regulatory requirements
impact many aspects of our operations, including manufacturing, developing, labeling, packaging, storage, distribution, import and export
and record keeping related to customers’ products. Noncompliance with any applicable regulatory requirements can result in government
refusal to approve facilities for manufacturing products or products for commercialization.
Our customers’ products must undergo pre-clinical
and clinical evaluations relating to product safety and efficacy before they are approved as commercial therapeutic products. The regulatory
authorities having jurisdiction in the countries in which our customers intend to market their products may delay or put on hold clinical
trials, delay approval of a product or determine that the product is not approvable. The FDA or other regulatory agencies can delay approval
of a drug if our manufacturing facilities are not able to demonstrate compliance with CGMPs, pass other aspects of pre-approval inspections
(i.e., compliance with filed submissions) or properly scale up to produce commercial supplies. The FDA and comparable government authorities
having jurisdiction in the countries in which our customers intend to market their products have the authority to withdraw product approval
or suspend manufacturing if there are significant problems with raw materials or supplies, quality control and assurance or the product
is deemed adulterated or misbranded. If new legislation or regulations are enacted or existing legislation or regulations are amended
or are interpreted or enforced differently, we may be required to obtain additional approvals or operate according to different manufacturing
or operating standards or pay additional fees. This may require a change in our manufacturing techniques or additional capital investments
in our facilities.
Environmental and Safety Matters
Certain products manufactured by us involve the
use, storage and transportation of toxic and hazardous materials. Our operations are subject to extensive laws and regulations relating
to the storage, handling, emission, transportation and discharge of materials into the environment and the maintenance of safe working
conditions. We maintain environmental and industrial safety and health compliance programs and training at our facilities.
Prevailing legislation tends to hold companies
primarily responsible for the proper disposal of their waste even after transfer to third party waste disposal facilities. Other future
developments, such as increasingly strict environmental, health and safety laws and regulations, and enforcement policies, could result
in substantial costs and liabilities to us and could subject the handling, manufacture, use, reuse or disposal of substances or pollutants
at our facilities to more rigorous scrutiny than at present.
Intellectual Property
We do not currently own any patents and do not
have any patent applications pending in the United States or any foreign countries. However, we have acquired and developed and continue
to acquire and develop knowledge and expertise (“know-how”) and trade secrets in the provision of process development and
manufacturing services. Our know-how and trade secrets may not be patentable, but they are valuable in that they enhance our ability to
provide high-quality services to our customers. We typically place restrictions in our agreements with third-parties, which contractually
restrict their right to use and disclose any of our proprietary technology with which they may be involved. In addition, we have internal
non-disclosure safeguards, including confidentiality agreements, with our employees.
We also own trademarks to protect the names of
our services. Trademark protection continues in some countries as long as the trademark is used, and in other countries, as long as the
trademark is registered. Trademark registration is for fixed terms and can be renewed indefinitely.
Segment Information
Our business is organized into one reportable
operating segment, our contract manufacturing and development services segment. In
addition, we had no foreign-based operations and no long-lived assets located in foreign countries as of and for the fiscal years ended
April 30, 2023, 2022 and 2021.
Customers
Revenues have historically been derived from a
small customer base. Although we continue to expand our customer base, we remain dependent on a limited number of customers for a substantial
majority of our revenues. For the fiscal years ended April 30, 2023, 2022 and 2021, we derived approximately 65%, 60% and 76% of our revenues
from our top three customers, respectively. The loss of, or a significant reduction of business from, any of our primary customers could
have a material adverse effect on our business, financial condition and results of operations. Refer to Note 2, “Summary of Significant
Accounting Policies” of the Notes to Consolidated Financial Statements for additional financial information regarding our customer
concentration.
Seasonality
Our business is not subject to seasonality. However,
the timing of customer orders, the scale, scope, mix, and the duration of our fulfillment of such customer orders can result in variability
in our periodic revenues.
Backlog
Our backlog represents, as of a point in
time, expected future revenue from work not yet completed under signed contracts. As of April 30, 2023, our backlog was
approximately $191 million, a 25% increase as compared to approximately $153 million as of April 30, 2022. While we anticipate a
significant amount of our backlog will be recognized over the next five (5) fiscal quarters, our backlog is subject to a number of
risks and uncertainties, including but not limited to: 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; the risk that a customer may experience delays in its program(s) or otherwise, which could result in the
postponement of anticipated services; the risk that we may not successfully execute on all customer projects; and 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.
Competition
Our competition in the CDMO market includes a
number of full-service contract manufacturers and large pharmaceutical companies that have the ability to insource manufacturing. Also,
some pharmaceutical companies have been seeking to divest all or portions of their manufacturing capacity, and any such divested assets
may be acquired by our competitors. Some of our significantly larger and global competitors have substantially greater financial, marketing,
technical and other resources than we do. Moreover, additional competition may emerge and may, among other things, create downward pricing
pressure, which could negatively impact our financial condition and results of operations.
Human Capital
As of April 30,
2023, we had 365 employees. All of our employees are based in Orange County, California, with the exception of a small number of
employees primarily within our sales, marketing and supply chain functions who are located in various other states. None of our
employees are represented by labor unions or are covered by a collective bargaining agreement with respect to their employment. We
have not experienced any work stoppages, and we consider our relationship with our employees to be good.
We consider talent acquisition,
development, engagement and retention a key driver to our business success and are committed to developing a comprehensive, cohesive and
positive company culture focused on quality and a commitment to the safety and health of our employees, customers and the general public.
We accomplish these initiatives through the following:
Talent Acquisition
and Retention
We are dedicated to
attracting and retaining exceptional talent, recognizing their vital contribution to our success. In a highly competitive employment market,
particularly for science, technology, engineering and math (“STEM”) skills, our talent acquisition team employs a comprehensive
approach. We embrace alternative degree paths, establish collaborative relationships with organizations, schools, and universities, and
have launched an internship program to build a pipeline of early-career talent.
Total Rewards
We have implemented a
total rewards program which we believe allows us to compete for top talent in the Southern California market. Our total rewards philosophy
has been to create investment in our workforce by offering competitive compensation and benefits package. We provide all full-time employees
with compensation packages that include base salary, annual discretionary incentive bonuses, and long-term equity awards. We also offer
comprehensive employee benefits, including life, disability, and health insurance (including medical, dental and vision), dependent care
and flexible spending accounts, paid time off, leaves (including medical, maternity and paternity leaves), Employee Stock Purchase Program,
a 401(k) plan with a company match and educational assistance. It is our expressed intent to be an employer of choice in our industry
by providing market-competitive compensation and benefits package.
Health, Safety,
and Wellness
The health, safety, and
wellness of our employees is a priority in which we have always invested and will continue to do so. We provide our employees and their
families with access to a variety of innovative, flexible, and convenient health and wellness programs. Program benefits are intended
to provide protection and security, so employees can have peace of mind concerning events that may require time away from work or that
may impact their financial well-being.
Diversity, Equity,
and Inclusion
We believe a diverse
workforce is critical to our success and we are fundamentally committed to creating and maintaining a work environment in which employees
are treated fairly, with dignity, decency, respect and in accordance with all applicable laws. We strive to create a professional work
environment that is free from all forms of harassment, discrimination and bullying in the workplace, including sexual harassment and any
form of retaliation. We are an equal opportunity employer and we strive to administer all human resources actions and policies without
regard to race, color, religion, sex, national origin, ethnicity, age, disability, sexual orientation, gender identification or expression,
past or present military or veteran status, marital status, familial status, or any other status protected by applicable law. Our management
team and employees are expected to exhibit and promote honest, ethical, and respectful conduct in the workplace. All employees must adhere
to a code of business conduct and ethics and our employee handbook, which combined, define standards for appropriate behavior and are
annually trained to help prevent, identify, report, and stop any type of discrimination and harassment. Our recruitment, hiring, development,
training, compensation, and advancement is based on qualifications, performance, skills, and experience without regard to gender, race,
or ethnicity.
Training and Development
We believe in encouraging
employees in becoming lifelong learners by providing ongoing learning and leadership training opportunities. As part of onboarding of
new employees, we provide comprehensive training regarding CGMP, environmental, health and safety practices, as well as job function specific
training. Many of these training programs are repeated annually and are supplemented by other periodic training programs to maintain and
improve employee awareness of safety and other issues. Several times per year we provide supervisory training to newly promoted, or soon
to be promoted employees, as well as sponsor more senior employees’ participation in external leadership programs. We listen to
the needs of our employees and employ appropriate training methods ranging from in-house, partnering with outside vendors, attending conferences
and networking events. Additionally, we applied for and received training funds through a State of California program supporting the biotechnology
industry through the development of future biotech workers. This program provides us with additional funds to help supplement our training
programs.
We have a formal annual review process not only
to determine pay and equity adjustments tied to individual contributions, but to identify areas where training and development may be
needed. In addition, we strive to provide real-time recognition of employee performance, including through a web-based portal where employees
can be nominated for various levels of spot awards and accumulate points towards the purchase of gifts.
Company Culture
We are committed to instilling
a company culture that is focused on integrity, transparency, quality and respect. We expect our employees to observe the highest levels
of business ethics, integrity, mutual respect, tolerance and inclusivity. Our employee handbook and Code of Business Conduct and Ethics
set forth policies reflecting these values and provide direction for registering complaints in the event of any violation of our policies.
We maintain an “open door” policy at all levels of our organization and any form of retaliation against an employee is strictly
prohibited.
Employee Engagement
We believe that in order to be successful, we
must build and maintain a relationship with our employees that focuses on transparency and listening to their recommendations. We proactively
communicate through all-employee meetings, department meetings, one-on-one meetings and check-ins. Employee input regarding our organizational
climate is solicited at least annually through a combination of internal and external surveys solicited from all employees. We routinely
use the information gathered in these processes to address identified key areas for improvement.
Corporate Responsibility and Sustainability
In fiscal 2022 we engaged a third-party consultant
to assist us with our establishment of a more formal environmental, social, governance (“ESG”) and sustainability program.
Working with the consultant, and under the oversight of our Corporate Governance Committee, we embarked on a comprehensive initiative
to assess, benchmark and prioritize our ESG and sustainability practices. In addition, our executive leadership team assembled
a working team to formally launch the first phase of this initiative focusing on sustainable procurement and other environmental initiatives,
including the engagement of EcoVadis, a leading global corporate social responsibility and sustainability company, to help us establish
and enhance processes supporting strong ESG practices throughout our supply chain. This arrangement provides an independent supplier assessment
against 21 criteria in categories of environment, labor and human rights, ethics, and sustainable procurement. During fiscal 2023 we focused
on building our supplier procurement program with EcoVadis, ultimately onboarding more than 90% of our procurement spend with rated suppliers
in the EcoVadis program. As we continue to build our sustainable procurement program, we have also approved a supplier code of conduct,
which formalizes our commitment to build a network of suppliers consisting of ethical and reliable partners. In addition to our sustainable
procurement program, we have formalized an executive steering team to drive overall ESG initiatives and their associated workstreams for
our people, community and environment.
Company Information
We were originally incorporated in the State of
California in June 1981 and reincorporated in the State of Delaware in September 1996. Our principal executive offices are located
at 14191 Myford Road, Tustin, California, 92780 and our telephone number is (714) 508-6100. Our principal website address is www.avidbio.com.
The information on, or that can be accessed through, our website is not part of this Annual Report.
Available Information
This Annual Report, our Quarterly Reports on Form 10-Q,
our Current Reports on Form 8-K, and our proxy statements, and all amendments to those reports filed with or furnished to the SEC
are available, free of charge, through the SEC’s website at www.sec.gov and our website at www.avidbio.com as soon as reasonably
practicable after such reports are electronically filed with or furnished to the SEC. The information on, or that can be accessed through,
our website is not part of this Annual Report.
You should carefully consider
the risks and uncertainties described below, together with all of the other information contained in this Annual Report, including our
consolidated financial statements and the related notes thereto, before making a decision to invest in our securities. The risks and uncertainties
described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently believe
are not material, also may become important factors that affect us and impair our business operations. The occurrence of any of the events
or developments discussed in the risk factors below could have a material and adverse impact on our business, financial condition, results
of operations and cash flows and, in such case, our future prospects would likely be materially and adversely affected.
Risks Related to Our Business
A significant portion of our revenues comes
from a limited number of customers.
Our revenues have historically been derived from
a limited number of customers. Although we continue to expand our customer base, we remain dependent on a limited number of customers
for a substantial majority of our revenues. For example, for the fiscal years ended April 30, 2023, 2022 and 2021, we derived approximately
65%, 60% and 76% of our revenues from our top three customers, respectively. The loss of, or a significant reduction of business from,
any of our primary customers could have a material adverse effect on our business, financial condition, and results of operations.
We generally do not have long-term customer
contracts and our backlog cannot be relied upon as a future indicator of revenues.
We generally do not have long-term contracts with
our customers, and existing contracts and purchase commitments may be canceled under certain circumstances. As a result, we are exposed
to market and competitive price pressures on every order, and our agreements with customers do not provide assurance of future revenues.
Our customers are not required to make minimum purchases and, in certain circumstances, may cease using our services at any time without
penalty. Our backlog should not be relied on as a measure of anticipated demand or future revenue, because the orders constituting our
backlog may be subject to changes in delivery schedules or cancellation without significant penalty to the customer. Any reductions, cancellations
or deferrals in customer orders would negatively impact our business.
We are making a significant investment by
expanding our CDMO service offering into the development and manufacture of viral vectors which will subject us to a number of risks and
uncertainties that could adversely affect our operations and financial results.
Our expansion of our CDMO service offering into viral vector development and manufacturing services for the cell and gene therapy market
involves a number of risks that could adversely affect our operations and financial results, including the following risks:
| · | we may experience delays in the construction of the manufacturing facility, including delays in the receipt,
installation and/or validation of necessary equipment; |
| · | we may experience significant cost overruns associated with the construction of the facility; |
| · | our entry into a new service offering may distract our executive teams’ focus on our core mammalian
cell culture operations; |
| · | we may be unable to timely hire qualified individuals to manage and our viral vector operations; and |
| · | we may experience delays and other challenges engaging viral vector customers due to our lack of operating
experience in the viral vector market. |
In addition to the foregoing, we have commenced
a service offering that is currently dominated by a small number of larger organizations with established viral vector operations and
significantly greater financial resources with whom we may experience difficulties in competing for talent and customers. If we are unable
to manage these risks, our business and operating results could be materially harmed.
We have made a significant capital investment in our
Myford facility in order to meet potential future mammalian cell culture development and manufacturing needs and, as a result, we depend
on the success of attracting new and retaining existing customers’ business.
In the fourth quarter of fiscal 2023, we
completed the expansion of our Myford facility, which significantly expanded its production capacity. This expansion represents a
substantial investment in our manufacturing capabilities, and has resulted in a significant increase in our fixed costs. If we are
not able to utilize the additional capacity from this expansion, our margins could be adversely affected. Further, our future
revenues may not be sufficient to ensure the economical operation of this expanded capacity, in which case, our results of
operations could be adversely affected.
Our rapid growth during the past three fiscal
years may not be indicative of our future growth, and if we continue to grow rapidly, we may fail to manage our growth effectively.
From the fiscal year ended April 30, 2020 through
the fiscal year ended April 30, 2023, our revenues have increased from $59.7 million to $149.3 million, representing growth in revenues
of 150% over the three year period. We believe our ability to continue to experience revenue growth will depend on a number of factors,
including our ability to:
| · | complete the construction of our cell and gene therapy facility; |
| · | continue to expand our customer base, and identify and focus on additional development and manufacturing
opportunities with existing customers; |
| · | effectively compete with our competitors in the contract development and manufacturing sector; |
| · | continue to broaden our market awareness through a diversified, yet flexible, marketing strategy; and |
| · | selectively pursue complementary or adjacent service offerings, either organically or through acquisition. |
Moreover, we continue to expand our headcount
and operations. We grew from 227 employees as of April 30, 2020 to 365 employees as of April 30, 2023. We anticipate that we will continue
to expand our operations and headcount in the near term and beyond. This potential future growth could place a significant strain on our
management, administrative, operational and financial resources, company culture and infrastructure. Our success will depend in part on
our ability to manage this growth effectively while retaining personnel. To manage the expected growth of our operations and personnel,
we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. Failure
to effectively manage growth could result in difficulty or delays in adding new customers, maintaining our strong quality systems, declines
in quality or customer satisfaction, increases in costs, system failures, difficulties in introducing new features or solutions, the need
for more capital than we anticipate or other operational difficulties, and any of these difficulties could harm our business performance
and results of operations.
We rely on third parties to supply most
of the necessary raw materials and supplies for the products we manufacture on behalf of our customers and our inability to obtain such
raw materials or supplies may adversely impact our business, financial condition, and results of operations.
Our operations require various raw materials,
including proprietary media, resins, buffers, and filters, in addition to numerous additional raw materials supplied primarily by third
parties. We or our customers specify the raw materials and other items required to manufacture their product and, in some cases, specify
the suppliers from whom we must purchase these raw materials. In certain instances, the raw materials and other items can only be supplied
by a limited number of suppliers and, in some cases, a single source, or in limited quantities. If third-party suppliers do not supply
raw materials or other items on a timely basis, it may cause a manufacturing run to be delayed or canceled which would adversely impact
our financial condition and results of operations. Additionally, we do not have long-term supply contracts with any of our single source
suppliers. If we experience difficulties acquiring sufficient quantities of required materials or products from our existing suppliers,
or if our suppliers are found to be non-compliant with the FDA’s quality system regulation, CGMPs or other applicable laws or regulations,
we would be required to find alternative suppliers. If our primary suppliers become unable or unwilling to perform, any resulting delays
or interruptions in the supply of raw materials required to support our manufacturing of CGMP pharmaceutical-grade products would ultimately
delay our manufacture of products for our customers, which could materially and adversely affect our financial condition and operating
results. Furthermore, third-party suppliers may fail to provide us with raw materials and other items that meet the qualifications and
specifications required by us or our customers. If third-party suppliers are not able to provide us with raw materials that meet our or
our customers’ specifications on a timely basis, we may be unable to manufacture their product or it could prevent us from delivering
products to our customers within required timeframes. Any such delay in delivering our products may create liability for us to our customers
for breach of contract or cause us to experience order cancellations and loss of customers. In the event that we manufacture products
with inferior quality components and raw materials, we may become subject to product liability claims caused by defective raw materials
or components from a third-party supplier or from a customer, or our customer may be required to recall its products from the market.
We, and certain of our customers may, maintain
cash at financial institutions, often in balances that exceed federally-insured limits. The failure of financial institutions could adversely
affect our access to to our funds, our ability to pay operational expenses or make other payments, and the ability of our customers to
pay us for our services.
We, and certain of our customers may,
maintain cash in accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. If such
banking institutions were to fail, we and/or potentially certain of our customers could lose all or a portion of those amounts held
in excess of such insurance limitations. For example, the FDIC took control of Silicon Valley Bank on March 10, 2023. Although we
did not have any cash or cash equivalents at Silicon Valley Bank and the Federal Reserve subsequently announced that account holders
would be made whole, the FDIC may not make all account holders whole in the event of future bank failures. In addition, even if
account holders are ultimately made whole with respect to a future bank failure, account holders’ access to their accounts and
assets held in their accounts may be substantially delayed. Any material loss that we and/or our customers may experience in the
future or inability for a material time period to access our or their cash and cash equivalents could have an adverse effect on our
ability to pay our operational expenses or make other payments, and/or our customers’ ability to pay us for services rendered
(or may cause them to cancel scheduled services) which could adversely affect our business.
All of our manufacturing facilities are
situated in Orange County, California, which increases our exposure to significant disruption to our business as a result of unforeseeable
developments in a single geographic area.
We operate our manufacturing facilities in Orange
County, California. It is possible that we could experience prolonged periods of reduced production due to unforeseen catastrophic events
occurring in or around our facilities. It is also possible that operations could be disrupted due to other unforeseen circumstances such
as power outages, explosions, fires, floods, earthquakes or accidents. As a result, we may be unable to shift manufacturing capabilities
to alternate locations, accept materials from suppliers, meet customer shipment needs or address other severe consequences that may be
encountered, and we may suffer damage to our reputation. Our financial condition and results of our operations could be materially adversely
affected were such events to occur.
Our manufacturing services are highly complex,
and if we are unable to provide quality and timely services to our customers, our business could suffer.
The manufacturing services we offer are highly
complex, due in part to strict regulatory requirements. A failure of our quality control systems in our facilities could cause problems
to arise in connection with facility operations for a variety of reasons, including equipment malfunction, viral contamination, failure
to follow specific manufacturing instructions, protocols and standard operating procedures, problems with raw materials or environmental
factors. Such problems could affect production of a single manufacturing run or a series of runs, requiring the destruction of products,
or could halt manufacturing operations altogether. In addition, our failure to meet required quality standards may result in our failure
to timely deliver products to our customers, which, in turn, could damage our reputation for quality and service. Any such incident could,
among other things, lead to increased costs, lost revenue, reimbursement to customers for lost drug substance, damage to and possibly
termination of existing customer relationships, time and expense spent investigating the cause and, depending on the cause, similar losses
with respect to other manufacturing runs. With respect to our commercial manufacturing, if problems are not discovered before the product
is released to the market, we may be subject to regulatory actions, including product recalls, product seizures, injunctions to halt manufacture
and distribution, restrictions on our operations, civil sanctions, including monetary sanctions, and criminal actions. In addition, such
issues could subject us to litigation, the cost of which could be significant.
If we do not enhance our existing, or introduce
new, service offerings in a timely manner, our offerings may become obsolete or noncompetitive over time, customers may not buy our offerings
and our revenues and profitability may decline.
Demand for our manufacturing services may change
in ways that we may not anticipate due to evolving industry standards and customer needs that are increasingly sophisticated and varied,
as well as the introduction by others of new offerings and technologies that provide alternatives to our offerings. In the event we are
unable to offer or enhance our service offerings or expand our manufacturing infrastructure to accommodate requests from our customers
and potential customers, our offerings may become obsolete or noncompetitive over time, in which case our revenue and operating results
would suffer. For example, if we are unable to respond to changes in the nature or extent of the technological or other needs of our customers
through enhancing our offerings, our competition may develop offerings that are more competitive than ours, and we could find it more difficult
to renew or expand existing agreements or obtain new agreements. Potential innovations intended to facilitate enhanced or new offerings
generally will require a substantial capital investment before we can determine their commercial viability, and we may not have financial
resources sufficient to fund all desired innovations. Even if we succeed in creating enhanced or new offerings, however, they may still
fail to result in commercially successful offerings or may not produce revenue in excess of our costs of development, and they may be
rendered obsolete by changing customer preferences or the introduction by our competitors of offerings embodying new technologies or features.
Finally, the marketplace may not accept our innovations due to, among other things, existing patterns of clinical practice, the need for
regulatory clearance and/or uncertainty over market access or government or third-party reimbursement.
If we use hazardous and biological materials
in a manner that causes injury or violates applicable law, we may be liable for damages.
Our contract manufacturing operations involve
the controlled use of hazardous materials and chemicals. We are subject to federal, state and local laws and regulations in the United
States governing the use, manufacture, storage, handling and disposal of hazardous materials and chemicals. Although we believe that our
procedures for using, handling, storing and disposing of these materials comply with legally prescribed standards, we may incur significant
additional costs to comply with applicable laws in the future. Also, even if we are in compliance with applicable laws, we cannot completely
eliminate the risk of contamination or injury resulting from hazardous materials or chemicals. As a result of any such contamination or
injury, we may incur liability, or local, city, state or federal authorities may curtail the use of these materials and interrupt our business
operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our
resources. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations
may impair our contract manufacturing operations, which could materially harm our business, financial condition and results of operations.
Our business, financial
condition, and results of operations may be adversely affected by pandemics or similar public health crises.
Public health crises
such as pandemics or similar outbreaks may affect our operations and those of third parties on which we rely, including our customers
and suppliers. Our business, financial condition, and results of operations may be affected by: disruptions in our customers’ abilities
to fund, develop, or bring to market products as anticipated; delays in or disruptions to the conduct of clinical trials by our customers;
cancellations of contracts or confirmed orders from our customers; and inability, difficulty, or additional cost or delays in obtaining
key raw materials, components, and other supplies from our existing supply chain; among other factors caused by a public health crises.
For example, the COVID-19
pandemic led to the implementation of various responses, including government-imposed quarantines, travel restrictions and other public
health safety measures. The extent to which future pandemics impact our operations and/or those of our customers and suppliers will depend
on future developments, which are highly uncertain and unpredictable, including the duration or recurrence of outbreaks, potential future
government actions, new information that will emerge concerning the severity and impact of that pandemic and the actions to contain the
pandemic or address its impact in the short and long term, among others.
The business disruptions
associated with a global pandemic could impact the business, product development priorities and operations of our customers and suppliers.
For example, disruptions in supply chains and disruptions to the operations of the FDA and other drug regulatory authorities, could result
in, among other things, delays of inspections, reviews, and approvals of our customers’ products, as well as the volume and timing
of orders from these customers. Such disruptions could result in delays in the development programs of our customers or impede the commercial
efforts for our customers’ approved products, resulting in potential reductions or delays in orders from our customers which could
have a material negative effect on our business in the future.
Potential product liability claims, errors
and omissions claims in connection with services we perform and potential liability under indemnification agreements between us and our
officers and directors could adversely affect us.
We manufacture products intended for use in humans.
These activities could expose us to risk of liability for personal injury or death to persons using such products. We seek to reduce our
potential liability through measures such as contractual indemnification provisions with customers (the scope of which may vary by customer,
and the performances of which are not secured) and insurance maintained by us and our customers. We could be materially adversely affected
if we are required to pay damages or incur defense costs in connection with a claim that is outside the scope of the indemnification agreements,
if the indemnity, although applicable, is not performed in accordance with its terms or if our liabilities exceed the amount of applicable
insurance or indemnity. In addition, we could be held liable for errors and omissions in connection with the services we perform. Although
we currently maintain product liability and errors and omissions insurance with respect to these risks, such coverage may not be adequate
or continue to be available on terms acceptable to us.
We also indemnify our officers and directors for
certain events or occurrences while the officer or director is serving at our request in such capacity. The maximum potential amount of
future payments we could be required to make under these indemnification agreements is unlimited. Although we have a director and officer
insurance policy that covers a portion of any potential exposure, we could be materially and adversely affected if we are required to
pay damages or incur legal costs in connection with a claim above such insurance limits.
Any claims beyond our insurance coverage
limits, or that are otherwise not covered by our insurance, may result in substantial costs and a reduction in our available capital resources.
We maintain property insurance, employer’s
liability insurance, product liability insurance, general liability insurance, business interruption insurance, and directors’ and
officers’ liability insurance, among others. Although we maintain what we believe to be adequate insurance coverage, potential claims
may exceed the amount of insurance coverage or may be excluded under the terms of the policy, which could cause an adverse effect on our
business, financial condition and results from operations. Generally, we would be at risk for the loss of inventory that is not within
customer specifications. These amounts could be significant. In addition, in the future we may not be able to obtain adequate insurance
coverage or we may be required to pay higher premiums and accept higher deductibles in order to secure adequate insurance coverage.
Third parties may claim that our services
or our customer’s products infringe on or misappropriate their intellectual property rights.
Any claims that our services infringe the rights
of third parties, including claims arising from any of our customer engagements, regardless of their merit or resolution, could be costly
and may divert the efforts and attention of our management and technical personnel. We may not prevail in such proceedings, given the
complex technical issues and inherent uncertainties in intellectual property litigation. If such proceedings result in an adverse outcome,
we could be required, among other things, to pay substantial damages, discontinue the use of the infringing technology, expend significant
resources to develop non-infringing technology, license such technology from the third party claiming infringement (which license may
not be available on commercially reasonable terms or at all) and/or cease the manufacture, use or sale of the infringing processes or
offerings, any of which could have a material adverse effect on our business.
In addition, our customers’ products may
be subject to claims of intellectual property infringement and such claims could materially affect our business if their products cease
to be manufactured and they have to discontinue the use of the infringing technology which we may provide. Any of the foregoing could
affect our ability to compete or could have a material adverse effect on our business, financial condition and results of operations.
We depend on key personnel and the loss
of key personnel could harm our business and results of operations.
We depend on our ability to attract and retain
qualified scientific and technical employees, as well as a number of key executives. These employees may voluntarily terminate their employment
with us at any time. We may not be able to retain key personnel, or attract and retain additional qualified employees. We do not maintain
key-man or similar policies covering any of our senior management or key personnel. Our inability to attract and retain key personnel
would have a material adverse effect on our business.
We have federal and state net operating
loss, or NOL, carry forwards which could be used to offset/defer federal and state income taxes. Our ability to use such carry forwards
to offset future taxable income may be subject to certain limitations related to changes in ownership of our stock and decisions by California
and other states to limit or suspend NOL carry forwards.
As of April 30, 2023, we had federal and state
NOL carry forwards of approximately $442.4 million and $294.7 million, respectively. These NOL carry forwards could potentially be used
to offset certain future federal and state income tax liabilities. The federal net operating loss carry forwards generated prior to January
1, 2018 expire in fiscal years 2024 through 2038, unless previously utilized. The federal net operating loss generated after January 1,
2018 of $77.9 million can be carried forward indefinitely. Utilization of net operating losses generated subsequent to 2020 are limited
to 80% of future taxable income. However, utilization of NOL carry forwards may be subject to a substantial annual limitation pursuant
to Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions due to ownership changes that have
occurred previously or that could occur in the future. In general, an ownership change, as defined by Section 382, results from transactions
increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over
a three-year period. A Section 382 analysis has been completed through the fiscal year ended April 30, 2022, which it was determined that
no such change in ownership had occurred. However, ownership changes occurring subsequent to April 30, 2022 may impact the utilization
of our NOL carry forwards and other tax attributes. Additionally, states may impose other limitations on the use of state NOL carry forwards.
Any limitation may result in expiration of a portion of the carry forwards before utilization. If we were not able to utilize our carry
forwards, we would be required to use our cash resources to pay taxes that would otherwise have been offset, thereby reducing our liquidity.
We have recorded significant deferred tax
assets, and we might never realize their full value, which would result in a charge against our earnings.
As of April 30, 2023, we had deferred tax assets
of $113.6 million. Realization of our deferred tax assets is dependent upon our generating sufficient taxable income in future years
to realize the tax benefit from those assets. Deferred tax assets are reviewed on a periodic basis for realizability. A charge against
our earnings would result if, based on the available evidence, it is more likely than not that some portion of the deferred tax asset
will not be realized beyond our existing valuation allowance, if any. This could be caused by, among other things, deterioration in performance,
adverse market conditions, adverse changes in applicable laws or regulations, including changes that restrict the activities of or affect
the services provided by our business and a variety of other factors.
If a deferred tax asset net of our valuation allowance,
if any, was determined to be not realizable in a future period, the charge to earnings would be recognized as an expense in our results
of operations in the period the determination is made. Additionally, if we are unable to utilize our deferred tax assets, our cash
flow available to fund operations could be adversely affected. Depending on future circumstances, it is possible that we might never
realize the full value of our deferred tax assets. Any future impairment charges related to a significant portion of our deferred tax
assets could have an adverse effect on our financial condition and results of operations.
Our effective tax rate may fluctuate,
and we may incur obligations in tax jurisdictions in excess of accrued amounts.
Our effective tax rate is derived from a combination
of applicable tax rates in the various places that we operate. In preparing our financial statements, we estimate the amount of tax that
will become payable in each such place. Nevertheless, our effective tax rate may be different than experienced in the past due to numerous
factors, including the impact of stock-based compensation, changes in the mix of our profitability between tax jurisdictions, the results
of examinations and audits of our tax filings, our inability to secure or sustain acceptable agreements with tax authorities, changes
in accounting for income taxes and changes in tax laws. Any of these factors could cause us to experience an effective tax rate significantly
different from previous periods or our current expectations and may result in tax obligations in excess of amounts accrued in our financial
statements.
In addition, in the fourth quarter of fiscal 2022,
we determined, based on our facts and circumstances, that it was more likely than not that our deferred tax assets would be realized and,
as a result, we fully released our valuation allowance related to federal and state deferred tax assets. This resulted in a substantial
increase in our reported net income and our earnings per share compared to our operating results for fiscal 2022. As such, fiscal 2022
net income is not indicative of the actual or future profitability trend of our business. Starting in fiscal 2023, we
commenced recording income tax expense at an estimated tax rate that approximates statutory tax rates, which could result in a significant
reduction in our net income and net income per share.
We may be subject to various litigation
claims and legal proceedings.
We, as well as certain of our directors and officers,
may be subject to claims or lawsuits during the ordinary course of business. Regardless of the outcome, these lawsuits may result in significant
legal fees and expenses and could divert management’s time and other resources. If the claims contained in these lawsuits are successfully
asserted against us, we could be liable for damages and be required to alter or cease certain of our business practices. Any of these
outcomes could cause our business, financial performance and cash position to be negatively impacted.
We have become increasingly dependent on
information technology and any breakdown, interruption or breach of our information technology systems could subject us to liability or
interrupt the operation of our business, which could have a material adverse effect on our business, financial condition, results of operations
and cash flows.
We are increasingly dependent upon sophisticated
information technology systems and infrastructure in connection with the conduct of our business. We must constantly update our information
technology infrastructure and our various current information technology systems throughout the organization may not continue to meet
our current and future business needs. Furthermore, modification, upgrade or replacement of such systems may be costly. In addition, due
to the size and complexity of these systems, any breakdown, interruption, corruption or unauthorized access to or cyber-attack on these
systems could create system disruptions, shutdowns or unauthorized disclosure of confidential information. While we attempt to take appropriate
security and cyber-security measures to protect our data and information technology systems and to prevent such breakdowns and unauthorized
breaches and cyber-attacks, these measures may not be successful and these breakdowns and breaches in, or attacks on, our systems and
data may not be prevented. Such breakdowns, breaches or attacks may cause business interruption and could have a material adverse effect
on our business, financial condition, results of operations and cash flows and could cause the market value of our shares of common stock
to decline, and we may suffer financial damage or other loss, including fines or criminal penalties because of lost or misappropriated
information.
Increasing attention
to ESG matters may impact our business, financial results or stock price.
Companies across all industries are facing increasing
scrutiny from stakeholders related to their ESG practices and disclosures, including
practices and disclosures related to climate change, diversity and inclusion and governance standards. Investor advocacy groups, certain
institutional investors, lenders, investment funds and other influential investors are also increasingly focused on ESG practices and
disclosures and in recent years have placed increasing importance on the implications and social cost of their investments. In addition,
government organizations are enhancing or advancing legal and regulatory requirements specific to ESG matters. The heightened stakeholder
focus on ESG issues related to our business requires the continuous monitoring of various and evolving laws, regulations, standards and
expectations and the associated reporting requirements. A failure to adequately meet stakeholder expectations may result in noncompliance,
the loss of business, reputational impacts, diluted market valuation, an inability to attract customers and an inability to attract and
retain top talent. In addition, our adoption of certain standards or mandated compliance to certain requirements could necessitate additional
investments that could have an adverse effect on our results of operations.
We may seek to grow our business through
acquisitions of complementary businesses, and the failure to manage acquisitions, or the failure to integrate them with our existing business,
could harm our financial condition and operating results.
From time to time, we may consider opportunities
to acquire other companies, products or technologies that may enhance our manufacturing capabilities, expand the breadth of our markets
or customer base, or advance our business strategies. Potential acquisitions involve numerous risks, including: problems assimilating
the acquired service offerings, products or technologies; issues maintaining uniform standards, procedures, quality control and policies;
unanticipated costs associated with acquisitions; diversion of management’s attention from our existing business; risks associated
with entering new markets in which we have limited or no experience; increased legal and accounting costs relating to the acquisitions
or compliance with regulatory matters; and unanticipated or undisclosed liabilities of any target.
We have no current commitments with respect to
any acquisition. We do not know if we will be able to identify acquisitions we deem suitable, whether we will be able to successfully
complete any such acquisitions on favorable terms or at all, or whether we will be able to successfully integrate any acquired service
offerings, products or technologies. Our potential inability to integrate any acquired service offerings, products or technologies effectively
may adversely affect our business, financial condition, and results of operations.
Risks Related to Our Customers
The consumers of the products we manufacture
for our customers may significantly influence our business, financial condition, and results of operations.
We depend on, and have no control over, consumer
demand for the products we manufacture for our customers. Consumer demand for our customers’ products could be adversely affected
by, among other things, delays in health regulatory approval, the inability of our customers to demonstrate the efficacy and safety of
their products, the loss of patent and other intellectual property rights protection, the emergence of competing or alternative products,
including generic drugs and the degree to which private and government payment subsidies for a particular product offset the cost to consumers
and changes in the marketing strategies for such products. Additionally, if the products we manufacture for our customers do not gain
market acceptance, our revenues and profitability may be adversely affected.
We believe that continued changes to the healthcare
industry, including ongoing healthcare reform, adverse changes in government or private funding of healthcare products and services, legislation
or regulations governing the privacy of patient information or patient access to care, or the delivery, pricing or reimbursement of pharmaceuticals
and healthcare services or mandated benefits, may cause healthcare industry participants to purchase fewer services from us or influence
the price that others are willing to pay for our services. Changes in the healthcare industry’s pricing, selling, inventory, distribution
or supply policies or practices could also significantly reduce our revenue and profitability.
If production volumes of key products that we
manufacture for our customers decline, our financial condition and results of operations may be adversely affected.
Our customers’ failure to receive
or maintain regulatory approval for their product candidates could negatively impact our revenues and profitability.
Our success depends upon the regulatory
approval of the products we manufacture. As such, if our customers experience a delay in, or a failure to receive, approval for any
of their product candidates or fail to maintain regulatory approval of their products, and we are not able to manufacture these
products, our revenue and profitability could be adversely affected. Additionally, if the FDA or a comparable foreign regulatory
authority does not approve of our facilities for the manufacture of a customer product, or if it withdraws such approval in the
future, our customers may choose to identify alternative manufacturing facilities and/or relationships, which could significantly
impact our ability to expand our manufacturing capacity and capabilities and achieve profitability.
We depend on spending and demand from our
customers for our contract manufacturing and development services and any reduction in spending or demand, whether due to a deterioration
in macroeconomic conditions or unfavorable research and development results, could have a material adverse effect on our revenues and
profitability.
The amount that our customers spend on the development
and manufacture of their products or product candidates, particularly the amount our customers choose to spend on outsourcing these services
to us, substantially impacts our revenue and profitability. During times of greater economic uncertainty, such as the biopharmaceutical
industry is currently experiencing, our smaller customers with products in earlier stages of development tend to be much more negatively
impacted due to the tightening of the access to capital. As a result, such earlier stage customers may be forced to delay or cancel our
services in an effort to conserve cash which could have a material adverse effect on our revenues and profitability. In addition, the
outcomes of our customers’ research, development and marketing also significantly influence the amount that our customers choose
to spend on our services and offerings. Our customers determine the amounts that they will spend on our services based upon, among other
things, the clinical and market success of their products, available resources and their need to develop new products which, in turn,
depend upon a number of other factors, including their competitors’ research, development and product initiatives and the anticipated
market for any new products, as well as clinical and reimbursement scenarios for specific products and therapeutic areas. Further, increasing
consolidation in the pharmaceutical industry may impact such spending, particularly in the event that any of our customers choose to develop
or acquire integrated manufacturing operations. Any reduction in customer spending on biologics development and related services as a
result of these and other factors could have a material adverse effect on our business, financial condition, and results of operations.
If we are unable to protect the confidentiality
of our customers’ proprietary information, we may be subject to claims.
Many of the formulations used and processes developed
by us in the manufacture of our customers’ products are subject to trade secret protection, patents or other intellectual property
protections owned or licensed by such customer. While we make significant efforts to protect our customers’ proprietary and confidential
information, including requiring our employees to enter into agreements protecting such information, if any of our employees breach
the non-disclosure provisions in such agreements, or if our customers make claims that their proprietary information has been disclosed,
our reputation may suffer damage and we may become subject to legal proceedings that could require us to incur significant expense and
divert our management’s time, attention and resources.
Risks Related to the Industry in Which We Operate
Failure to comply with existing and future
regulatory requirements could adversely affect our business, financial condition, and results of operations.
Our industry is highly regulated. We are required
to comply with the regulatory requirements of various local, state, provincial, national and international regulatory bodies having jurisdiction
in the countries or localities in which we manufacture products or in which our customers’ products are distributed. In particular,
we are subject to laws and regulations concerning development, testing, manufacturing processes, equipment and facilities, including compliance
with CGMPs, import and export, and product registration and listing, among other things. As a result, most of our facilities are subject
to regulation by the FDA, as well as regulatory bodies of other jurisdictions where our customers have marketing approval for their products
including, but not limited to, the EMA, ANVISA and/or Health Canada, depending on the countries in which our customers market and sell
the products we manufacture on their behalf. As we expand our operations, we may be exposed to more complex and new regulatory and administrative
requirements and legal risks, any of which may require expertise in which we have little or no experience. It is possible that compliance
with new regulatory requirements could impose significant compliance costs on us. Such costs could have a material adverse effect on our
business, financial condition and results of operations.
These regulatory requirements impact many aspects
of our operations, including manufacturing, developing, storage, distribution, import and export and record keeping related to customers’
products. Noncompliance with any applicable regulatory requirements can result in government refusal to approve: (i) facilities for testing
or manufacturing products or (ii) products for commercialization. The FDA and other regulatory agencies can delay, limit or deny approval
for many reasons, including:
| · | changes to the regulatory approval process, including new data requirements for product candidates in
those jurisdictions, including the United States, in which our customers may be seeking approval; |
| · | that a customer’s product candidate may not be deemed to be safe or effective; |
| · | the inability of the regulatory agency to provide timely responses as a result of its resource constraints;
and |
| · | that the manufacturing processes or facilities may not meet the applicable requirements. |
In addition, if new legislation or regulations
are enacted or existing legislation or regulations are amended or are interpreted or enforced differently, we may be required to obtain
additional approvals or operate according to different manufacturing or operating standards. This may require a change in our development
and manufacturing techniques or additional capital investments in our facilities. Any related costs may be significant. If we fail to
comply with applicable regulatory requirements in the future, then we may be subject to warning letters and/or civil or criminal penalties
and fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, restrictions on the import and export
of our products, debarment, exclusion, disgorgement of profits, operating restrictions and criminal prosecution and the loss of contracts
and resulting revenue losses. Inspections by regulatory authorities that identify any deficiencies could result in remedial actions, production
stoppages or facility closure, which would disrupt the manufacturing process and supply of product to our customers. In addition, such
failure to comply could expose us to contractual and product liability claims, including claims by customers for reimbursement for lost
or damaged active pharmaceutical ingredients or recall or other corrective actions, the cost of which could be significant.
In addition, certain products we manufacture must
undergo pre-clinical and clinical evaluations relating to product safety and efficacy before they are approved as commercial therapeutic
products. The regulatory authorities having jurisdiction in the countries in which our customers intend to market their products may delay
or put on hold clinical trials or delay approval of a product or determine that the product is not approvable. The FDA or other regulatory
agencies can delay approval of a drug if our manufacturing facility, including any newly commissioned facility, is not able to demonstrate
compliance with CGMPs, pass other aspects of pre-approval inspections or properly scale up to produce commercial supplies. The FDA and
comparable government authorities having jurisdiction in the countries in which we or our customers intend to market their products have
the authority to withdraw product approval or suspend manufacture if there are significant problems with raw materials or supplies, quality
control and assurance or the product we manufacture is adulterated or misbranded. If our manufacturing facilities and services are not
in compliance with FDA and comparable government authorities, we may be unable to obtain or maintain the necessary approvals to continue
manufacturing products for our customers, which would materially adversely affect our financial condition and results of operations.
We operate in a highly competitive market
and competition may adversely affect our business.
We operate in a market that is highly competitive.
Our competition in the contract manufacturing market includes full-service contract manufacturers and large pharmaceutical companies offering
third-party manufacturing services to fill their excess capacity. We may also compete with the internal operations of those pharmaceutical
companies that choose to source their product offerings internally. In addition, most of our competitors may have substantially greater
financial, marketing, technical or other resources than we do. Moreover, additional competition may emerge, particularly in lower-cost
jurisdictions such as India and China, which could, among other things, result in a decrease in the fees paid for our services, which
may adversely affect our financial condition and results of operations.
Risks Related to the Ownership of Our Common
Stock
Our issuance of additional capital stock
pursuant to our stock incentive plan, or in connection with financings, acquisitions, or otherwise will dilute the interests of other
security holders and may depress the price of our common stock.
We expect
to issue additional capital stock in the future that will result in dilution to all other stockholders. We expect to grant equity awards
to employees, directors and consultants under our stock incentive plan. We may also raise capital through equity financings in the future.
As part of our growth strategy, we may seek to acquire companies and issue equity securities to pay for any such acquisition. Any such
issuances of additional capital stock may cause stockholders to experience significant dilution of their ownership interests and the per
share value of our common stock to decline. Furthermore, if we issue additional equity or convertible debt securities, the new equity
securities could have rights senior to those of our common stock. For example, if we elect to settle our conversion obligation under our
1.25% Convertible Senior Notes due 2026 (“Convertible Notes”) in shares of our common stock or a combination of cash and
shares of our common stock, the issuance of such common stock may dilute the ownership interests of our stockholders and sales in the
public market could adversely affect prevailing market prices.
Our highly volatile stock price may adversely
affect the liquidity of our common stock.
The market price of our common stock has generally
been highly volatile and is likely to continue to be highly volatile. For instance, the market price of our common stock has ranged from
$5.08 to $34.51 per share over the last three fiscal years ended April 30, 2023.
The market price of our common stock may be significantly
impacted by many factors including the following:
| · | the loss of a significant customer; |
| · | significant changes in our financial results or that of our competitors, including our ability to continue
as a going concern; |
| · | the ability to meet our revenue guidance; |
| · | the offering and sale of shares of our common stock, either sold at market prices or at a discount under
an equity transaction; |
| · | significant changes in our capital structure; |
| · | published reports by securities analysts; |
| · | actual or purported short squeeze trading activity; |
| · | announcements of partnering transactions, joint ventures, strategic alliances, and any other transaction
that involves the development, sale or use of our technologies or competitive technologies; |
| · | regulatory developments, including possible delays in the regulatory approval of our customers’
products which we manufacture; |
| · | outcomes of significant litigation, disputes and other legal or regulatory proceedings; |
| · | general stock trends in the biotechnology and pharmaceutical industry sectors; |
| · | public concerns as to the safety and effectiveness of the products we manufacture; |
| · | economic trends and other external factors including, but not limited to, interest rate fluctuations,
economic recession, inflation, foreign market trends, national crisis, and disasters; and |
| · | healthcare reimbursement reform and cost-containment measures implemented
by government agencies. |
These and other external factors have caused and
may continue to cause the market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors
from readily selling their shares of our common stock, and may otherwise negatively affect the liquidity of our common stock.
Anti-takeover provisions in our certificate
of incorporation, amended and restated bylaws, the Indenture, as well as provisions of Delaware law could prevent or delay a change in
control of our company, even if such change in control would be beneficial to our stockholders.
Provisions of our certificate of incorporation
and amended and restated bylaws could discourage, delay or prevent a merger, acquisition or other change in control of our company, even
if such change in control would be beneficial to our stockholders. These include: authorizing the issuance of “blank check”
preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;
no provision for the use of cumulative voting for the election of directors; limiting the ability of stockholders to call special meetings;
requiring all stockholder actions to be taken at a meeting of our stockholders (i.e. no provision for stockholder action by written consent);
and establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can
be acted upon by stockholders at stockholder meetings.
Further,
in connection with our Convertible Notes issuances, we entered into an indenture dated as of March 12, 2021 as amended by a first supplemental
indenture dated April 30, 2021 (as amended or supplemented, the “Indenture”) with U.S. Bank National Association, as trustee.
Certain provisions in the Indenture could make it more difficult or more expensive for a third party to acquire us. For example, if a
takeover would constitute a fundamental change, holders of the Convertible Notes will have the right to require us to repurchase their
Convertible Notes in cash. In addition, if a takeover constitutes a make-whole fundamental change, we may be required to increase the
conversion rate for holders who convert their Convertible Notes in connection with such takeover. In either case, and in other cases,
our obligations under the Convertible Notes and the Indenture could increase the cost of acquiring us or otherwise discourage a third
party from acquiring us or removing incumbent management.
In addition, Section 203 of the Delaware General
Corporation Law prohibits us, except under specified circumstances, from engaging in any mergers, significant sales of stock or assets
or business combinations with any stockholder or group of stockholders who owns at least 15% of our common stock.
Our amended and restated bylaws
provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us
and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or
our directors, officers or employees.
Our amended and restated bylaws provide
that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware is the exclusive forum
for any derivative action or proceeding brought on our behalf, any action asserting a breach of a fiduciary duty owed by any of our
directors, officers, or other employees to us, any action asserting a claim against us arising pursuant to the Delaware General
Corporation Law, our certificate of incorporation or our bylaws, any action to interpret, apply, enforce, or determine the validity
of our certificate of incorporation or bylaws, or any action asserting a claim against us that is governed by the internal affairs
doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds
favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our
directors, officers and other employees.
We do not intend to pay dividends on our
common stock, so any returns will be limited to the value of our stock.
We have never declared or paid any cash dividend
on our common stock. We currently anticipate that we will retain future earnings, if any, for the development, operation and expansion
of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Any return to stockholders will
therefore be limited to the appreciation of the trading price of our common stock.
If securities or industry analysts do not
publish research reports about us, or if they issue adverse opinions about our business, our stock price and trading volume could decline.
The research and reports that
industry or securities analysts publish about us or our business will influence the market for our common stock. If one or more analysts
who cover us issues an adverse opinion about us, our stock price would likely decline. If one or more of these analysts ceases research
coverage of us or fails to regularly publish reports on us, we could lose visibility in the financial markets which, in turn, could cause
our stock price or trading volume to decline. Further, if we fail to meet the market expectations of analysts who follow our stock, our
stock price likely would decline.
Risks Related to Our
Outstanding Convertible Notes
We may not have
sufficient cash flow from our business to make payments on our significant debt when due, and we may incur additional indebtedness in
the future.
In March 2021, we
issued the Convertible Notes in a private offering to qualified institutional buyers pursuant to Rule 144 under the Securities Act.
We may be required to use a substantial portion of our cash flows from operations to pay interest and principal on our indebtedness.
Our ability to make scheduled payments of the principal and to pay interest on or to refinance our indebtedness, including the
Convertible Notes, depends on our future performance, which is subject to economic, financial, competitive and other factors beyond
our control. Our business may not continue to generate cash flow from operations in the future sufficient to service our debt and
make necessary capital expenditures. If we are unable to generate such cash flow, we may be required to adopt one or more
alternatives, such as selling assets, restructuring debt or obtaining additional equity capital on terms that may be onerous or
highly dilutive. Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such
time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result
in a default on our debt obligations.
In addition, we may incur
substantial additional debt in the future, subject to the restrictions contained in our future debt agreements, some of which may be secured
debt. We are not restricted under the terms of the Indenture governing the Convertible Notes, from incurring additional debt, securing
existing or future debt, recapitalizing our debt, repurchasing our stock, pledging our assets, making investments, paying dividends, guaranteeing
debt or taking a number of other actions that are not limited by the terms of the Indenture governing the Convertible Notes that could
have the effect of diminishing our ability to make payments on the Convertible Notes when due.
The conditional
conversion feature of our Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
In the event the conditional conversion feature
of the Convertible Notes is triggered, holders of the Convertible Notes will be entitled to convert the notes at any time during specified
periods at their option. If one or more holders elect to convert their Convertible Notes, unless we elect to satisfy our conversion obligation
by delivering solely shares of our common stock (other than paying cash in lieu of delivering any fractional share), we would be required
to settle a portion or all of our conversion obligation through the payment of cash, which could adversely affect our liquidity. In addition,
even if holders do not elect to convert their Convertible Notes when these conversion triggers are satisfied, we could be required under
applicable accounting rules to reclassify all or a portion of the outstanding principal of the Convertible Notes as a current rather than
long-term liability, which would result in a material reduction of our net working capital.
The capped call
transactions may affect the value of our Convertible Notes and our common stock.
In connection with the
pricing of the Convertible Notes, we entered into capped call transactions with the option counterparties. The capped call transactions
cover, subject to customary anti-dilution adjustments, the aggregate number of shares of our common stock that initially underlie the
Convertible Notes. The capped call transactions are expected generally to reduce the potential dilution to our common stock as a result
of conversion of the Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of the
converted Convertible Notes, as the case may be, with such reduction and/or offset subject to a cap. In connection with establishing their
initial hedges of the capped call transactions, the option counterparties or their respective affiliates may have purchased shares of
common stock and/or entered into various derivative transactions with respect to our common stock concurrently with or shortly after the
pricing of the Convertible Notes, including with certain investors in the Convertible Notes.
In addition, the option
counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with
respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions
following the pricing of the Convertible Notes and prior to the maturity of the Convertible Notes. They are likely to do so on each exercise
date for the capped call transactions, which are expected to occur during each 40-trading day period beginning on the 41st scheduled trading
day prior to the maturity date of the Convertible Notes, or following any termination of any portion of the capped call transactions in
connection with any repurchase, redemption or early conversion of the Convertible Notes. This activity could also cause or prevent an
increase or decrease in the price of our common stock or the Convertible Notes. The potential effect, if any, of these transactions
on the price of our common stock or the Convertible Notes will depend in part on market conditions and cannot be ascertained at this time.
Any of these activities could adversely affect the value of our common stock.
We are subject
to counterparty risk with respect to the capped call transactions.
The counterparties to the capped
call transactions are financial institutions, and we will be subject to the risk that one or more of the option counterparties may default,
fail to perform or exercise their termination rights under the capped call transactions. Our exposure to the credit risk of the option
counterparties will not be secured by any collateral. If a counterparty to the capped call transactions becomes subject to insolvency
proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at the time under such transaction.
Our exposure will depend on many factors but, generally, our exposure will increase if the market price or the volatility of our common
stock increases. In addition, upon a default, failure to perform or a termination of the capped call transactions by a counterparty, we
may suffer more dilution than we currently anticipate with respect to our common stock.