Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2019
or
For the transition period from to
Commission file number: 001-32839
AVID BIOSERVICES, INC.
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
95-3698422
(I.R.S. Employer Identification No.)
2642 Michelle Drive, Suite 200, Tustin, California
(Address of principal executive offices)
92780
(Zip Code)
(714) 508-6100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value per share
Preferred Stock Purchase Rights
10.50% Series E Convertible Preferred Stock,
$0.001 par value per share
Trading Symbol(s)
CDMO
—
CDMOP
Name of each exchange on which registered
The NASDAQ Stock Market LLC
—
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Non-accelerated filer ☐
Accelerated filer ☒
Smaller reporting company ☒
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the shares of common stock held by non-affiliates of the registrant as of October 31, 2018, the last business day of the
registrant’s most recently completed second fiscal quarter, was approximately $293,016,000, calculated based on the closing price of the registrant’s common
stock as reported by The NASDAQ Capital Market.
As of June 14, 2019, the number of shares of registrant’s common stock outstanding was 56,137,724.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this report incorporates certain information by reference from the registrant’s proxy statement for the annual meeting of stockholders, which proxy
statement will be filed no later than 120 days after the close of the registrant’s fiscal year to which this report relates.
AVID BIOSERVICES, INC.
Form 10-K
For the Fiscal Year Ended April 30, 2019
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
SIGNATURES
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market For Registrant’s Common Equity, Related Stockholder Matters And Issuer Purchases Of Equity Securities
Selected Financial Data
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations
Quantitative And Qualitative Disclosures About Market Risk
Financial Statements And Supplementary Data
Changes In And Disagreements With Accountants On Accounting And Financial Disclosures
Controls And Procedures
Other Information
Directors, Executive Officers And Corporate Governance
Executive Compensation
Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters
Certain Relationships And Related Transactions, And Director Independence
Principal Accounting Fees and Services
Exhibits And Financial Statement Schedules
Form 10-K Summary
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Cautionary Note on Forward-Looking Statements
In this Annual Report on Form 10-K (the “Annual Report”), unless the context otherwise indicates, the terms “we,” “us,” “our,” “Company” and “Avid” refer
to Avid Bioservices, Inc. and its consolidated subsidiaries. In addition to historical information, this Annual Report contains “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21 of the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), that involve risks and uncertainties. The inclusion of forward-looking statements should not be regarded as a
representation by us or any other person that the objectives or plans will be achieved because our actual results may differ materially from any forward-
looking statement. The words “may,” “should,” “plans,” “believe,” “anticipate,” “estimate,” “expect,” their opposites and similar expressions are intended to
identify forward-looking statements, but the absence of these words does not necessarily mean that a statement is not forward-looking. We caution readers
that such statements are not guarantees of future performance or events and are subject to a number of factors that may tend to influence the accuracy of the
statements, including but not limited to, those risk factors outlined in the section titled “Risk Factors” as well as those discussed elsewhere in this Annual
Report. You should not duly rely on these forward-looking statements, which speak only as of the date of this Annual Report. We undertake no obligation to
publicly revise any forward-looking statement to reflect circumstances or events after the date of this Annual Report or to reflect the occurrence of
unanticipated events. You should, however, review the factors and risks we describe in the reports that we file from time to time with the Securities and
Exchange Commission (“SEC”) after the date of this Annual Report.
Avid Bioservices® is a registered trademark of Avid Bioservices, Inc. All other brand names or trademarks appearing in this Annual Report are the property
of their respective holders.
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ITEM 1.
BUSINESS
Overview
PART I
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”) commercial manufacturing focused on biopharmaceutical products derived from
mammalian cell culture. With over 25 years of experience producing monoclonal antibodies and recombinant proteins in batch, fed-batch and perfusion
modes, our services include CGMP clinical and commercial product manufacturing, purification, bulk packaging, stability testing and regulatory submissions
and support. We also provide a variety of process development services, including cell line development and optimization, cell culture and feed optimization,
analytical methods development and product characterization.
We have experience in performing process development and manufacturing of biologics since 1993 in our Franklin biomanufacturing facility (“Franklin
Facility”) located at our headquarters in Tustin, California. In March 2016, we expanded our manufacturing capacity through the commissioning of one-half
of our 84,000 square foot Myford biomanufacturing facility (“Myford Facility”), our second biomanufacturing facility, which includes multiple single-use
bioreactors up to the 2,000-liter manufacturing scale. The Myford Facility was designed to accommodate a fully disposable biomanufacturing process for
products in clinical development to commercial. The Myford Facility is located adjacent to our Franklin Facility.
Business Transition
During fiscal year 2018, we announced our intent to cease our research and development activities and to transition our business to a dedicated CDMO, which
we completed during the fourth quarter of fiscal year 2018. As part of our transition efforts during fiscal year 2018, we instituted a number of strategic actions
designed to reduce costs and better position ourselves as a dedicated CDMO, including the following: (i) we amended our Certificate of Incorporation to
change our corporate name to Avid Bioservices, Inc. and we adopted the new ticker symbol “CDMO” on The NASDAQ Capital Market to align with the new
end-market focus and strategic positioning of our business; (ii) we classified our r84 technology as held for sale, which we subsequently sold in fiscal year
2019 pursuant to an Asset Assignment and Purchase Agreement (as described in Note 10 to the accompanying consolidated financial statements) and
abandoned our remaining research and development assets; (iii) we sold our phosphatidylserine (PS)-targeting program pursuant to an Asset Assignment and
Purchase Agreement (as described in Note 10 to the accompanying consolidated financial statements); and (iv) we closed an underwritten public offering of
our common stock, pursuant to which we sold 10,294,445 shares of our common stock at an offering price of $2.25 per share for aggregate gross proceeds of
$23.2 million before deducting underwriting discounts, commissions and other offering related expenses of $1.7 million.
Business Strategy
Following the completion of our business transition to a dedicated CDMO, we established and began executing on the following near-term strategic
objectives:
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Expand existing customer relationships and diversify our customer base by securing additional customers to support our potential future revenue
growth beyond fiscal year 2019.
Continue to invest in manufacturing facilities and infrastructure to maximize our facility utilization and support our customers’ development and
clinical and commercial manufacturing requirements.
Broaden our sales force by hiring sales representatives to execute our business development initiatives in key markets.
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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:
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·
Expertise in Mammalian Cell Culture Manufacturing: We believe that consolidation in the CDMO industry over the past several years has resulted in
a limited number of nimble, 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 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 clients 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 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 clients 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 client satisfaction and retention; and (iii) our single-use bioreactors contributes to enhanced
manufacturing efficiency for our customers and reduces 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 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 16-year inspection
history with no significant impact on our business. In addition, between 2005 and 2017, we completed six successful pre-approval inspections. We
also completed four U.S. Food and Drug Administration (“FDA”) inspections between 2013 and the most recently completed inspection in early
calendar year 2018, none of which resulted in any Form 483 observations by the FDA. Further, we have successfully complied with audits from
large pharmaceutical companies.
· Modern and Optimized Infrastructure: As a result of the development of our Myford Facility, we have positioned our business to capitalize on
increasing demand in the biologics manufacturing industry for modular cleanroom space and single-use bioreactors. These developments have
driven demand among pharmaceutical companies for facilities that can match bioreactor size to smaller volume production runs. With single-use
bioreactors from 200 to 2,000 liters, our Myford Facility is designed to provide our customers with the desired efficiency and flexibility.
·
Significant Manufacturing Experience with a Proven Track Record: We have 26 years of experience producing monoclonal antibodies and
recombinant proteins, over 14 years of CGMP commercial manufacturing experience and over 11 years of experience with single-use bioreactor
technology. Our management team and board of directors have a deep understanding of the CDMO industry and have contributed their collective
expertise to our recent transition to a dedicated CDMO.
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Our Growth Strategy
We believe we have a significant opportunity to drive organic growth by leveraging our strengths, broadening our capabilities, increasing our capacity and
improving our market visibility. Further, our transition to a dedicated CDMO has allowed us to re-allocate resources previously utilized for our research and
development activities and focus on the growth of our CDMO business.
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Diversify Customer Base. We have taken and continue to take steps to diversify and expand our customer base and have developed marketing and
sales strategies designed to drive new client acquisitions, while also continuing to leverage our existing relationships to pursue additional
collaborations with our existing customers.
Expand Process Development Capabilities. We also continue to expand our process development capabilities in order to make our operations more
attractive to emerging, mid-sized and large pharmaceutical companies. We are currently in the process of expanding and optimizing our process
development capabilities and laboratory space, which includes expanding our total available process development laboratory space to more than
6,000 square feet, upgrading the infrastructure and equipment within our existing process development laboratories and implementing new state-of-
the-art technologies and equipment designed to facilitate efficient, high-throughput development of innovative upstream and downstream
manufacturing processes. We are strategically conducting this work in phases to avoid disruption to current customer programs.
Expand Manufacturing Footprint and Enhance Efficiencies. We lease an additional 42,000 square feet of vacant warehouse space within the same
building as our existing Myford Facility, which will allow us to utilize existing manufacturing and quality infrastructure that we believe should
enhance our manufacturing efficiencies and reduce the overall cost and timeframe to construct a third biomanufacturing facility. This space could
house a facility that can accommodate up to six additional 2,000-liter bioreactors. However, we currently do not expect to commence construction of
the new facility until the manufacturing capacity at our existing facilities is close to full utilization or we determine that we require additional
capacity to meet specific customer demand.
Increase Operating Margins. We believe we have the opportunity to drive operating margin expansion by increasing manufacturing throughput,
filling our available capacity, process efficiencies and continued process improvements. We believe increased facility capacity utilization resulting
from the growth strategies described herein will permit us to generate more favorable operating margins. We expect to improve operating margins
through investment in our facilities, people, process and technology.
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.
Our Facilities
Our 12,000 square-foot Franklin Facility includes stainless steel bioreactors (100-liter to 1,000-liter) and single-use bioreactors (200-liter to 1,000-liter),
water-for-injection, an autoclave and depyrogenation oven, material storage (including a walk-in cold room) and cell bank cryofreezers. The Franklin Facility
is located at our headquarters in Tustin, California.
Our 42,000 square-foot Myford Facility is designed to utilize 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. Our Myford Facility includes single-use bioreactors (200-
liter to 2,000-liter), quality control labs for environmental and analytical testing, warehousing and material storage (including two walk-in cold rooms) and
cell bank cryofreezers. The Myford Facility is located adjacent to our Franklin Facility and has an additional 42,000 square-feet of space available for future
expansion.
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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. See “Risk Factors—Risks Related to Our Business—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, results of operations and financial condition” 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 16 years of inspection history with no significant impact to our business. To date, we have
been successfully audited and qualified by large and small and 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, such as 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 manufacture 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.
The costs associated with complying with the various applicable local, state, national and international regulations could be significant and the failure to
comply with such legal requirements could have an adverse effect on our results of operations and financial condition. See “Risk Factors—Risks Related to
Our Business—Failure to comply with existing and future regulatory requirements could adversely affect our business, results of operations and financial
condition” for additional discussion of the costs associated with complying with the various regulations.
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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 so long as the trademark is used, and in other
countries, so long as the trademark is registered. Trademark registration is for fixed terms and can be renewed indefinitely.
Segment Information
Our business had historically been organized into two reportable operating segments: (i) our contract manufacturing services segment and (ii) our former
research and development segment. However, as a result of the aforementioned strategic shift in our corporate direction to focus solely on our CDMO
business, which resulted in the discontinuation of our research and development segment (as described in Note 10 to the accompanying consolidated financial
statements), management has determined that we operate in one operating segment with one reporting segment. Accordingly, the operating results of our
former research and development segment and the related assets and liabilities have been presented as discontinued operations in the accompanying
consolidated financial statements for all periods presented. 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, 2019, 2018 and 2017.
Customers
Revenues have historically been derived from a small customer base. For the fiscal years ended April 30, 2019, 2018 and 2017, we derived approximately
64%, 86% and 98% of our revenues from the top three customers, respectively. While we have been able to expand and diversify our customer base since we
became a dedicated CDMO in January 2018, we continue to be dependent on a limited number of customers for a substantial majority of our revenue. In
addition, the duration of our fulfillment of customer contracts varies from a few months to more than 24 months due to the nature and size of each customer’s
requirements. The loss of, or a significant reduction of business from, any of our primary customers could have a material adverse effect on our business,
results of operations and financial condition. Refer to Note 2, “Summary of Significant Accounting Policies” to the accompanying consolidated financial
statements for additional financial information regarding our customer concentration, including the name of significant customers, and geographic location of
customers.
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Backlog
Our backlog represents, as of a point in time, future contract manufacturing revenue from work not yet completed under signed contracts. As of April 30,
2019, our backlog was approximately $46 million as compared to approximately $48 million as of April 30, 2018. While we anticipate the majority of our
backlog will be recognized during fiscal year 2020, our backlog is subject to a number of risks and uncertainties, including the risk that a customer timely
cancels its commitments prior to our initiation of manufacturing services, in which case we may be required to refund some or all of the amounts paid to us in
advance under those canceled commitments; the risk that a customer may experience delays in its program(s) or otherwise, which could result in the
postponement of anticipated manufacturing services; and the risk that we may not successfully execute on all customer projects, any of which could have a
negative impact on our liquidity, reported backlog and future revenue.
Competition
Our competition in the CDMO market includes a number of full-service contract manufacturers and large pharmaceutical companies offering third-party
manufacturing services to fill their excess capacity. Also, large pharmaceutical companies have been seeking to divest portions of their manufacturing
capacity, and any such divested businesses may compete with us in the future. Some of our competitors have substantially greater financial, marketing,
technical or other resources than we do. Moreover, additional competition may emerge and may, among other things, result in a decrease in the fees paid for
our services, which would affect our results of operations and financial condition.
Employees
As of April 30, 2019, we employed 211 full-time employees and 4 part-time employees. None of our employees are covered by a collective bargaining
agreement. We have not experienced employment-related work stoppages and consider our employee relations to be good.
Company Information
We were originally incorporated in the State of California in June 1981 and reincorporated in the State of Delaware on September 25, 1996. Our principal
executive offices are located at 2642 Michelle Drive, Suite 200, 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 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.
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ITEM 1A.
RISK FACTORS
You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this report, including our
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, results of operations, financial condition and cash flows, and in such case, our future prospects would likely
be materially and adversely affected.
Risks Related to Our Business
If we cannot secure additional business, we may have to raise additional capital or further restructure, or cease, our operations.
We have expended substantial funds on our contract manufacturing business and, historically, on our research and development business, which we
discontinued in fiscal year 2018. As a result, we have historically experienced losses and negative cash flows from operations since our inception and expect
negative cash flows from operations to continue until we can generate sufficient revenue to generate positive cash flow from operations.
Our ability to fund our operations is dependent on the amount of cash on hand and our ability to generate positive cash flow to sustain our current operations.
At April 30, 2019, we had $32.4 million in cash and cash equivalents. Although it is difficult to forecast all of our future liquidity requirements, we believe
that our cash and cash equivalents on hand combined with our projected cash receipts from services generated under our customer contracts will be sufficient
to fund our operations beyond one year after the date our financial statements are issued without securing any additional manufacturing services projects,
capital equipment financing, or raising additional capital in the equity markets. In addition, in the event a customer timely cancels its commitments prior to
our initiation of manufacturing services, we may be required to refund some or all of the advance payments made to us under those canceled commitments,
which would have a negative impact on our liquidity, reported backlog and future revenue.
In the event we are unable to secure sufficient business to support our current operations, we may need to raise additional capital in
the future. There can be no assurance that equity financing will be available on acceptable terms or at all. Our ability to raise additional capital in the equity
markets to fund our future operations is dependent on a number of factors, including, but not limited to, the market demand for our common stock. The
market demand or liquidity of our common stock is subject to a number of risks and uncertainties, including but not limited to, our financial results and
economic and market conditions. If we are unable to fund our continuing operations through these sources we may need to further restructure, or cease, our
operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us.
Our operating results will be adversely affected if we are unable to maximize our facility capacity utilization.
Our operating results are significantly influenced by our capacity utilization and, as such, if we are unable to utilize our facilities to capacity, our margins
could be adversely affected, and our results of operations and financial condition will continue to be adversely affected. We have experienced idle
manufacturing capacity due primarily to declines in commitments from certain of our existing customers, and we may continue to experience such idle
manufacturing capacity until we secure substantial additional revenues from existing and/or new customers.
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We have a history of losses, anticipate future losses and may never achieve profitability.
We have incurred net losses in most fiscal years since we began operations in 1981, including net losses of $4.2 million and $21.8 million for the fiscal years
ended April 30, 2019 and 2018, respectively. As of April 30, 2019, we had an accumulated deficit of $560.6 million. We expect negative cash flows from
operations to continue until we can generate sufficient additional revenue from operations to achieve profitability and positive cash flows. If we fail to
generate sufficient additional revenue, we may never achieve profitability.
Because a significant portion of our revenue comes from a limited number of customers, any decrease in sales to these customers could harm our
business, results of operations and financial condition.
Revenue has historically been derived from a small customer base. For the fiscal years ended April 30, 2019, 2018 and 2017, we derived approximately 64%,
86% and 98% of our revenue from the top three customers, respectively. While we have been able to expand and diversify our customer base since we
became a dedicated CDMO in January 2018, we continue to be dependent on a limited number of customers for a substantial majority of our revenue. The
loss of, or a significant reduction of business from, any of our major customers could have a material adverse effect on our business, results of operations and
financial condition.
Failure to comply with existing and future regulatory requirements could adversely affect our business, results of operations and financial condition.
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 such as 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 and geographic scope, we may be exposed to more
complex and new regulatory and administrative requirements and legal risks, any of which may require expertise in which we have little or no experience. It
is possible that compliance with new regulatory requirements could impose significant compliance costs on us. Such costs could have a material adverse
effect on our business, financial condition and results of operations.
These regulatory requirements impact many aspects of our operations, including manufacturing, developing, storage, distribution, import and export and
record keeping related to customers’ products. Noncompliance with any applicable regulatory requirements can result in government refusal to approve (i)
facilities for testing or manufacturing products or (ii) products for commercialization. The FDA and other regulatory agencies can delay, limit or deny
approval for many reasons, including:
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changes to the regulatory approval process, including new data requirements for product candidates in those jurisdictions, including the United
States, in which our customers may be seeking approval;
that a customer’s product candidate may not be deemed to be safe or effective;
the ability 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.
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In addition, if new legislation or regulations are enacted or existing legislation or regulations are amended or are interpreted or enforced differently, we may
be required to obtain additional approvals or operate according to different manufacturing or operating standards. This may require a change in our
development and manufacturing techniques or additional capital investments in our facilities. Any related costs may be significant. If we fail to comply with
applicable regulatory requirements in the future, then we may be subject to warning letters and/or civil or criminal penalties and fines, suspension or
withdrawal of regulatory approvals, product recalls, seizure of products, restrictions on the import and export of our products, debarment, exclusion,
disgorgement of profits, operating restrictions and criminal prosecution and the loss of contracts and resulting revenue losses. Inspections by regulatory
authorities that identify any deficiencies could result in remedial actions, production stoppages or facility closure, which would disrupt the manufacturing
process and supply of product to our customers. In addition, such failure to comply could expose us to contractual and product liability claims, including
claims by customers for reimbursement for lost or damaged active pharmaceutical ingredients or recall or other corrective actions, the cost of which could be
significant.
In addition, certain products we manufacture must undergo pre-clinical and clinical evaluations relating to product safety and efficacy before they are
approved as commercial therapeutic products. The regulatory authorities having jurisdiction in the countries in which we or 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 results of operations and financial condition.
Our customer’s failure to receive or maintain regulatory approval for their product candidates could negatively impact our revenue and profitability.
Our contract manufacturing business materially depends upon the regulatory approval of the products we manufacture. As such, if our customers experience a
delay in, or failure to receive, approval for any of their product candidates or fail to maintain regulatory approval of their products, 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 CDMO capacity and capabilities and achieve profitability.
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.
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We depend on spending and demand from our customers for our contract manufacturing and development services and any reduction in spending or
demand could have a material adverse effect on our business.
The amount that our customers spend on the development and manufacture of their products or product candidates, particularly the amount our customers
choose to spend on outsourcing these services to us, substantially impacts our revenue and profitability. The outcomes of our customers’ research,
development and marketing also significantly influence the amount that our customers choose to spend on our services and offerings. Our customers
determine the amounts that they will spend on our services based upon, among other things, the clinical and market success of their products, available
resources, access to capital and their need to develop new products, which, in turn, depend upon a number of other factors, including their competitors’
research, development and product initiatives and the anticipated market for any new products, as well as clinical and reimbursement scenarios for specific
products and therapeutic areas. Further, increasing consolidation in the pharmaceutical industry may impact such spending, particularly in the event that any
of our customers choose to develop or acquire integrated manufacturing operations. Any reduction in customer spending on biologics development and
related services as a result of these and other factors could have a material adverse effect on our business, results of operations and financial condition.
The consumers of the products we manufacture for our customers may significantly influence our business, results of operations and financial condition.
We depend on, and have no control over, consumer demand for the products we manufacture for our customers. Consumer demand for our customers’
products could be adversely affected by, among other things, delays in health regulatory approval, the inability of our customers to demonstrate the efficacy
and safety of their products, the loss of patent and other intellectual property rights protection, the emergence of competing or alternative products, including
generic drugs, the degree to which private and government payment subsidies for a particular product offset the cost to consumers and changes in the
marketing strategies for such products. 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 continue to decline, results of operations and financial condition may continue
to be adversely affected.
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
During fiscal year 2018 we completed our transition to a dedicated CDMO and, in connection with the transition we divested our research and development
assets and reduced our overall workforce to reduce costs and better position us to achieve potential profitability. We intend to continue to grow our business
operations as demand for our services increases and increase the number of our employees to accommodate such potential growth, which may cause us to
experience periods of rapid growth and expansion. This potential future growth could create a strain on our organizational, administrative and operational
infrastructure, including manufacturing operations, quality control, technical support and other administrative functions. Our ability to manage our growth
properly will require us to continue to improve our operational, financial and management controls.
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As we expect our commercial operations and sales volume to grow, we will need to continue to increase our capacity for manufacturing, customer service,
billing and general process improvements and expand our internal quality assurance program, among other things. We may also need to purchase additional
equipment, some of which can take several months or more to procure, install and validate, and increase our manufacturing, maintenance, software and
computing capacity to meet increased demand. We may not be able to successfully implement the increase in scale, expansion of personnel, purchase and
validation of equipment or process enhancements, which could adversely affect our ability to increase revenues.
If we are unable to protect the confidentiality of our customers’ proprietary information, we may be subject to claims.
Many of the formulations used and processes developed by us in the manufacture of our customers’ products are subject to trade secret protection, patents or
other intellectual property protections owned or licensed by such customer. While we make significant efforts to protect our customers’ proprietary and
confidential information, including requiring our employees to enter into agreements protecting such information, if any of our employees breaches the non-
disclosure provisions in such agreements, or if our customers make claims that their proprietary information has been disclosed, our reputation may suffer
damage and we may become subject to legal proceedings that could require us to incur significant expense and divert our management’s time, attention and
resources.
Our services and our customers’ products may infringe on or misappropriate the intellectual property rights of third parties.
Any claims that our services infringe the rights of third parties, including claims arising from any of our customer engagements, regardless of their merit or
resolution, could be costly and may divert the efforts and attention of our management and technical personnel. We may not prevail in such proceedings given
the complex technical issues and inherent uncertainties in intellectual property litigation. If such proceedings result in an adverse outcome, we could be
required, among other things, to pay substantial damages, discontinue the use of the infringing technology, expend significant resources to develop non-
infringing technology, license such technology from the third party claiming infringement (which license may not be available on commercially reasonable
terms or at all) and/or cease the manufacture, use or sale of the infringing processes or offerings, any of which could have a material adverse effect on our
business.
In addition, our customers’ products may be subject to claims of intellectual property infringement and such claims could materially affect our business if
their products cease to be manufactured and they have to discontinue the use of the infringing technology which we may provide. Any of the foregoing could
affect our ability to compete or could have a material adverse effect on our business, financial condition and results of operations.
If we do not enhance our existing or introduce new service offerings in a timely manner, our offerings may become obsolete or uncompetitive 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 uncompetitive 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.
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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 results of operations
and financial condition.
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, results of operations and financial condition.
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 results of operations and financial condition.
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 operating results and financial
condition.
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.
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, and our recently discontinued research and development activities involved, the controlled use of hazardous
materials and chemicals. We are subject to federal, state and local laws and regulations in the U.S. 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.
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Potential product liability claims, errors and omissions claims in connection with services we perform and potential liability under indemnification
agreements between us and our officers and directors could adversely affect us.
We manufacture products intended for use in humans. These activities could expose us to risk of liability for personal injury or death to persons using such
products. We seek to reduce our potential liability through measures such as contractual indemnification provisions with customers (the scope of which may
vary by customer, and the performances of which are not secured) and insurance maintained by us and our customers. We could be materially adversely
affected if we are required to pay damages or incur defense costs in connection with a claim that is outside the scope of the indemnification agreements, if the
indemnity, although applicable, is not performed in accordance with its terms or if our liabilities exceed the amount of applicable insurance or indemnity. In
addition, we could be held liable for errors and omissions in connection with the services we perform. We currently maintain product liability and errors and
omissions insurance with respect to these risks. There can be no assurance, however, that our insurance coverage will be adequate or that insurance coverage
will 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.
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. There can be no assurance that we will be able to retain key personnel, or to 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 (“NOL”) carry forwards which, if we were to become profitable, could be used to offset/defer federal and
state income taxes. Our ability to use such carry forwards to offset future taxable income may be subject to certain limitations related to changes in
ownership of our stock.
As of April 30, 2019, we had federal and state NOL carry forwards of approximately $426 million and $274 million, respectively, expiring from 2020 to
2038. These NOL carry forwards could potentially be used to offset certain future federal and state income tax liabilities. However, utilization of NOL carry
forwards may be subject to a substantial annual limitation pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state
provisions due to ownership changes that have occurred previously or that could occur in the future. In general, an ownership change, as defined by Section
382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage
points over a three-year period. A Section 382 analysis was completed as of the fiscal year ended April 30, 2018 and we subsequently reviewed such activity
through April 30, 2019, which we determined that no such change in ownership has occurred. However, ownership changes occurring subsequent to April 30,
2019 may impact the utilization of our NOL carry forwards and other tax attributes. 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.
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U.S. federal income tax reform could adversely affect us.
In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was signed into law, significantly reforming the Internal Revenue Code of 1986, as amended
(the “Code”). The Tax Act, among other things, includes changes to U.S. federal tax rates, imposes significant additional limitations on the deductibility of
interest, allows for the expensing of capital expenditures, effectuates the migration from a “worldwide” system of taxation to a territorial system and modifies
or repeals many business deductions and credits. While we have completed the accounting for the income tax effects of the Tax Act on our financial
statements as of April 30, 2019, we continue to examine the impact the Tax Act may have on our business. As the overall impact of the Tax Act is evolving,
we continue to evaluate the effect of the Tax Act on our business, including our projection of minimal cash taxes and our net operating losses, the impact of
such tax reform could have a negative impact on our financial results and the market price of our common stock.
Business disruptions could seriously harm our future revenues and financial condition and increase our costs and expenses.
Our operations could be subject to earthquakes, power shortages and surges, telecommunications failures, water shortages, floods, fires, extreme weather
conditions, medical epidemics and other natural or manmade disasters or business interruptions, for which we have limited insurance or are predominantly
self-insured. The occurrence of any of these business disruptions could seriously harm our manufacturing operations and financial condition and increase our
costs and expenses. Our ability to obtain raw materials, components and supplies for the manufacture, as well as the services of outside testing laboratories, of
our third party customers’ products, for which we act as a contract manufacturer, could be disrupted, if the operations of these suppliers and/or labs is affected
by a man-made or natural disaster or other business interruption. Our corporate headquarters and manufacturing facilities are located in California near major
earthquake faults. The ultimate impact on us, our significant suppliers and our general infrastructure of being located near major earthquake faults and being
consolidated in certain geographical areas is unknown, but our operations and financial condition could suffer in the event of a major earthquake or other
natural disaster.
We may face additional liabilities associated with our prior research and development activities.
In 2018, we sold the majority of our research and development assets, including our development-stage immunotherapy product, bavituximab (as described in
Note 10 to the accompanying consolidated financial statements). As a result, we are no longer pursuing our prior research and development activities,
including the clinical development associated therewith. We may still face unknown liabilities associated with these prior activities. For example, in the
course of our prior development of our product candidate, bavituximab, we contracted with third parties to conduct a series of clinical trials and although we
maintain product liability insurance for clinical studies in the amount of $10 million per occurrence or $10 million in the aggregate on a claims-made basis, as
well as country-specific coverage where required for clinical sites located in foreign countries, our coverage may not be adequate in the event we face a
product liability claim due to an adverse effect resulting from any of such trials. Any liabilities arising from our prior research and development activities that
are not covered by our insurance coverage could negatively impact our financial position and results of operations.
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,
cash flows and results of operations.
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, cash flows and results of operations
and could cause the market value of our common shares to decline, and we may suffer financial damage or other loss, including fines or criminal penalties
because of lost or misappropriated information.
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Our governance documents and state law provide certain anti-takeover measures which will discourage a third party from seeking to acquire us unless
approved by the Board of Directors.
We have a rights plan that is designed to protect stockholders against unsolicited attempts to acquire control of us that do not offer a fair price to our
stockholders as determined by our board of directors. Under the plan, the acquisition of 15% or more of our outstanding common stock by any person or
group, unless approved by our board of directors, will trigger the right of our stockholders (other than the acquirer of 15% or more of our common stock) to
acquire additional shares of our common stock, and, in certain cases, the stock of the potential acquirer, at a 50% discount to market price, thus significantly
increasing the acquisition cost to a potential acquirer. In addition, our certificate of incorporation and by-laws contain certain additional anti-takeover
protective devices. For example,
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no stockholder action may be taken without a meeting, without prior notice and without a vote; solicitations by consent are thus prohibited;
special meetings of stockholders may be called only by our board of directors; and
our board of directors has the authority, without further action by the stockholders, to fix the rights and preferences, and issue shares, of preferred
stock. An issuance of preferred stock with dividend and liquidation rights senior to the common stock and convertible into a large number of shares
of common stock could prevent a potential acquirer from gaining effective economic or voting control.
Further, we are subject to Section 203 of the Delaware General Corporation Law, which, subject to certain exceptions, restricts certain transactions and
business combinations between a corporation and a stockholder owning 15% or more of the corporation’s outstanding voting stock for a period of three years
from the date the stockholder becomes a 15% stockholder.
Although we believe these provisions and our rights plan collectively provide for an opportunity to receive higher bids by requiring potential acquirers to
negotiate with our board of directors, they would apply even if the offer may be considered beneficial by some stockholders. In addition, these provisions may
frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace
members of our board of directors, which is responsible for appointing the members of our management.
Our bylaws, as amended, provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us
and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or
employees.
Our bylaws, as amended, provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware is the exclusive
forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of a fiduciary duty owed by any of our directors, officers,
or other employees to us, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or
our bylaws, any action to interpret, apply, enforce, or determine the validity of our certificate of incorporation or bylaws, or any action asserting a claim
against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum
that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors,
officers and other employees.
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Risks Related to the Ownership of Our Common Stock
A significant number of shares of our common stock are issuable pursuant to outstanding options, restricted stock units and convertible securities, and
we may issue additional shares of common stock in the future. Sales or conversions of these shares will dilute the interests of other security holders and
may depress the price of our common stock.
As of April 30, 2019, an aggregate of 7,264,713 shares of common stock were reserved for issuance under outstanding stock options and restricted stock
units, or available for future issuance under our stock incentive plans. Additionally, as of April 30, 2019, there were 1,196,261 shares of common stock
reserved for and available for issuance under our Employee Stock Purchase Plan (the “ESPP”) and up to 6,826,435 shares of common stock issuable upon
conversion of our outstanding 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”). The issuance of additional shares of common
stock upon the exercise, release or conversion, as applicable, of any of the foregoing securities, or the perception that such issuances may occur, would have a
dilutive impact on other stockholders and could have a material negative effect on the market price of our common stock.
Our highly volatile stock price may adversely affect the liquidity of our common stock.
The market price of our common stock has generally been highly volatile and is likely to continue to be highly volatile. For instance, the market price of our
common stock has ranged from $1.97 to $8.44 per share over the last three fiscal years ended April 30, 2019 (as adjusted to reflect the 1-for-7 reverse stock
split of our issued and outstanding common stock that took effect on July 10, 2017).
In addition, the market price of our common stock may be significantly impacted by many factors, including, but not limited to:
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our 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;
our 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;
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.
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These and other external factors have caused and may continue to cause the market price and demand for our common stock to fluctuate substantially, which
may limit or prevent investors from readily selling their shares of common stock, and may otherwise negatively affect the liquidity of our common stock.
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 their 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.
We may not be able to pay dividends on the Series E Preferred Stock.
Additional Risks Related to the Ownership of our Series E Preferred Stock
We are incorporated in Delaware and governed by the Delaware General Corporation Law. Delaware law allows a corporation to pay dividends only out of
surplus, as determined under Delaware law, or if there is no surplus, out of net profits for the fiscal year in which the dividend was declared and for the
preceding fiscal year. Under Delaware law, however, we cannot pay dividends out of net profits if, after we pay the dividend, our capital would be less than
the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets. In addition, payment of our dividends
depends upon our financial condition and other factors as our board of directors may deem relevant from time to time. Our business may not generate
sufficient cash flow from operations or future borrowings may not be available to us in an amount sufficient to enable us to make distributions on our Series E
Preferred Stock.
The market price of the Series E Preferred Stock could be substantially affected by various factors.
The market price of the Series E Preferred Stock will depend on many factors, which may change from time to time, including:
·
·
·
·
·
·
·
·
·
prevailing interest rates, increases in which may have an adverse effect on the market price of the Series E Preferred Stock;
trading prices of common and preferred equity securities issued by other biopharmaceutical companies;
the annual yield from distributions on the Series E Preferred Stock as compared to yields on other financial instruments;
announcements of technological innovations or new commercial products by us or our competitors;
publicity regarding actual or potential company-sponsored clinical trial and investigator-sponsored clinical trial results relating to products under
development by us or our competitors;
announcements of licensing agreements, joint ventures, strategic alliances, and any other transaction that involves the development, sale or use of
our technologies;
regulatory developments and product safety concerns;
general economic and financial market conditions;
government action or regulation;
20
·
·
·
·
significant changes in the financial condition, performance and prospects of us and our competitors;
changes in financial estimates or recommendations by securities analysts with respect to us, our competitors in our industry;
our issuance of additional preferred equity or debt securities; and
actual or anticipated variations in quarterly operating results of us and our competitors.
As a result of these and other factors, holders of our Series E Preferred Stock may experience a decrease, which could be substantial and rapid, in the market
price of the Series E Preferred Stock, including decreases unrelated to our operating performance or prospects.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
PROPERTIES
Our corporate offices and manufacturing facilities are all located in close proximity in Tustin, California. We currently lease an aggregate of approximately
183,000 square feet of office, warehouse and manufacturing space in five buildings under four separate lease agreements.
We lease approximately 26,000 square feet for our corporate headquarters under a non-cancellable operating lease agreement that began April 2016 and
terminates August 2023. The lease contains two separate option periods that could extend the lease term to August 2035.
We lease approximately 48,000 square feet of office, manufacturing and laboratory space under a non-cancellable operating lease agreement that began
December 1998 and terminates December 2027. The lease contains two separate option periods that could extend the lease term to December 2037.
We lease approximately 84,000 square feet of manufacturing and laboratory space under a non-cancellable operating lease agreement that began July 2014
and terminates January 2027. The lease contains two separate option periods that could extend the lease term to January 2037.
We lease approximately 25,000 square feet of office and warehouse space under a non-cancellable operating lease agreement that began April 2016 and
terminates August 2023. The lease contains two separate option periods that could extend the lease term to August 2035.
We believe that the space we lease is adequate to meet our current needs and that, if necessary, additional space would be available to accommodate any
future growth.
ITEM 3.
LEGAL PROCEEDINGS
In the ordinary course of business, we are at times subject to various legal proceedings and disputes. We make provisions for liabilities when it is both
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions, if any, are reviewed at least quarterly and
adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events
pertaining to a particular case. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or
in the aggregate, would have a material adverse effect on our consolidated results of operations or financial position.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
21
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
PART II
Market Information
Our common stock is listed on The NASDAQ Capital Market under the trading symbol “CDMO.”
Holders of Common Stock
As of June 14, 2019, we had 327 stockholders of record of our common stock. This number does not include beneficial owners whose shares are held in street
name.
Securities Authorized for Issuance under Equity Compensation
The information included under Item 12 of Part III of this Annual Report is hereby incorporated by reference into this Item 5 of Part II of this Annual Report.
Recent Sales of Unregistered Securities
None.
22
Performance Graph
Notwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the following information relating to the price
performance of our common stock shall not be deemed to be “filed” with the SEC or to be “soliciting material” under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), and it shall not be deemed to be incorporated by reference into any of our filings under the Securities Act of 1933, as
amended, or the Exchange Act, except to the extent we specifically incorporate it by reference into such filing.
The following chart shows the performance from April 30, 2014 through April 30, 2019 of Avid Bioservices, Inc. common stock, compared with an
investment in the stocks represented in the NASDAQ ICB: 4577 Pharmaceuticals Index and the NASDAQ U.S. Benchmark TR Index assuming the
investment of $100 at the beginning of the period and the reinvestment of dividends, if any. The total return data for the comparative indexes were prepared
by NASDAQ OMX Global Indexes.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
VALUE OF INVESTMENT OF $100 ON APRIL 30, 2014
The underlying data for the foregoing graph is as follows:
Avid Bioservices, Inc.
NASDAQ ICB: 4577 Pharmaceuticals (subsector)
NASDAQ U.S. Benchmark TR Index
April 30,
2014
100.00 $
100.00 $
100.00 $
$
$
$
April 30,
2015
April 30,
2016
April 30,
2017
April 30,
2018
April 30,
2019
75.29 $
117.61 $
112.61 $
20.35 $
116.02 $
112.50 $
35.38 $
125.41 $
133.63 $
30.13 $
135.34 $
151.28 $
39.33
154.48
170.47
23
ITEM 6.
SELECTED FINANCIAL DATA
The selected consolidated financial data set forth below as of April 30, 2019 and 2018, and for the fiscal years ended April 30, 2019, 2018 and 2017, are
derived from our audited consolidated financial statements included elsewhere in this Annual Report. This information should be read in conjunction with
those consolidated financial statements, the notes thereto, and with “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” The selected consolidated financial data set forth below as of April 30, 2017, 2016 and 2015, and for the fiscal years ended April 30, 2016 and
2015, are derived from our audited consolidated financial statements that are contained in Annual Reports previously filed with the SEC, not included herein.
Fiscal Year Ended April 30,
Statement of Operations Data:
2019 (a)
2018
2017
(in thousands, expect for share and per share amounts)
2016
2015
Revenues
(Loss) income from continuing operations
Income (loss) from discontinued operations, net of
tax(b) (c)
Net loss
Net loss attributable to common stockholders (d)
Basic and diluted net (loss) income per common share
attributable to common stockholders:
Continuing operations
Discontinued operations
Net loss per share attributable to common stockholders
Balance Sheet Data:
Cash and cash equivalents
Working capital
Total assets
Capital lease, less current portion
Accumulated deficit
Stockholders' equity
____________
$
$
$
$
$
$
$
$
$
$
$
$
$
$
53,603
(5,056)
841
(4,215)
(8,901)
(0.17)
0.01
(0.16)
2019(a)
32,351
28,156
78,395
93
(560,605)
53,068
$
$
$
$
$
$
$
$
$
$
$
$
$
$
53,621
(20,563)
(1,250)
(21,813)
(26,499)
(0.53)
(0.03)
(0.56)
$
$
$
$
$
$
$
$
57,630 $
1,393 $
44,357 $
3,597 $
26,744
(6,799)
(29,552) $
(28,159) $
(32,799) $
(59,249) $
(55,652) $
(60,136) $
(43,559)
(50,358)
(54,054)
(0.09) $
(0.79) $
(0.88) $
(0.03) $
(1.92) $
(1.95) $
(0.40)
(1.67)
(2.07)
2018
42,265
29,964
95,760
–
(559,129)
55,738
As of April 30,
2017
(in thousands)
$
$
$
$
$
$
46,799 $
26,943 $
118,112 $
– $
(537,435) $
53,582 $
2016
2015
61,412 $
24,234 $
109,043 $
– $
(509,276) $
50,074 $
68,001
43,192
97,464
–
(453,624)
59,035
(a) On May 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective method to all contracts not
completed as of May 1, 2018 (as described in Note 2 to the accompanying consolidated financial statements). Under the modified retrospective
method, results for the reporting periods beginning on or after May 1, 2018 are presented in accordance with ASC 606, while prior period amounts
are not adjusted and continue to be reported under the accounting standards that were in effect prior to May 1, 2018.
(b) For all periods presented, the operating results of our former research and development segment are reported as income (loss) from discontinued
(c)
operations, net of tax (as described in Note 1 to the accompanying consolidated financial statements).
Income (loss) from discontinued operations, net of tax for fiscal years 2019 and 2018 include a gain on sale of research and development assets
before tax of $1,000 and $8,000, respectively (as described in Note 10 to the accompanying consolidated financial statements).
(d) Net loss attributable to common stockholders represents our net loss plus Series E preferred stock accumulated dividends.
24
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is included to describe our financial position and results of operations for each of the three fiscal years in the period ended April 30,
2019. The audited consolidated financial statements and notes thereto contain detailed information that should be referred to in conjunction with this
discussion.
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”) commercial manufacturing focused on biopharmaceutical products derived from
mammalian cell culture. With over 25 years of experience producing monoclonal antibodies and recombinant proteins in batch, fed-batch and perfusion
modes, our services include CGMP clinical and commercial product manufacturing, purification, bulk packaging, stability testing and regulatory submissions
and support. We also provide a variety of process development services, including cell line development and optimization, cell culture and feed optimization,
analytical methods development and product characterization.
Strategic Objectives
The following are our near-term strategic objectives:
·
·
·
Expand existing customer relationships and diversify our customer base by securing additional customers to support our future potential revenue
growth beyond fiscal year 2019;
Continue to invest in manufacturing facilities and infrastructure to maximize our facility utilization and support our customers’ development and
clinical and commercial manufacturing requirements; and
Broaden our sales force by hiring sales representatives to execute our business development initiatives in key markets.
We are currently in the process of expanding and optimizing our process development capabilities and laboratory space, which includes expanding our total
available process development laboratory space, upgrading the infrastructure and equipment within our existing process development laboratories, and
implementing new state-of-the-art technologies and equipment designed to facilitate efficient, high-throughput development of innovative upstream and
downstream manufacturing processes. We are strategically conducting this work in phases to avoid disruption to current customer programs.
Performance and Financial Measures
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and
operating performance of our business are contract manufacturing revenue, gross profit, selling, general and administrative expenses and operating income.
We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items
in those financial statements from period to period and the primary factors that accounted for those changes.
Revenues
Revenues are derived from contract manufacturing services provided under our customer contracts and are disaggregated into manufacturing and process
development revenue streams. The manufacturing revenue stream represents revenue from the manufacturing of customer product(s) derived from
mammalian cell culture covering clinical through commercial manufacturing runs. The process development revenue stream represents revenue from non-
manufacturing related services associated with the custom development of a manufacturing process and analytical methods for a customer’s product.
25
Gross Profit
Gross profit is equal to revenues less cost of revenues. Cost of revenues reflects the direct cost of labor, overhead and material costs. Direct labor costs
include personnel costs within the manufacturing, process development, quality assurance, quality control, validation, supply chain and facilities functions.
Overhead costs include the rent, common area maintenance, utilities, property taxes, security, materials and supplies, software, small equipment and
deprecation costs of all manufacturing and laboratory locations.
We regularly analyze the components of gross profit as well as gross profit as a percentage of revenues. Specifically we look at the gross profit margins of our
manufacturing revenue and process development revenue, and the effects of idle capacity, if any, on these revenue streams.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses are composed of corporate-level expenses including personnel and support costs of corporate
functions such as executive management, accounting, business development, legal, human resources, information technology, and other centralized services.
SG&A expenses include corporate legal fees, audit and accounting fees, investor relation expenses, non-employee director fees, facility related expenses, and
other expenses relating to our general management, administration, and business development activities. SG&A expenses are generally not directly
proportional to revenues, but we expect such expenses to increase over time to support the needs of our growing company.
Results of Operations (in thousands)
The following table compares the operating results from our continuing operations for the fiscal years ended April 30, 2019, 2018 and 2017, which are further
discussed below.
Revenues
Cost of revenues
Gross profit (loss)
Operating expenses:
Selling, general and administrative
Restructuring charges
Total operating expenses
Operating income (loss)
Interest and other income, net
Income (loss) from continuing operations before income taxes
Income tax benefit
Income (loss) from continuing operations
_____________
Fiscal Year Ended April 30,
2019 (1)
2018
2017
$
$
$
$
53,603
46,379
7,224
12,846
–
12,846
(5,622)
282
(5,340)
284
(5,056)
$
$
53,621 $
56,545
(2,924)
16,456
1,258
17,714
(20,638)
75
(20,563) $
–
(20,563) $
57,630
38,259
19,371
18,079
–
18,079
1,292
101
1,393
–
1,393
(1) On May 1, 2018, we adopted ASU 2014-09, Revenue from Contracts (Topic 606): Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method
applied to all contracts not completed as of May 1, 2018. Under the modified retrospective method, results for reporting periods beginning after May 1, 2018 are presented under ASC
606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under the accounting standards in effect for the prior period.
Refer to Note 2, Summary of Significant Accounting Policies—Accounting Standards Adopted in Fiscal Year 2019, in the accompanying Notes to Consolidated Financial Statements for
details regarding the adoption of ASC 606.
26
Fiscal Year 2019 Compared to Fiscal Year 2018
Revenues
Revenues were $53,603 in fiscal 2019 and were flat compared to $53,621 in fiscal 2018. In late fiscal 2018 we secured several new customers who
contributed significantly to revenue in fiscal 2019. Our incremental revenues recognized from a more diversified customer base were offset by a reduction in
manufacturing demand from our, historically, two largest customers. The net change in revenue was attributed to the following components, represented as a
percentage of revenue:
Attributable to
Net increase in revenue from the adoption of ASC 606
Net decrease in revenue from our, historically, two largest customers due to a reduction in manufacturing demand during fiscal 2019,
% of Revenue
24.7%
excluding the impact of the adoption of ASC 606
Net change in revenues from all other customers, excluding the impact of the adoption of ASC 606
Total
(39.9%)
15.2%
0.0%
Gross Profit (Loss)
Gross profit was $7,224 in fiscal 2019 compared to a gross loss of $2,924 in fiscal 2018, an increase of $10,148 primarily due to the variability of
manufacturing costs from product to product. Gross margins were a positive 13.5% and a negative 5.5%, respectively. Excluding the $3,500 favorable impact
from the adoption of ASC 606, the increase in gross profit was attributable to decreased manufacturing labor and overhead costs and the variability of
manufacturing costs from product to product.
Selling, General and Administrative Expenses
SG&A expenses were $12,846 in fiscal 2019 compared to $16,456 in fiscal 2018, a decrease of $3,610 or 22%. As a percentage of revenue, SG&A expenses
for the fiscal years 2019 and 2018 were 24.0% and 30.7%, respectively. The net decrease in SG&A expenses were attributed to the following components:
Attributable to
Costs associated with the transition of our business to a dedicated CDMO:
Increase from settlement of a derivative and class action complaint resolved during the first quarter of fiscal 2018
Decrease in payroll and related costs
Decrease in legal and other professional consulting fees
Write-off of a long-term equipment deposit
Decrease in administrative facility costs
Net change in all other non-recurring SG&A expenses
Subtotal of net change in SG&A expenses associated with business transition
SG&A expenses:
Increase in bonus related to achievement level of corporate goals
Increase in stock-based compensation
Net change in all other SG&A expenses
Subtotal of net change in SG&A expenses
Total
$
$
$
$
$
1,500
(2,298)
(1,298)
(1,023)
(927)
(397)
(4,443)
657
301
(125)
833
(3,610)
27
Restructuring Charges in Fiscal 2018
During fiscal year 2018, we incurred restructuring charges of $1,588 directly related to a restructuring plan we implemented in August 2017, pursuant to
which we reduced our overall workforce by 57 employees in order to reduce operating costs and improve cost efficiencies while we pursued the license or
sale of our research and development assets and focus our efforts on growing our CDMO business (as described in Note 9 to the accompanying consolidated
financial statements). The costs incurred under this restructuring plan, which was completed in October 2017, consisted of one-time termination benefits,
including severance, and other employee-related costs. Of the total restructuring charges incurred, $1,258 was related to our contract manufacturing services
segment and $330 was related to our discontinued research and development segment. The restructuring costs associated with our discontinued research and
development segment are included in loss from discontinued operations in the accompanying consolidated financial statements for the fiscal year ended April
30, 2018. We did not incur any restructuring charges during the fiscal years ended April 30, 2019 or 2017.
Operating Loss
Operating loss was $5,622, or a negative 10.5% of revenue, for fiscal 2019 compared to an operating loss of $20,638, or a negative 38.5% of revenue, in the
prior fiscal year. Of the $15,016 improvement in year-over-year operating loss, $10,148 was attributable to a gross profit improvement, $3,610 to an SG&A
decrease and no restructuring charges in fiscal 2019 compared to fiscal 2018 that resulted in a decrease of $1,258, as noted above.
Income Tax Benefit
In September 2018, we recognized a $1,000 gain in discontinued operations, before taxes, for the sale of our r84 technology (as described in Note 10 to the
accompanying consolidated financial statements). In accordance with the “Intraperiod Tax Allocation” rules under ASC 740: Income Taxes, which requires
the allocation of an entity’s total annual income tax provision among continuing operations and, in our case, discontinued operations for fiscal 2019, we
recorded a tax benefit in continuing operations with an offsetting tax expense of $284 recorded in discontinued operations.
Fiscal Year 2018 Compared to Fiscal Year 2017
Revenues
Revenues were $53,621 in fiscal 2018 compared to $57,630 in fiscal 2017, a decrease of $4,009 or 7.0%. The decrease in revenues during fiscal 2018 was
primarily due to fewer manufacturing runs completed and shipped compared to the prior year, which can primarily be attributed to a decrease in
manufacturing demand from our, historically, two largest customers.
Gross Profit (Loss)
During fiscal 2018, gross margins declined to a negative 5.5% on a loss of $2,924 compared to gross margins of 33.6% for fiscal 2017 on a profit of $19,371.
The decrease in gross margins was primarily driven by idle capacity costs incurred in fiscal 2018 compared to fiscal 2017, during which we incurred no idle
capacity costs. The fiscal 2018 decline was further impacted by higher manufacturing costs associated with lower facility utilization in addition to the
variability of manufacturing costs form product to product.
Selling, General and Administrative Expenses
The decrease in SG&A expenses of $1,623, or 9.0%, during fiscal 2018 compared to fiscal 2017 was primarily due to current period decreases in payroll and
related costs and non-employee director fees. The decrease in payroll and related costs can primarily be attributed to a decrease in headcount and other
personnel costs related to our efforts to align our cost structure to match the needs of our current CDMO operations combined with a decrease in stock-based
compensation expense. The decrease in non-employee director fees is attributed to the settlement terms of a derivative and class action complaint approved by
the Court of Chancery of the State of Delaware on July 27, 2017, pursuant to which our former non-employee directors agreed to pay or cause to be paid
$1,500 to us, which non-recurring amount was applied against non-employee director fees during the fiscal quarter of fiscal 2018. These fiscal 2018 decreases
in SG&A expenses were partially offset by non-recurring costs related to the write-off of a long-term equipment deposit, severance and other certain non-
recurring costs associated with the transition of our business to a dedicated CDMO.
28
Operating Loss
Operating loss was $20,638, or a negative 38.5% of revenue, for fiscal 2018 compared to an operating income of $1,292, or a 2.2% of revenue, in fiscal 2017.
The $21,930 decrease was attributable to a decline in gross profit of $22,295 and an SG&A decrease of $1,623, partially offset by restructuring charges of
$1,258 in fiscal 2018, as noted above.
Discontinued Operations
As a result of the sale of our r84 and PS-targeting technologies in September 2018 and February 2018, respectively (as described in Note 10 to the
accompanying consolidated financial statements), the abandonment of our remaining research and development assets, and the strategic shift in our corporate
direction to focus solely on our CDMO business, the operating results of our former research and development segment have been excluded from continuing
operations and reported as income (loss) from discontinued operations, net of tax, in the accompanying consolidated financial statements for all periods
presented. The gains of $1,000 and $8,000, respectively, which were recorded in connection with the aforementioned sales of our r84 and PS-targeting
technologies, which are included in income (loss) from discontinued operations, net of tax, in the accompanying Consolidated Statements of Operations and
Comprehensive Loss for the fiscal years ended April 30, 2019 and 2018, respectively.
Critical Accounting Policies
Our discussion and analysis of our consolidated financial position and results of operations are based on our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of our consolidated financial
statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We
review our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for our judgments about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may vary from what we anticipate, and different assumptions or estimates about the future could change our
reported results. While our significant accounting policies are more fully described in Note 2 to the accompanying consolidated financial statements, we
believe the following accounting policies to be critical to the assumptions and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
On May 1, 2018, we adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (codified as “ASC 606”),
using the modified retrospective method applied to all contracts not completed as of May 1, 2018. Under the modified retrospective method, results for
reporting periods beginning after May 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in
accordance with our historic accounting under the accounting standards in effect for those periods.
The cumulative effect of adopting ASC 606 resulted in a one-time adjustment of $2,739 to the opening balance of accumulated deficit which is reflected in
the accompanying Consolidated Statements of Stockholders’ Equity for the fiscal year ended April 30, 2019. The cumulative effect adjustment relates to the
recognition of revenue and related costs for customer contracts that transfer goods or services over time. Under ASC 606, the timing of the recognition of
revenue and the related cost of revenue associated with goods or services provided to customers with no alternative use are recognized over time utilizing an
input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation.
Under these customer contracts the customer retains control of the product as it is being created or enhanced by our services and/or we are entitled to
compensation for progress to date that includes an element of profit margin.
Our revenues derived from contract manufacturing services provided under our customer contracts are disaggregated into the following revenue streams.
29
Manufacturing revenue
The manufacturing revenue stream generally represents revenue from the manufacturing of customer product(s) derived from mammalian cell culture
covering clinical through commercial manufacturing runs. Under a manufacturing contract, a quantity of manufacturing runs are ordered and the product is
manufactured according to the customer’s specifications and typically only one performance obligation is included. Each manufacturing run represents a
distinct service that is sold separately and has stand-alone value to the customer. The product(s) are manufactured exclusively for a specific customer and
have no alternative use. The customer retains control of their product during the entire manufacturing process and can make changes to the process or
specifications at their request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin.
Revenue associated with this stream is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the
most current estimates for the entire cost of the performance obligation.
Process development revenue
The process development revenue stream generally represents revenue from non-manufacturing related services associated with the custom development of a
manufacturing process and analytical methods for a customer’s product. Under a process development contract, the customer owns the product details and
process, which has no alternative use. These process development projects are customized to each customer to meet their specifications and typically only one
performance obligation is included. Each process represents a distinct service that is sold separately and has stand-alone value to the customer. The customer
also retains control of their product as the product is being created or enhanced by our services and can make changes to their process or specifications upon
request. Revenue associated with this stream is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date
to the most current estimates for the entire cost of the performance obligation.
The timing of revenue recognition, billings and cash collections results in billed trade receivables, contract assets (unbilled receivables), and contract
liabilities (customer deposits and deferred revenue). Contract assets are recorded when our right to consideration is conditioned on something other than the
passage of time. Contract assets are reclassified to trade receivables on the balance sheet when our rights become unconditional. Contract liabilities represent
customer deposits and deferred revenue billed and/or received in advance of our fulfillment of performance obligations. Contract liabilities will convert to
contract manufacturing revenue as we perform our obligations under the contract.
We apply the practical expedient available under ASC 606 that permits us not to disclose the value of unsatisfied performance obligations for contracts with
an original expected length of one year or less. In addition, we currently do not have any unsatisfied performance obligations for contracts greater than one
year.
Costs incurred to obtain a contract are not material. These costs are generally employee sales commissions, which are expensed when incurred and included
in selling, general and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive loss.
Prior to the adoption of ASC 606, revenue was generally recognized when all of the following criteria are met: (i) persuasive evidence of an arrangement
exists, (ii) delivery has occurred or services have been rendered, (iii) the seller’s price to the buyer is fixed or determinable, and (iv) collectability is
reasonably assured.
Stock-based Compensation
We account for stock options, restricted stock units and other stock-based awards granted under our equity compensation plans in accordance with the
authoritative guidance for stock-based compensation. The estimated fair value of stock options granted to employees in exchange for services is measured at
the grant date, using a fair value based method, such as a Black-Scholes option valuation model, and is recognized as expense on a straight-line basis over the
requisite service periods. The fair value of restricted stock units is measured at the grant date based on the closing market price of our common stock on the
date of grant, and is recognized as expense on a straight-line basis over the period of vesting. Forfeitures are recognized as a reduction of stock-based
compensation expense as they occur. As of April 30, 2019, there were no outstanding stock-based awards with market or performance conditions.
30
The estimated fair value of stock options are measured at the grant date, using a fair value based method, such as a Black-Scholes option valuation model, and
is amortized as compensation expense on a straight-line basis over the requisite service period of the award, which is generally the vesting period. The use of
a valuation model requires us to make certain estimates and assumptions with respect to selected model inputs. The expected volatility is based on the daily
historical volatility of our common stock covering the estimated expected term. The expected term of options granted reflects actual historical exercise
activity and assumptions regarding future exercise activity of unexercised, outstanding options. The risk-free interest rate is based on U.S. Treasury notes with
terms within the contractual life of the option at the time of grant. The expected dividend yield assumption is based on our expectation of future dividend
payouts. We have never declared or paid any cash dividends on our common stock and currently do not anticipate paying such cash dividends.
If factors change and we employ different assumptions in the determination of fair value in future periods, the stock-based compensation expense that we
record may differ significantly from what we have recorded in the current period. There are a number of factors that affect the amount of stock-based
compensation expense, including the number of employee options granted during subsequent fiscal years, the price of our common stock on the date of grant,
the volatility of our stock price, the estimate of the expected life of options granted and the risk-free interest rates.
Liquidity and Capital Resources
The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. At April 30, 2019, we had $32,351 in cash and cash equivalents. Our ability to fund
our operations is dependent on the amount of cash on hand and our ability to generate positive cash flow to sustain our current operations. We have expended
substantial funds on our contract manufacturing business and, historically, on our research and development business, which we discontinued in fiscal year
2018. As a result, we have historically experienced losses and negative cash flows from operations since our inception and we expect negative cash flows
from operations to continue until we can generate sufficient revenue to generate positive cash flow from operations. We plan to fund our operations using our
existing cash and cash equivalents and cash generated from services provided under our customer contracts. In the event we are unable to secure sufficient
additional manufacturing services projects to support our current operations, we may need to raise additional capital in the equity markets in order to fund our
future operations. There can be no assurance that equity financing will be available on acceptable terms or at all. Our ability to raise additional capital in the
equity markets is dependent on a number of factors, including, but not limited to, the market demand for our common stock. The market demand or liquidity
of our common stock is subject to a number of risks and uncertainties, including but not limited to, our financial results and economic and market conditions.
If we are unable to fund our continuing operations through these sources, we may need to further restructure, or cease, our operations. In addition, even if we
are able to raise additional capital, it may not be at a price or on terms that are favorable to us. Any of these actions could materially harm our business,
results of operations, and future prospects. Further, we performed an analysis and concluded that based on our cash and cash equivalents as of April 30, 2019
in conjunction with cash generated from services provided under our customer contracts will provide us with adequate cash on hand to support our operations
for at least one year from the issuance date of this Annual Report.
Cash Flow Analysis
Significant components of the changes in cash flows from operating, investing and financing activities for the fiscal years ended April 30, 2019, 2018 and
2017 are as follows:
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash (used in) provided by financing activities
2019
Fiscal Year Ended April 30,
2018
2017
$
$
(11,595)
4,544
(2,863)
(25,992) $
(793)
22,251
(39,169)
(3,059)
28,165
31
Cash Used In Operating Activities
Net cash used in operating activities represents our net loss, as reported, adjustments to reconcile net loss to net cash used in operating activities and net
changes in the timing of cash flows as reflected by the changes in operating assets and liabilities.
Net cash used in operating activities in fiscal 2019 was primarily attributable to a net loss of $4,215; a $1,000 gain on the sale of certain research and
development assets, offset by noncash charges for depreciation and amortization and stock-based compensation for an aggregate adjustment of $3,468;
combined with a net change in operating assets and liabilities of $10,848. The net change in operating assets and liabilities was primarily due to the timing of
cash receipts and expenditures associated with accounts receivable, inventories, accounts payable, contract liabilities and accrued liabilities of discontinued
operations.
Net cash used in operating activities in fiscal 2018 was primarily attributable to a net loss of $21,813, combined with an aggregate adjustment of $2,208 to
reconcile net loss to net cash used in operating activities, including an $8,000 gain on the sale of certain research and development assets, offset by noncash
charges for depreciation and amortization and stock-based compensation, and a net change in operating assets and liabilities of $1,971. The net change in
operating assets and liabilities was primarily due to the timing of cash receipts and expenditures associated with accounts receivable, inventories, accrued
payroll and related costs, contract liabilities and the assets and accrued liabilities of discontinued operations.
Net cash used in operating activities in fiscal 2017 was primarily attributable to a net loss of $28,159, offset by an aggregate adjustment of $5,827 to reconcile
net loss to net cash used in operating activities, including noncash charges for depreciation and amortization and stock-based compensation, combined with a
net change in operating assets and liabilities of $16,837. The net change in operating assets and liabilities was primarily due to the timing of cash receipts and
expenditures associated with accounts receivable, inventories, accounts payable, contract liabilities and the liabilities of discontinued operations.
Cash Provided By (Used In) Investing Activities
Investing activities consist of capital expenditures for our manufacturing and development operations and includes proceeds from the sale of certain research
and development assets associated with our discontinued research and development segment.
Net cash provided by investing activities during fiscal 2019 consisted of property and equipment acquisitions of $1,502 related to our manufacturing
operations, offset by proceeds of $6,000 related to the sale of certain research and development assets associated with our discontinued research and
development segment and $46 in proceeds from the sale of certain property and equipment.
Net cash used in investing activities during fiscal 2018 consisted of property and equipment acquisitions of $3,793 related to our manufacturing operations,
offset by proceeds of $3,000 related to the sale of certain research and development assets associated with our discontinued research and development
segment.
Net cash used in investing activities during fiscal 2017 consisted of property and equipment acquisitions of $3,627 related to our manufacturing operations
combined with a decrease in other assets of $568 primarily related to a tenant improvement allowance provided to us under a facility operating lease.
32
Cash (Used In) Provided By Financing Activities
Financing activities consist of proceeds from issuance of common and preferred stock, the exercise of stock options, proceeds from the issuance of common
stock under our employee stock purchase plan, cash dividends paid on preferred stock, and payments on capital leases.
Net cash used in financing activities was $2,863 in fiscal 2019. This included $4,325 in dividends paid on preferred stock, partially offset by $1,278 of
proceeds from the exercise of stock options and $258 of proceeds from the issuance of common stock under our employee stock purchase plan.
Net cash provided by financing activities was $22,251 in fiscal 2018. This included $21,494 in net proceeds in connection with an underwritten public
offering of our common stock at a public offering price of $2.25 per share, $4,193 in net proceeds from the sale of shares of our common stock under an At
Market Issuance Sales Agreement, partially offset by $4,325 in dividends paid on preferred stock.
Net cash provided by financing activities was $28,165 in fiscal 2017. This included $17,759 in net proceeds from the sale of shares of our common stock
under an At Market Issuance Sales Agreement, $12,691 in net proceeds from the sale of shares of our common stock under an Equity Distribution Agreement,
$1,576 in net proceeds from the sale of shares of our Series E Preferred Stock under a separate At Market Issuance Sales Agreement, partially offset by
$4,279 in dividends paid on preferred stock.
Capital Expenditures
Our capital expenditures were $1,502 during fiscal 2019. We anticipate utilizing up to approximately $5,000 for capital expenditures in fiscal 2020, which
includes laboratory and manufacturing equipment; software and enhancements; and for enhancing our current laboratory and manufacturing facilities.
Contractual Obligations
Contractual obligations represent future cash commitments and liabilities under agreements with third parties, and exclude contractual liabilities already
recorded on our consolidated balance sheet as current liabilities and contingent liabilities for which we cannot reasonably predict future payments.
The following chart represents our contractual obligations as of April 30, 2019, aggregated by type:
Operating leases (1)
Capital lease
Purchase obligations (2)
Total contractual obligations
______________
Total
< 1 year
Payments Due by Period
1-3 years
4-5 years
After 5 years
$
$
23,473
193
1,731
25,397
$
$
$
3,032
90
1,731
4,853
$
$
$
6,309 $
103
–
6,412 $
6,070 $
–
–
6,070 $
8,062
–
–
8,062
(1) Represents future minimum lease payments under our facility operating lease agreements as further described in Note 3 to the accompanying consolidated financial statements.
(2) Represents non-cancellable purchase orders for certain consumables associated with our single-use bioreactors in our Myford Facility.
Off Balance Sheet Arrangements.
We do not have any off balance sheet arrangements, as defined in Item 303 of Regulation S-K.
Recently Issued Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies—Pending Adoption of Recent Accounting Pronouncements, in the accompanying Notes to
Consolidated Financial Statements for a discussion of recent accounting pronouncements and their effect, if any, on our consolidated financial statements.
33
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash and cash equivalents are primarily invested in money market funds with one major commercial bank with the primary objective to preserve our
principal balance. Our deposits held with this bank exceed the amount of government insurance limits provided on our deposits and, therefore, we are
exposed to credit risk in the event of default by the major commercial bank holding our cash balances. However, these deposits may be redeemed upon
demand and, therefore, bear minimal risk. In addition, while changes in U.S. interest rates would affect the interest earned on our cash balances at April 30,
2019, such changes would not have a material adverse effect on our financial position or results of operations based on historical movements in interest rates.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of April 30, 2019 and 2018
Consolidated Statements of Operations and Comprehensive Loss for each of the three years in the period ended April 30, 2019
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended April 30, 2019
Consolidated Statements of Cash Flows for each of the three years in the period ended April 30, 2019
Notes to Consolidated Financial Statements
Page
35
36
37
38
39
40
34
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Avid Bioservices, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Avid Bioservices, Inc. (the Company) as of April 30, 2019 and 2018, the related
consolidated statements of operations and comprehensive loss, stockholders' equity and cash flows for each of the three years in the period ended April 30,
2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company at April 30, 2019 and 2018, and the results of its operations and its cash flows for each of
the three years in the period ended April 30, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of April 30, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated June 27, 2019 expressed an unqualified opinion thereon.
Adoption of ASU No. 2014-09
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for recognizing revenue as a result of the adoption of
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and the amendments in ASUs 2015-14, 2016-08,
2016-10 and 2016-12 effective May 1, 2018.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1999.
Irvine, California
June 27, 2019
35
AVID BIOSERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Contract assets
Inventories
Prepaid expenses
Assets of discontinued operations
Total current assets
Property and equipment, net
Restricted cash
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued payroll and related costs
Contract liabilities
Other current liabilities
Liabilities of discontinued operations
Total current liabilities
Deferred rent, less current portion
Capital lease, less current portion
Commitments and contingencies (Note 8)
Stockholders' equity:
Preferred stock, $0.001 par value; 5,000,000 shares authorized; 1,647,760 shares issued and outstanding
at respective dates
Common stock, $0.001 par value; 150,000,000 shares authorized; 56,135,697 and 55,689,222 shares
issued and outstanding at respective dates
Additional paid-in-capital
Accumulated deficit
Total stockholders' equity
Total liabilities and stockholders' equity
2
56
613,615
(560,605)
53,068
$
78,395
$
See accompanying notes to consolidated financial statements.
36
April 30,
2019
2018
$
$
$
$
32,351
7,374
4,327
6,557
709
–
51,318
25,625
1,150
302
78,395
$
$
4,352
3,540
14,651
619
–
23,162
2,072
93
42,265
3,754
–
16,129
679
5,000
67,827
26,479
1,150
304
95,760
1,909
2,564
27,935
905
4,550
37,863
2,159
–
2
55
614,810
(559,129)
55,738
95,760
AVID BIOSERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share information)
2019
Year Ended April 30,
2018
2017
Revenues
Cost of revenues
Gross profit (loss)
Operating expenses:
Selling, general and administrative
Restructuring charges
Total operating expenses
Operating (loss) income
Interest and other income, net
(Loss) income from continuing operations before income taxes
Income tax benefit
(Loss) income from continuing operations
Income (loss) from discontinued operations, net of tax
Net loss
Comprehensive loss
Series E preferred stock accumulated dividends
Net loss attributable to common stockholders
Basic and diluted net (loss) income per common share attributable to common
stockholders:
Continuing operations
Discontinued operations
Net loss per share attributable to common stockholders
$
$
$
$
$
$
$
$
57,630
38,259
19,371
18,079
–
18,079
1,292
101
1,393
–
1,393
(29,552)
(28,159)
$
53,603
46,379
7,224
53,621 $
56,545
(2,924)
16,456
1,258
17,714
(20,638)
75
(20,563) $
–
(20,563)
(1,250)
(21,813) $
12,846
–
12,846
(5,622)
282
(5,340)
284
(5,056)
841
(4,215)
(4,215)
(4,686)
$
$
$
(21,813) $
(28,159)
(4,686)
(4,640)
(8,901)
$
(26,499) $
(32,799)
(0.17)
0.01
(0.16)
$
$
$
(0.53) $
(0.03) $
(0.56) $
(0.09)
(0.79)
(0.88)
Weighted average basic and diluted shares outstanding
55,981,060
47,063,020
37,109,493
See accompanying notes to consolidated financial statements.
37
AVID BIOSERVICES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share information)
BALANCES, April 30, 2016
Series E preferred stock issued,
net of issuance costs of $58
Series E preferred stock
dividends paid
Common stock issued, net of
issuance costs of $487
Common stock issued, net of
issuance costs of $340
Common stock issued under
Employee Stock Purchase
Plan
Exercise of stock options
Stock-based compensation
expense
Net loss
BALANCES, April 30, 2017
Series E preferred stock
dividends paid
Cumulative-effect adjustment
to accumulated deficit
pursuant to adoption of ASU
2016-09
Common stock issued, net of
issuance costs of $111
Common stock issued, net of
issuance costs of $1,669
Common stock issued under
Employee Stock Purchase
Plan
Exercise of stock options
Fractional shares issued
pursuant to reverse stock split
Stock-based compensation
expense
Net loss
BALANCES, April 30, 2018
Series E preferred stock
dividends paid
Cumulative-effect adjustment
to accumulated deficit
pursuant to adoption of ASC
606 (Note 2)
Common stock issued under
Employee Stock Purchase
Plan
Exercise of stock options
Stock-based compensation
expense
Net loss
BALANCES, April 30, 2019
Preferred Stock
Shares
Amount
1,577,440
$
70,320
–
–
–
–
–
–
–
1,647,760
–
–
–
–
–
–
–
–
–
1,647,760
–
–
–
–
–
–
1,647,760
$
Common Stock
Shares
33,847,213
$
Amount
–
–
6,137,403
3,750,323
270,075
9,026
–
–
44,014,040
–
–
1,051,259
10,294,445
88,327
222,255
18,896
–
–
55,689,222
–
–
75,148
371,327
–
–
56,135,697
$
2
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
2
–
–
6
4
–
–
–
–
44
–
–
1
10
–
–
–
–
–
55
–
–
–
1
–
–
56
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Stockholders’
Equity
34
$
559,314
$
(509,276)
$
1,576
(4,279)
17,753
12,687
526
31
3,363
–
590,971
(4,325)
(119)
4,192
21,484
317
752
–
1,538
–
614,810
(4,325)
–
–
–
–
–
–
–
(28,159)
(537,435)
–
119
–
–
–
–
–
(21,813)
(559,129)
–
50,074
1,576
(4,279)
17,759
12,691
526
31
3,363
(28,159)
53,582
(4,325)
–
4,193
21,494
317
752
–
1,538
(21,813)
55,738
(4,325)
–
2,739
2,739
258
1,277
1,595
–
613,615
$
–
–
–
(4,215)
(560,605)
$
$
258
1,278
1,595
(4,215)
53,068
See accompanying notes to consolidated financial statements.
38
AVID BIOSERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization
Stock-based compensation
Loss on disposal of assets
Gain on sale of research and development assets
Changes in operating assets and liabilities:
Accounts receivable
Contract assets
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued payroll and related costs
Contract liabilities
Other accrued expenses and other liabilities
Assets and liabilities of discontinued operations
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Decrease in other assets
Proceeds from sale of property and equipment
Proceeds from sale of research and development assets
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net of issuance costs
Proceeds from issuance of preferred stock, net of issuance costs
Proceeds from issuance of common stock under employee stock purchase plan
Proceeds from exercise of stock options
Dividends paid on preferred stock
Principal payments on capital lease
Net cash (used in) provided by financing activities
Change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Cash and cash equivalents, end of period
Restricted cash, end of period
Cash, cash equivalents and restricted cash, end of period
Supplemental disclosures of cash flow information
Interest paid
Supplemental disclosure of non-cash activities
Unpaid purchases of property and equipment
Property and equipment acquired under capital lease
Receivable related to the sale of research and development assets
$
$
$
$
$
$
$
2019
Year Ended April 30,
2018
2017
$
(4,215)
$
(21,813) $
(28,159)
2,746
1,595
127
(1,000)
(3,620)
(1,439)
1,701
(28)
2,125
976
(5,371)
(642)
(4,550)
(11,595)
(1,502)
–
46
6,000
4,544
–
–
258
1,278
(4,325)
(74)
(2,863)
(9,914)
43,415
33,501
32,351
1,150
33,501
2,562
1,538
1,692
(8,000)
3,988
–
16,970
153
(1,271)
(2,491)
(17,582)
1,009
(2,747)
(25,992)
(3,793)
–
–
3,000
(793)
25,687
–
317
752
(4,325)
(180)
22,251
$
$
$
(4,534) $
47,949
43,415 $
42,265
1,150
43,415 $
11
$
4 $
318
245
–
$
$
$
180 $
– $
5,000 $
2,463
3,363
1
–
(4,883)
–
(16,913)
434
(3,804)
372
11,275
(407)
(2,911)
(39,169)
(3,627)
568
–
–
(3,059)
30,450
1,576
526
31
(4,279)
(139)
28,165
(14,063)
62,012
47,949
46,799
1,150
47,949
6
658
319
–
See accompanying notes to consolidated financial statements.
39
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Note 1 – Description of Company and Basis of Presentation
We are a contract development and manufacturing organization (“CDMO”) that provides a comprehensive range of services from process development to
Current Good Manufacturing Practices (“CGMP”) commercial manufacturing focused on biopharmaceutical products derived from mammalian cell culture
for biotechnology and pharmaceutical companies.
Effective January 5, 2018, we changed our name to Avid Bioservices, Inc. from Peregrine Pharmaceuticals, Inc. in connection with our transition to a
dedicated CDMO and the discontinuation of our research and development activities. Except where specifically noted or the context otherwise requires,
references to “Avid,” “the Company,” “we,” “us,” and “our,” in this Annual Report refer to Avid Bioservices, Inc. and its subsidiaries.
Basis of Presentation and Preparation
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”)
and include the accounts of Avid Bioservices, Inc. and its subsidiaries. All intercompany accounts and transactions among the consolidated entities have been
eliminated in the consolidated financial statements. The preparation of our financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ
materially from these estimates.
The financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. At April 30, 2019, we had $32,351 in cash and cash equivalents. Our ability to fund our operations
is dependent on the amount of cash on hand and our ability to generate positive cash flow to sustain our current operations. We have expended substantial
funds on our contract manufacturing business and, historically, on our legacy research and development of pharmaceutical product candidates. As a result, we
have historically experienced losses and negative cash flows from operations since our inception and expect negative cash flows from operations to continue
until we can generate sufficient revenue to generate positive cash flow from operations. We plan to fund our operations using our existing cash and cash
equivalents and cash generated from services provided under our customer contracts. In the event we are unable to secure sufficient business to support our
current operations, we may need to raise additional capital in the future. There can be no assurance that equity financing will be available on acceptable terms
or at all. Our ability to raise additional capital in the equity markets to fund our future operations is dependent on a number of factors, including, but not
limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties,
including but not limited to, our financial results and economic and market conditions. If we are unable to fund our continuing operations through these
sources we may need to further restructure, or cease, our operations. In addition, even if we are able to raise additional capital, it may not be at a price or on
terms that are favorable to us. Any of these actions could materially harm our business, results of operations, and future prospects. Further, we performed an
analysis and concluded that based on our cash and cash equivalents as of April 30, 2019 in conjunction with cash generated from services provided under our
customer contracts will provide us with adequate cash on hand to support our operations for at least one year from the date that our consolidated financial
statements are issued.
Certain prior year amounts related to deferred revenue and customer deposits have been reclassified to contract liabilities to conform to the current period’s
presentation. This reclassification had no effect on previously reported net loss.
Discontinued Operations
For all periods presented, the operating results of our former research and development segment have been excluded from continuing operations and reported
as income (loss) from discontinued operations, net of tax, in the accompanying consolidated financial statements. In addition, the assets and liabilities related
to our discontinued research and development segment are reported as assets and liabilities of discontinued operations in the accompanying Consolidated
Balance Sheet at April 30, 2018. For additional information on the discontinuation of our research and development segment, refer to Note 10, “Sale of
Research and Development Assets”.
Segment Reporting
Our business had historically been organized into two reportable operating segments: (i) contract manufacturing services and (ii) research and development.
However, as a result of the aforementioned discontinuation of our research and development segment, management has determined that the Company
operates in only one operating segment. Accordingly, we reported our financial results for one reportable segment.
40
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Note 2 – Summary of Significant Accounting Policies
Cash and Cash Equivalents
We consider all short-term investments readily convertible to cash, without notice or penalty, with an initial maturity of 90 days or less to be cash equivalents.
Restricted Cash
Under the terms of three separate operating leases related to our facilities, we are required to maintain, as collateral, letters of credit during the terms of such
leases (Note 3). At April 30, 2019 and 2018, restricted cash of $1,150 was pledged as collateral under these letters of credit.
Revenue Recognition
We derive revenue from contract manufacturing services provided under our customer contracts, which we have disaggregated into the following revenue
streams:
Manufacturing revenue
The manufacturing revenue stream generally represents revenue from the manufacturing of customer product(s) derived from mammalian cell culture
covering clinical through commercial manufacturing runs. Under a manufacturing contract, a quantity of manufacturing runs are ordered and the product is
manufactured according to the customer’s specifications and typically only one performance obligation is included. Each manufacturing run represents a
distinct service that is sold separately and has stand-alone value to the customer. The product(s) are manufactured exclusively for a specific customer and
have no alternative use. The customer retains control of their product during the entire manufacturing process and can make changes to the process or
specifications at their request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin.
Revenue associated with this stream is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date to the
most current estimates for the entire cost of the performance obligation.
Process development revenue
The process development revenue stream generally represents revenue from non-manufacturing related services associated with the custom development of a
manufacturing process and analytical methods for a customer’s product. Under a process development contract, the customer owns the product details and
process, which has no alternative use. These process development projects are customized to each customer to meet their specifications and typically only one
performance obligation is included. Each process represents a distinct service that is sold separately and has stand-alone value to the customer. The customer
also retains control of their product as the product is being created or enhanced by our services and can make changes to their process or specifications upon
request. Revenue associated with this stream is recognized over time utilizing an input method that compares the cost of cumulative work-in-process to date
to the most current estimates for the entire cost of the performance obligation.
41
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
The following table disaggregates our revenue for the fiscal years ended April 30, 2019, 2018 and 2017 by revenue stream.
Manufacturing revenue
Process development revenue
Total Revenues
2019
Fiscal Year Ended April 30,
2018
2017
$
$
43,432
10,171
53,603
$
$
47,437 $
6,184
53,621 $
52,215
5,415
57,630
Revenues for the fiscal years ended April 30, 2018 and 2017 have not been adjusted in accordance with our modified retrospective adoption of Accounting
Standards Concepts (“ASC”) 606 Revenue from Contracts with Customers (“ASC 606”) as of May 1, 2018, and continues to be reported under the
accounting standards that were in effect prior to our adoption of ASC 606 as further discussed below under the section, “Accounting Standards Adopted in
Fiscal Year 2019”.
The timing of revenue recognition, billings and cash collections results in billed trade receivables, contract assets (unbilled receivables), and contract
liabilities (customer deposits and deferred revenue). Contract assets are recorded when our right to consideration is conditioned on something other than the
passage of time. Contract assets are reclassified to trade receivables on the balance sheet when our rights become unconditional. Contract liabilities represent
customer deposits and deferred revenue billed and/or received in advance of our fulfillment of performance obligations. Contract liabilities convert to revenue
as we perform our obligations under the contract.
Payment terms can vary by the type of contract manufacturing services offered, however, the term between invoicing and when payment is due is not
significant. For certain services, payment prior to satisfaction of a performance obligation can be required, and results in recording a contract liability.
During the fiscal year ended April 30, 2019, we recognized revenue of $14,312 for which the contract liability was recorded in the prior year.
We apply the practical expedient available under ASC 606 that permits us not to disclose the value of unsatisfied performance obligations for contracts with
an original expected length of one year or less. In addition, we currently do not have any unsatisfied performance obligations for contracts greater than one
year.
Costs incurred to obtain a contract are not material. These costs are generally employee sales commissions, which are expensed when incurred and included
in selling, general and administrative expense in the accompanying consolidated statements of operations and comprehensive loss.
Accounts Receivable
Accounts receivable generally represent trade amounts billed for contract manufacturing services and are recorded at the invoiced amount net of an allowance
for doubtful accounts, if necessary. Accounts receivable consisted of the following:
Trade receivables
Other receivables
Total Accounts receivable
April 30,
2019
2018
$
$
7,374 $
–
7,374 $
3,539
215
3,754
We continually monitor our allowance for doubtful accounts for all receivables. We apply judgment in assessing the ultimate realization of our receivables
and we estimate an allowance for doubtful accounts based on various factors, such as the aging of accounts receivable balances, historical experience, and the
financial condition of our customers. Based on our analysis of our receivables as of April 30, 2019 and 2018, we determined no allowance for doubtful
accounts was necessary.
42
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Concentrations of Credit Risk and Customer Base
Financial instruments that potentially subject us to a significant concentration of credit risk consist of cash and cash equivalents, restricted cash, trade
receivables and contract assets. We maintain our cash and restricted cash balances primarily with one major commercial bank and our deposits held with the
bank exceed the amount of government insurance limits provided on our deposits. We are exposed to credit risk in the event of default by the major
commercial bank holding our cash and restricted cash balances to the extent of the cash and restricted cash amounts recorded on the accompanying
consolidated balance sheet.
Our trade receivables from amounts billed for contract manufacturing services have historically been derived from a small customer base. Most contracts
require up-front payments and installment payments during the service period. We perform periodic evaluations of the financial condition of our customers
and generally do not require collateral, but we can terminate any contract if a material default occurs. At April 30, 2019 and 2018, approximately 95% and
93%, respectively, of our trade receivables were due from six customers. Our contract assets are reclassified to trade receivables when our rights to
consideration become unconditional. At April 30, 2019 approximately 87% of our contract assets were attributable to eight customers.
Our revenues have historically been derived from a small customer base. Historically, these customers have not entered into long-term contracts because their
need for drug supply depends on a variety of factors, including a product’s stage of development, the timing of regulatory filings and approvals, the product
needs of their collaborators, if applicable, their financial resources and the market demand with respect to a commercial product.
The percentages below represent revenues derived from each customer as a percentage of total revenues during the fiscal years ended April 30, 2019, 2018
and 2017:
Customer
Halozyme Therapeutics, Inc.
ADC Therapeutics America Inc.
Coherus BioSciences, Inc.
Other customers
Total
Geographic Location
U.S.
U.S.
U.S.
U.S./non-U.S.
2019
2018
2017
30%
21
13
36
100%
55%
9
22
14
100%
58%
–
26
16
100%
We attribute revenue to the individual countries where the customer is headquartered. Revenues derived from U.S. based customers were 95%, 99% and
100% for the fiscal years ended April 30, 2019, 2018 and 2017, respectively.
Inventories
Inventories are valued at the lower of cost or net realizable value, determined by the first-in, first-out method. Subsequent to the adoption of ASC 606 (Note
2), manufacturing costs associated with work-in-process inventory (comprised of raw materials, direct labor and overhead costs associated with in-process
manufacturing services) are recorded to cost of revenues in the accompanying consolidated financial statements as incurred. Overhead costs allocated to
work-in-process inventory are based on the normal capacity of our production facilities and do not include costs from under absorption of overhead costs or
idle capacity, which are expensed directly to cost of revenues in the period incurred. Inventories consist of the following:
Raw materials
Work-in-process
Total Inventories
April 30,
2019
2018
$
$
6,557 $
–
6,557 $
8,165
7,964
16,129
We periodically review raw materials inventory for potential impairment and adjust inventory to its net realizable value based on the estimate of future use
and reduce the carrying value of inventory as determined necessary.
43
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Property and Equipment
Property and equipment is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-
line method over the estimated useful lives of the related asset, generally ranging from three to ten years. Amortization of leasehold improvements is
calculated using the straight-line method over the shorter of the estimated useful life of the asset or the remaining lease term. Construction-in-progress, which
represents direct costs related to the construction of various equipment and leasehold improvements primarily associated with our manufacturing facilities, are
not depreciated until the asset is completed and placed into service. No interest was incurred or capitalized as construction-in-progress as of April 30, 2019
and 2018. All of our property and equipment are located in the U.S. Property and equipment consist of the following:
Leasehold improvements
Laboratory and manufacturing equipment
Computer equipment and software
Furniture, fixtures and office equipment
Construction-in-progress
Total Property and equipment, gross
Less: Accumulated depreciation and amortization
Total Property and equipment, net
April 30,
2019
2018
$
$
20,574 $
12,858
4,644
528
1,590
40,194
(14,569)
25,625 $
20,686
10,258
4,087
510
3,310
38,851
(12,372)
26,479
Depreciation and amortization expense for the years ended April 30, 2019, 2018 and 2017 was $2,746, $2,562 and $2,463, respectively.
Impairment
Long-lived assets are reviewed for impairment in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets
are reviewed for events or changes in circumstances that indicate that their carrying value may not be recoverable. Long-lived assets are reported at the lower
of carrying amount or fair value less cost to sell. For the fiscal years ended April 30, 2019 and 2018, there were no indicators of impairment of the value of
our long-lived assets.
Fair Value of Financial Instruments
The carrying amounts in the accompanying Consolidated Balance Sheets for cash and cash equivalents, restricted cash, accounts receivable, accounts payable
and accrued liabilities approximate their fair values due to their short-term maturities.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:
·
·
·
Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets or liabilities whose values are based on quoted market prices in
markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.
Level 3 – Unobservable inputs that are supported by little or no market activity and significant to the overall fair value measurement of the assets or
liabilities; therefore, requiring the company to develop its own valuation techniques and assumptions.
As of April 30, 2019 and 2018, we do not have any Level 2 or Level 3 financial assets or liabilities and our cash equivalents, which are primarily invested in
money market funds with one major commercial bank, are carried at fair value based on quoted market prices for identical securities (Level 1 input). In
addition, there were no transfers between any Levels of the fair value hierarchy during the fiscal years ended April 30, 2019 and 2018.
44
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Deferred Rent
Rent expense is recorded on a straight-line basis over the initial term of our operating lease agreements and the difference between rent expense and the
amounts paid is recorded as a deferred rent liability. Incentives granted under our operating leases, including tenant improvements and landlord-funded lease
incentives, are recorded as a deferred rent liability, which is amortized as a reduction to rent expense over the term of the operating lease (Note 3).
Restructuring Charges
Restructuring charges consist of one-time termination benefits, including severance and other employee-related costs related to a workforce reduction
pursuant to a restructuring plan we implemented and completed during the fiscal year ended April 30, 2018 (Note 9). One-time termination benefits were
expensed at the date we notified the employee, unless the employee was required to provide future service, in which case the benefits were expensed ratably
over the future service period.
Stock-Based Compensation
We account for stock options, restricted stock units and other stock-based awards granted under our equity compensation plans in accordance with the
authoritative guidance for stock-based compensation. The estimated fair value of stock options granted to employees in exchange for services is measured at
the grant date, using a fair value based method, such as a Black-Scholes option valuation model, and is recognized as expense on a straight-line basis over the
requisite service periods. The fair value of restricted stock units is measured at the grant date based on the closing market price of our common stock on the
date of grant, and is recognized as expense on a straight-line basis over the period of vesting. Forfeitures are recognized as a reduction of stock-based
compensation expense as they occur. As of April 30, 2019, there were no outstanding stock-based awards with market or performance conditions.
Income Taxes
We utilize the liability method of accounting for income taxes in accordance with ASC 740: Income Taxes (“ASC 740”). Under the liability method, deferred
taxes are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance is provided for the amount of
deferred tax assets that, based on available evidence, are not expected to be realized (Note 6). In addition, we recognize the impact of an uncertain tax
position only when it is more likely than not the tax position will be sustained upon examination by the tax authorities. We are required to file federal, state
and foreign income tax returns in various jurisdictions. The preparation of these returns requires us to interpret the applicable tax laws in effect in such
jurisdictions, which could affect the amount paid by us
The income tax benefit recognized in the accompanying Consolidated Statements of Operations and Comprehensive Loss for the year ended April 30, 2019
resulted from the “Intraperiod Tax Allocation” rules under ASC 740, which requires the allocation of an entity’s total annual income tax provision among
continuing operations and, in our case, discontinued operations. Accordingly, a tax benefit was recorded in continuing operations with an offsetting tax
expense recorded in discontinued operations (Note 10).
Comprehensive Loss
Comprehensive loss is the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive
loss is equal to our net loss for all periods presented.
45
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Accounting Standards Adopted in Fiscal Year 2019
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with
Customers (Topic 606) (codified as ASC 606), which, along with subsequent amendments issued after May 2014, replaced substantially all the relevant U.S.
GAAP revenue recognition guidance. ASC 606, as amended, is based on the principle that revenue is recognized to depict the contractual transfer of goods or
services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services utilizing a
new five-step revenue recognition model, which steps include (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when
(or as) the entity satisfies a performance obligation.
On May 1, 2018, we adopted ASC 606, as amended, to all contracts that had not been completed as of May 1, 2018 using the modified retrospective method.
Accordingly, results for the reporting period beginning after May 1, 2018 are presented in accordance with ASC 606, while prior period amounts have not
been adjusted and continue to be reported under the accounting standards that were in effect for the prior periods.
The cumulative effect of adopting ASC 606 resulted in a one-time adjustment of $2,739 to the opening balance of accumulated deficit which is reflected in
the accompanying Consolidated Statements of Stockholders’ Equity for the fiscal year ended April 30, 2019. The cumulative effect adjustment relates to the
recognition of revenue and related costs for customer contracts that transfer goods or services over time. Under ASC 606, the timing of the recognition of
revenue and the related cost of revenue associated with goods or services provided to customers with no alternative use are recognized over time utilizing an
input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation. By
contrast, in the prior periods, revenue and the related costs were recognized upon completion of the performance obligation in accordance with accounting
standards that were in effect in the prior periods. Under these customer contracts the customer retains control of the product as it is being created or enhanced
by our services and/or we are entitled to compensation for progress to date that includes an element of profit margin.
The cumulative effect of the adoption of ASC 606 on amounts previously reported on the Consolidated Balance Sheet at April 30, 2018 was as follows:
Contract assets
Inventories
Contract liabilities
Other current liabilities
Accumulated deficit
As
Reported
April 30, 2018
ASC 606
Transition
Adjustment
Balance at
May 1, 2018
$
$
–
16,129
27,935
905
(559,129)
2,888 $
(7,871)
(7,913)
191
2,739
2,888
8,258
20,022
1,096
(556,390)
The impact of the adoption of ASC 606 on the Consolidated Balance Sheet at April 30, 2019 was as follows:
Contract assets
Inventories
Contract liabilities
As
Reported
Effect of Adoption
Increase/(Decrease)
Balance Without
Adoption of ASC
606
$
4,327 $
6,557
14,651
4,327 $
(18,293)
(19,771)
–
24,850
34,422
The impact of the adoption of ASC 606 on the Consolidated Statements of Operations and Comprehensive Loss for the fiscal year ended April 30, 2019 was
as follows:
Revenues
Cost of revenues
Gross profit
Operating loss
Loss from continuing operations
$
As
Reported
Effect of Adoption
Increase/(Decrease)
Balance Without
Adoption of ASC
606
53,603 $
46,379
7,224
(5,622)
(5,056)
13,243 $
9,743
3,500
3,500
3,500
40,360
36,636
3,724
(9,122)
(8,556)
46
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which clarifies the presentation requirements of
restricted cash within the statement of cash flows. ASU 2016-18 will require that a statement of cash flows explain the change during the period in the total of
cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted
cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total
amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December
15, 2017. We adopted ASU 2016-18 on May 1, 2018 and the cash and cash equivalents at the beginning-of-period and end-of-period total amounts in our
consolidated statements of cash flows have been adjusted to include restricted cash for each of the periods presented.
In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance
about which changes to the terms or conditions of a stock-based payment award require an entity to apply modification accounting in Topic 718. This
pronouncement is effective for annual reporting periods beginning after December 15, 2017. We adopted ASU 2017-09 on May 1, 2018. The adoption of this
ASU did not have a material impact on our consolidated financial statements and related disclosures.
New Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases and its related amendments (collectively referred to as Topic 842) (codified as “ASC 842”). The
new standard requires lessees to recognize right-of-use assets and corresponding lease liabilities for leases with durations of greater than 12 months on the
balance sheet as well as provide disclosures with respect to certain qualitative and quantitative information regarding the amount, timing and uncertainty of
cash flows arising from leases. The right-of-use assets and lease liabilities will initially be measured at the present value of the future minimum lease
payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease
as either a finance lease or an operating lease. ASC 842 is effective for fiscal years, and interim periods within those years, beginning after December 15,
2018, which will be our fiscal year 2020 beginning May 1, 2019.
On May 1, 2019, we adopted ASC 842 and have elected the optional transition method to apply the standard as of the effective date and therefore, we will not
apply the standard to the comparative periods presented in the consolidated financial statements. We have elected the transition package of three practical
expedients permitted within the standard, which eliminates the requirements to reassess prior conclusions about lease identification, lease classification, and
initial direct costs. Further, we have elected a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to
short-term leases (i.e., leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component
for certain classes of assets. While we are finalizing our evaluation of the impact of the adoption of ASC 842 on our consolidated financial statements and
related disclosures, we expect to recognize on our balance sheet right-of-use assets ranging from $22,000 to $25,000, in aggregate, and lease liabilities
ranging from $24,000 to $27,000, in aggregate, which are primarily related to our facility operating leases (Note 3). The difference between the right-of-use
assets and lease liabilities is primarily attributed to the elimination of deferred rent. The adoption of ASC 842 is also expected to impact our consolidated
financial statement disclosures. We do not anticipate the adoption of ASC 842 will have a material impact to our Consolidated Statements of Operations and
Comprehensive Loss or to require a cumulative-effect adjustment to the opening balance of accumulated deficit.
The estimated impact of adopting ASC 842 is based on our best estimates at the time of the preparation of this Annual Report. The actual impact is subject to
change prior to our first quarterly filing of our fiscal year 2020. We are finalizing our implementation related to policies, processes and internal controls to
comply with this guidance.
47
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments.
This standard update requires that certain financial assets be measured at amortized cost net of an allowance for estimated credit losses such that the net
receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at
amortized cost reflecting an allowance for estimated credit losses expected to occur over the life of the assets. The estimate of credit losses must be based on
all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the
amounts. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, which will be our fiscal year
2021 beginning May 1, 2020; however, early adoption is permitted. We are currently evaluating the timing and impact of adopting ASU 2016-13 on our
consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for
Fair Value Measurement, which modifies the disclosure requirements in Topic 820 by removing certain disclosure requirements related to the fair value
hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, primarily surrounding
Level 3 fair value measurements and transfers between Level 1 and Level 2. ASU 2018-13 is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2019, which will be our fiscal year 2021 beginning May 1, 2020. Early adoption is permitted for any removed or modified
disclosures. We are currently evaluating the new guidance and do not expect the adoption of ASU 2018-13 to have a material impact on our consolidated
financial statements and related disclosures.
Note 3 – Leases
Operating Leases
We currently lease office, manufacturing and warehouse space in five buildings under four separate non-cancellable operating lease agreements. All of our
leased facilities are located in close proximity in Tustin, California, have original lease terms ranging from 7 to 12 years, contain two multi-year renewal
options, and scheduled rent increases of 3% on either an annual or biennial basis. Three of our leases provide for periods of free rent, lessor improvements
and tenant improvement allowances, of which, certain of these improvements have been classified as leasehold improvements and are being amortized over
the shorter of the estimated useful life of the improvements or the remaining life of the lease. As collateral for three of our leases we are required to maintain
letters of credit, which in aggregate is $1,150 and is included in restricted cash in the accompanying Consolidated Balance Sheets as of April 30, 2019 and
2018.
Future minimum lease payments under our non-cancelable operating leases as of April 30, 2019 are as follows:
Fiscal Year
2020
2021
2022
2023
2024
Thereafter
Total
Total
$
$
3,032
3,116
3,193
3,281
2,789
8,062
23,473
We record rent expense on a straight-line basis over the initial term of the lease. The difference between rent expense and the amounts paid under the
operating leases is recorded as a deferred rent liability in the accompanying consolidated financial statements. Annual rent expense under facility operating
lease agreements totaled $2,869, $2,935, and $2,180 for the fiscal years ended April 30, 2019, 2018, and 2017, respectively.
48
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Note 4 – Stockholders’ Equity
Stockholder Rights Agreement
On March 16, 2006, our Board of Directors adopted a Stockholder Rights Agreement, which was amended and restated on March 16, 2016 (the “Rights
Agreement”), that is designed to strengthen the ability of the Board of Directors to protect the interests of our stockholders against potential abusive or
coercive takeover tactics and to enable all stockholders the full and fair value of their investment in the event that an unsolicited attempt is made to acquire
Avid. The Rights Agreement is not intended to prevent an offer the Board of Directors concludes is in the best interest of Avid and its stockholders.
Under the Rights Agreement, the Board of Directors declared a dividend of one preferred share purchase right (a “Right”) for each share of our common
stock held by stockholders of record as of the close of business on March 27, 2006. Each Right entitles holders of each share of our common stock to buy
seven one thousandths (7/1,000th) of a share of Avid’s Series D Participating Preferred Stock, par value $0.001 per share, at an exercise price of $77.00 per
share, subject to adjustment. The Rights are neither exercisable nor traded separately from our common stock. The Rights will become exercisable and will
detach from the common shares if a person or group acquires 15% or more of our outstanding common stock, without prior approval from our Board of
Directors, or announces a tender or exchange offer that would result in that person or group owning 15% or more of our common stock. Each Right, when
exercised, entitles the holder (other than the acquiring person or group) to receive our common stock (or in certain circumstances, voting securities of the
acquiring person or group) with a value of twice the Rights’ exercise price upon payment of the exercise price of the Rights.
Avid will be entitled to redeem the Rights at $0.007 per Right at any time prior to a person or group achieving the 15% threshold. The Rights will expire on
March 16, 2021.
Series E Preferred Stock
On February 12, 2014, we filed with the Secretary of State of the State of Delaware a Certificate of Designations of Rights and Preferences (the “Certificate
of Designations”) to designate the 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”). The Certificate of Designations designated
2,000,000 shares of Series E Preferred Stock out of our 5,000,000 shares of authorized but unissued shares of preferred stock. The Series E Preferred Stock is
classified as permanent equity in accordance with FASB ASC Topic 480, Distinguishing Liabilities from Equity. As of April 30, 2019, 1,647,760 shares of our
Series E Preferred Stock were issued and outstanding.
Each share of Series E Preferred Stock is convertible at any time, at the option of the holder, into a number of whole shares of our common stock at an initial
conversion price of $21.00. The Series E Preferred Stock is also subject to conversion upon certain events constituting a change of control and a market
trigger conversion, at our option, as defined in the Certificate of Designations. The Series E Preferred Stock has no stated maturity date or mandatory
redemption and is senior to all of our other securities. We may redeem the Series E Preferred Stock for cash, in whole or in part, by paying the redemption
price of $25.00 per share, plus any accrued and unpaid dividends to the redemption date. Holders of the Series E Preferred Stock have no voting rights, except
as defined in the Certificate of Designations.
Holders of our Series E Preferred Stock are entitled to receive cumulative dividends at the rate of 10.50% per annum based on the liquidation preference of
$25.00 per share, and are payable quarterly in cash, on or about the 1st day of each January, April, July, and October. The Series E Preferred Stock dividend
for all issued and outstanding shares is set at $2.625 per annum per share. For the fiscal years ended April 30, 2019, 2018, and 2017, we paid aggregate cash
dividends of $4,325, $4,325, and $4,279, respectively, for issued and outstanding shares of our Series E Preferred Stock.
49
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Sales of Common Stock and Series E Preferred Stock
During the fiscal year ended April 30, 2019, we had no offerings of our common stock or Series E Preferred Stock.
During February 2018, we completed an underwriting public offering pursuant to which we sold 10,294,445 shares of our common stock at the public
offering price of $2.25 per share. The aggregate gross proceeds we received from the public offering was $23,163, before deducting underwriting discounts
and commissions and other offering related expenses of $1,669.
During the fiscal years ended April 30, 2018 and 2017, we sold an aggregate of 1,051,259 and 6,137,403 shares of our common stock, respectively, pursuant
to an At Market Issuance Sales Agreement (“AMI Sales Agreement) for aggregate gross proceeds of $4,304 and $18,246, respectively. We paid a commission
equal to 2.5% of the gross proceeds from the sale of our common stock pursuant to the AMI Sales Agreement. As of April 30, 2018, we had raised the full
amount of gross proceeds available to us under the AMI Sales Agreement.
During the fiscal year ended April 30, 2017, we sold an aggregate of 3,750,323 shares of our common stock pursuant to an Equity Distribution Agreement for
aggregate gross proceeds of $13,031. We paid a commission equal to 2.5% of the gross proceeds from the sale of our common stock pursuant to the Equity
Distribution Agreement. As of April 30, 2017, we had raised the full amount of gross proceeds available to us under the Equity Distribution Agreement.
During the fiscal year ended April 30, 2017, we sold an aggregate of 70,320 shares of our Series E Preferred Stock pursuant to an At Market Issuance Sales
Agreement (“Series E AMI Sales Agreement) for aggregate gross proceeds of $1,634. We paid a commission of up to 5% of the gross proceeds from the sale
of our Series E Preferred Stock pursuant to the Series E AMI Sales Agreement. As of April 30, 2017, we are no longer issuing shares of our Series E
Preferred Stock under the Series E AMI Sales Agreement.
Warrants
On August 30, 2018, warrants to purchase 39,040 shares of our common stock expired unexercised. As of April 30, 2019, we had no warrants issued and
outstanding
Shares of Common Stock Authorized and Reserved for Future Issuance
On October 4, 2018, our stockholders approved an amendment to our Certificate of Incorporation to decrease our authorized number of shares of common
stock from 500,000,000 shares to 150,000,000 shares (the “Certificate of Amendment”). The Certificate of Amendment became effective upon filing with the
Secretary of State of the State of Delaware on October 4, 2018.
As of April 30, 2019, 56,135,697 shares of our common stock were issued and outstanding. Our common stock outstanding as of April 30, 2019 excluded the
following shares of common stock reserved for future issuance:
Stock Incentive Plans
Employee Stock Purchase Plan
Conversion of our outstanding Series E Preferred Stock(1)
_____________
Shares
7,264,713
1,196,261
6,826,435
(1) The Series E Preferred Stock is convertible into a number of shares of our common stock determined by dividing the liquidation preference of $25.00 per share by the conversion price,
currently $21.00 per share. If all of our outstanding Series E Preferred Stock were converted at the $21.00 per share conversion price, the holders of our Series E Preferred Stock would
receive an aggregate of 1,961,619 shares of our common stock. However, we have reserved the maximum number of shares of our common stock that could be issued upon a change of
control event assuming our shares of common stock are acquired for consideration of $5.985 per share or less. In this scenario, each outstanding share of our Series E Preferred Stock could
be converted into 4.18 shares of our common stock.
50
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Note 5 – Benefit Plans
Stock Incentive Plans
On October 4, 2018 (the “Effective Date”), our stockholders approved the Avid Bioservices, Inc. 2018 Omnibus Incentive Plan (the “2018 Plan”) which
provides, among other things, the ability for us to grant stock options, restricted stock units and other forms of stock-based awards.
The number of shares of our common stock authorized for issuance under the 2018 Plan is the sum of (A) 2,350,000 and (B) the aggregate number of shares
of common stock available for the grant of awards under our 2009, 2010, and 2011 Stock Incentive Plans (the “Prior Plans”) as of the Effective Date. The
2018 Plan replaced the Prior Plans, and no new awards will be granted under the Prior Plans as of the Effective Date. However, any awards outstanding under
the Prior Plans on the Effective Date will remain subject to and be paid under the applicable Prior Plan, and any shares subject to outstanding awards under
the Prior Plans that subsequently expire, terminate, or are surrendered or forfeited for any reason without issuance of shares will automatically become
available for issuance under the 2018 Plan.
In addition, we currently maintain three expired stock incentive plans referred to as the 2005, 2003 and 2002 Stock Incentive Plans (collectively, the “Expired
Plans”). No future grants of stock-based awards can be issued from the Expired Plans, however, all outstanding awards granted under the Expired Plans will
remain subject to the terms of the Expired Plans until they are exercised, canceled or expired.
The 2018 Plan, the Prior Plans, and the Expired Plans are collectively referred to as the “Stock Plans”. As of April 30, 2019, we had an aggregate of
7,264,713 shares of our common stock reserved for issuance under the Stock Plans, of which, 3,474,590 shares were subject to outstanding stock options and
restricted stock units and 3,790,123 shares were available for future grants of stock-based awards.
Stock Options
Stock options granted under our Stock Plans are granted at an exercise price not less than the fair market value of our common stock on the date of grant.
Stock option grants to employees generally vest 25% on each of the first, second, third and fourth anniversaries of the date of grant, and stock option grants to
non-employee directors generally vest over a period of one to three years from the date of grant. The maximum contractual term of any stock option granted
under the Stock Plans is ten years.
The estimated fair value of stock options are measured at the grant date, using a fair value based method, such as a Black-Scholes option valuation model, and
is amortized as stock-based compensation expense on a straight-line basis over the requisite service period of the award, which is generally the vesting period.
The use of a valuation model requires us to make certain estimates and assumptions with respect to selected model inputs. The expected volatility is based on
the daily historical volatility of our common stock covering the estimated expected term. The expected term of options granted reflects actual historical
exercise activity and assumptions regarding future exercise activity of unexercised, outstanding options. The risk-free interest rate is based on U.S. Treasury
notes with terms within the contractual life of the option at the time of grant. The expected dividend yield assumption is based on our expectation of future
dividend payouts. We have never declared or paid any cash dividends on our common stock and currently do not anticipate paying such cash dividends.
51
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
The fair value of stock options on the date of grant and the weighted-average assumptions used to estimate the fair value of the stock options using the Black-
Scholes option valuation model for fiscal years ended April 30, 2019, 2018 and 2017, were as follows:
Risk-free interest rate
Expected life (in years)
Expected volatility
Expected dividend yield
2019
Fiscal Year Ended April 30,
2018
2017
2.81%
5.57
76.56%
–
2.21%
6.19
110.43%
–
1.32%
6.12
111.30%
–
The following summarizes our stock option transaction activity for fiscal year ended April 30, 2019:
Outstanding at May 1, 2018
Granted
Exercised
Canceled or expired
Outstanding at April 30, 2019
Vested and expected to vest
Exercisable at April 30, 2019
______________
Grant Date
Weighted
Average Exercise
Price
Weighted
Average
Remaining
Contractual
Life (in years)
Aggregate
Intrinsic
Value (1)
Stock Options
3,597,738
973,614
(371,327)
(925,810)
3,274,215
3,274,215
1,932,527
$
$
$
$
$
$
$
8.74
5.00
3.45
11.28
7.51
7.51
9.45
5.53 $
5.53 $
3.87 $
1,238
1,238
700
(1) Aggregate intrinsic value represents the difference between the exercise price of an option and the closing market price of our common stock on April 30, 2019, which was $4.79 per
share.
The weighted-average grant date fair value of options granted to employees during the fiscal years ended April 30, 2019, 2018 and 2017 was $3.30, $3.50 and
$2.86 per share, respectively.
The aggregate intrinsic value of stock options exercised during the fiscal years ended April 30, 2019, 2018 and 2017 was $547, $173 and $11, respectively.
Cash received from stock options exercised during fiscal years ended April 30, 2019, 2018 and 2017, totaled $1,278, $752 and $31, respectively.
We issue shares of common stock that are reserved for issuance under the Stock Plans upon the exercise of stock options, and we do not expect to repurchase
shares of common stock from any source to satisfy our obligations under our compensation plans.
As of April 30, 2019, the total estimated unrecognized compensation cost related to non-vested employee stock options was $3,880. This cost is expected to
be recognized over a weighted average vesting period of 2.70 years based on current assumptions.
52
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Restricted Stock
A restricted stock unit (“RSU”) represents the right to receive one share of our common stock upon the vesting of each unit. RSUs generally vest over four
years at the rate of one-fourth of the shares granted on each anniversary of the date of grant. The estimated fair value of RSUs is based on the closing market
value of our common stock on the date of grant, and is amortized as stock-based compensation expense on a straight-line basis over the period of vesting.
The following summarizes our RSUs transaction activity for fiscal year ended April 30, 2019:
Outstanding at May 1, 2018
Granted
Vested
Forfeited
Outstanding at April 30, 2019
Shares
– $
217,200
–
(16,825)
200,375 $
Weighted Average
Grant Date
Fair Value
–
4.28
–
3.78
4.32
There were no RSUs granted during the fiscal years ended April 30, 2018 and 2017. As of April 30, 2019, the total estimated unrecognized compensation cost
related to non-vested RSUs was $733. This cost is expected to be recognized over a weighted average vesting period of 3.34 years.
Employee Stock Purchase Plan
The Employee Stock Purchase Plan (the “ESPP”) is a stockholders’-approved plan under which allows eligible employees to purchase shares of our common
stock through payroll deductions at a price equal to 85% of the lower of the fair market value our common stock as of the first trading day of the offering
period or on the last trading day of the six-month offering period. Employee participants are limited to purchase no more than $25,000 of stock in any one
calendar year. During the fiscal years ended April 30, 2019, 2018 and 2017, a total of 75,148, 88,327 and 270,075 shares of our common stock were
purchased, respectively, under the ESPP at a weighted average purchase price per share of $3.44, $3.59 and $1.95, respectively. As of April 30, 2019, we had
1,196,261 shares of our common stock reserved for issuance under the ESPP.
The fair value of the shares purchased under the ESPP was determined using a Black-Scholes option pricing model (see explanation of valuation model inputs
above under “Stock Options”), and is recognized as expense on a straight-line basis over the requisite service period (or six-month offering period).
The weighted average grant date fair value of purchase rights under the ESPP during fiscal years ended April 30, 2019, 2018 and 2017 was $1.49, $1.65 and
$1.07, respectively, based on the following Black-Scholes option valuation model inputs:
Risk-free interest rate
Expected life (in years)
Expected volatility
Expected dividend yield
2019
Fiscal Year Ended April 30,
2018
2017
2.26%
0.50
71.10%
–
1.10%
0.50
75.18%
–
0.46%
0.50
105.27%
–
53
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
401(k) Plan
We have a 401(k) Plan (the “Plan”) pursuant to section 401(k) of the Internal Revenue Code that allows participating employees to contribute up to 100% of
their compensation on a tax deferred basis up to the maximum amount permitted by the Internal Revenue Code. We match 50% of employee contributions of
up to 6% of their annual eligible compensation. The expense related to our matching contributions to the Plan was $377, $564 and $845 for the fiscal years
ended April 30, 2019, 2018 and 2017, respectively.
Stock-based Compensation Expense
Stock-based compensation expense for the fiscal years ended April 30, 2019, 2018 and 2017 was comprised of the following:
Cost of revenues
Selling, general and administrative expense
Discontinued operations
Total
2019
Fiscal Year Ended April 30,
2018
2017
$
$
474
1,121
–
1,595
$
$
378 $
820
340
1,538 $
108
1,553
1,702
3,363
Due to our net loss position, no tax benefits have been recognized in the Consolidated Statements of Cash Flows.
Note 6 – Income Taxes
We are primarily subject to U.S. federal and California state jurisdictions. To our knowledge, all tax years remain open to examination by U.S. federal and
state authorities.
In accordance with ASC 740, we are required to recognize the impact of an uncertain tax position in the consolidated financial statements when it is more
likely than not the position will be sustained upon examination by the tax authorities. An uncertain tax position will not be recognized if it has less than a 50%
likelihood of being sustained upon examination by the tax authorities. We had no unrecognized tax benefits from uncertain tax positions as of April 30, 2019
and 2018. It is also our policy, in accordance with authoritative guidance, to recognize interest and penalties related to income tax matters in interest and other
expense in our consolidated statements of operations and comprehensive loss. We did not recognize interest or penalties related to income taxes for fiscal
years ended April 30, 2019, 2018, and 2017, and we did not accrue for interest or penalties as of April 30, 2019 and 2018.
54
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial reporting
and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be
recovered or settled. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
As a result of our cumulative losses, management has concluded that a full valuation allowance against our net deferred tax assets is appropriate.
At April 30, 2019, we had net deferred tax assets of $119,516. Due to uncertainties surrounding our ability to generate future taxable income to realize these
tax assets, a full valuation has been established to offset our net deferred tax assets. Additionally, the future utilization of our net operating loss carry forwards
to offset future taxable income may be subject to an annual limitation, pursuant to Internal Revenue Code Section 382, as a result of ownership changes that
may have occurred previously or that could occur in the future. A Section 382 analysis was completed as of the fiscal year ended April 30, 2018 and we
subsequently reviewed ownership activity through April 30, 2019, which it was determined that no significant change in ownership had occurred. However,
ownership changes occurring subsequent to April 30, 2019 may impact the utilization of net operating loss carry forwards and other tax attributes.
At April 30, 2019, we had federal net operating loss carry forwards of approximately $425,841. The federal net operating loss carry forwards generated prior
to January 1, 2018 expire in fiscal years 2020 through 2038. The federal net operating loss generated after January 1, 2018 of $6,609 can be carried forward
indefinitely and be available to offset up to 80% of future taxable income each year. We also have California state net operating loss carry forwards of
approximately $273,581 at April 30, 2019, which begin to expire in fiscal year 2029.
The provision for income taxes on our loss from continuing operations for the fiscal years ended April 30, 2019, 2018 and 2017 are comprised of the
following:
Federal income taxes at statutory rate
State income taxes
Expiration and adjustments of deferred tax assets
Change in valuation allowance
Stock-based compensation
Other, net
Tax Cuts and Jobs Act
Income tax benefit
2019
2018
2017
(1,120)
(48)
2,507
(2,480)
1,309
(452)
–
(284)
$
$
(6,112) $
155
1,840
(57,599)
1,584
6
60,126
– $
475
309
1,693
(2,616)
–
139
–
–
$
$
55
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts for income tax purposes. Significant components of our deferred tax assets and deferred tax liabilities at April 30, 2019 and 2018 are as
follows:
Net operating losses
Stock-based compensation
Deferred revenue
Deferred rent
Other
Total deferred tax assets
Less valuation allowance
Total deferred tax assets, net of valuation allowance
Deferred tax liabilities:
Fixed assets
Total deferred tax liabilities
Net deferred tax assets
2019
2018
113,612
3,416
1,610
555
1,256
120,449
(119,516)
933
(933)
(933)
–
$
$
$
115,236
4,828
2,852
568
879
124,363
(123,555)
808
(808)
(808)
–
$
$
$
On May 1, 2018, we adopted ASC 606 (Note 2). Upon adoption, no change in retained earnings was recorded related to income taxes as we maintain a full
valuation allowance. However, an adjustment of approximately $700 was recorded as a deferred tax liability and a corresponding reduction to the valuation
allowance.
On May 1, 2017, we adopted ASU 2016-09. Upon adoption, we have excess tax benefits for which a benefit could not previously be recognized of
approximately $2,400. The balance of the unrecognized excess tax benefits has been reversed with the impact recorded to retained earnings including any
change to the valuation allowance as a result of the adoption. Due to the full valuation allowance on the U.S. deferred tax assets, there was no impact to the
accompanying consolidated financial statements as a result of adopting ASU 2016-09 other than what is reflected in the accompanying Consolidated
Statements of Stockholders’ Equity for the fiscal year ended April 30, 2018.
In December 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted. The Tax Act includes a number of changes to existing U.S. tax laws that impact
us, most notably a reduction of the U.S. corporate income tax rate from 35% to 21% for tax years, effective January 1, 2018. We performed a review of the
Tax Act for the fiscal year ended April 30, 2018, and based on the information available at that time, we recorded a provisional increase in tax expense and a
corresponding decrease in net deferred tax assets of $60,126, which were fully offset by a valuation allowance.
We applied the guidance under Staff Accounting Bulletin No. 118 when accounting for the enactment-date effects of the Tax Act for the fiscal year ended
April 30, 2018 as we had not completed our accounting for all the enactment-date income tax effects of the Tax Act under ASC 740 for the remeasurement of
deferred tax assets and liabilities. We completed our accounting for the enactment-date income tax effects of the Tax Act during the quarter ended January 31,
2019. Upon further analyses of the Tax Act and Notices and regulations issued and proposed by the U.S. Department of the Treasury and the Internal Revenue
Service provisional amount recognized for the fiscal year ended April 30, 2018 did not change; therefore, there was no adjustment to tax expense.
56
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Note 7 – Net Loss per Common Share
Basic net loss per common share is computed by dividing our net loss attributable to common stockholders by the weighted average number of shares of
common stock outstanding during the period, excluding the dilutive effects of stock options, unvested RSUs, shares of common stock expected to be issued
under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Diluted net loss per common share is computed by dividing our net
loss attributable to common stockholders by the sum of the weighted average number of shares of common stock outstanding during the period plus the
potential dilutive effects of stock options, unvested RSUs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred
Stock outstanding during the period. Net loss attributable to common stockholders represents our net loss plus Series E Preferred Stock accumulated
dividends. Series E Preferred Stock accumulated dividends include dividends declared for the period (regardless of whether or not the dividends have been
paid) and dividends accumulated for the period (regardless of whether or not the dividends have been declared).
The potential dilutive effect of stock options, unvested RSUs, shares of common stock expected to be issued under our ESPP, and warrants outstanding during
the period are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive effect of our
Series E Preferred Stock outstanding during the period was calculated using the if-converted method assuming the conversion of Series E Preferred Stock as
of the earliest period reported or at the date of issuance, if later, but are excluded if their effect is anti-dilutive. However, because the impact of stock options,
unvested RSUs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net
loss, there was no difference between basic and diluted loss per common share amounts for the three years ended April 30, 2019.
The calculation of weighted average diluted shares outstanding excludes the dilutive effect of the following weighted average outstanding stock options,
unvested RSUs and shares of common stock expected to be issued under our ESPP as their impact is anti-dilutive during periods of net loss:
Stock options
RSUs
ESPP
Total
2019
2018
2017
138,822
34,122
10,589
183,533
53,978
–
1,972
55,950
–
–
45,767
45,767
The calculation of weighted average diluted shares outstanding also excludes the following weighted average outstanding stock options, unvested RSUs,
warrants, and Series E Preferred Stock (assuming the if-converted method), as their exercise prices or conversion price were greater than the average market
price of our common stock during the respective periods, resulting in an anti-dilutive effect:
Stock options
RSUs
Warrants
Series E Preferred Stock
Total
2019
2018
2017
2,712,454
33,532
12,942
1,978,783
4,737,711
3,636,699
–
39,040
1,978,783
5,654,522
4,156,421
–
39,040
1,955,588
6,151,049
57
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Note 8 – Commitments and Contingencies
In the ordinary course of business, we are at times subject to various legal proceedings and disputes. We make provisions for liabilities when it is both
probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Such provisions, if any, are reviewed at least quarterly and
adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events
pertaining to a particular case. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or
in the aggregate, would have a material adverse effect on our consolidated results of operations or financial position.
Note 9 – Restructuring Charges
In August 2017, we implemented a restructuring plan intended to reduce operating costs and improve cost efficiencies while we pursued strategic options for
our research and development assets and focused our efforts on growing our CDMO business. Under this restructuring plan, which we completed in October
2017, we reduced our overall workforce by 57 employees. As a result, during the fiscal quarter ended October 31, 2017, we incurred an aggregate of $1,588
in restructuring costs consisting of termination benefits, including severance, and other employee-related costs, of which $330 related to our discontinued
research and development segment and $1,258 related to our contract manufacturing services segment. The restructuring costs associated with our
discontinued research and development segment are included in income (loss) from discontinued operations, net of tax, in the accompanying consolidated
financial statements for the fiscal year ended April 30, 2018 (Note 10). The restructuring costs associated with our contract manufacturing services segment
are included in operating expenses in the accompanying consolidated financial statements for the fiscal year ended April 30, 2018. All restructuring costs
were paid in full during fiscal year 2018.
Note 10 – Sale of Research and Development Assets
On February 12, 2018, we entered into an Asset Assignment and Purchase Agreement (the “February 2018 Purchase Agreement”) with Oncologie, Inc.
(“Oncologie”) pursuant to which we sold to Oncologie the majority of our research and development assets, which included the assignment of certain
exclusive licenses related to our former phosphatidylserine (PS)-targeting program, as well as certain other licenses and assets useful and/or necessary for the
potential commercialization of bavituximab.
Pursuant to the February 2018 Purchase Agreement, we received an aggregate of $8,000 from Oncologie, of which $3,000 was received in fiscal year 2018
and $5,000 was received in fiscal year 2019. We are also eligible to receive up to an additional $95,000 in the event that Oncologie achieves certain
development, regulatory and commercialization milestones with respect to bavituximab. In addition, we are eligible to receive royalties on net sales that are
upward tiering into the mid-teens in the event that Oncologie commercializes and sells products utilizing bavituximab or the other transferred assets. As of
April 30, 2019, no development, regulatory or commercialization milestones have been achieved by Oncologie. Oncologie is responsible for all future
research, development and commercialization of bavituximab, including all related intellectual property costs and all other future liabilities and obligations
arising out of the ownership of the transferred assets (i.e., we remain obligated for all liabilities associated with the research and development assets
associated with the February 2018 Purchase Agreement incurred or arising prior to February 12, 2018).
On September 13, 2018, we entered into a separate Asset Assignment and Purchase Agreement (the “September 2018 Purchase Agreement”) with Oncologie
pursuant to which we sold to Oncologie our r84 technology, which included the assignment of certain licenses, patents and other assets useful and/or
necessary for the potential commercialization of the r84 technology.
58
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Pursuant to the September 2018 Purchase Agreement, we received $1,000 from Oncologie, which amount was paid to us in October 2018. We are also
eligible to receive up to an additional $21,000 in the event that Oncologie achieves certain development, regulatory and commercialization milestones with
respect to r84. In addition, we are eligible to receive royalties on net sales ranging from the low to mid-single digits in the event that Oncologie
commercializes and sells products utilizing the r84 technology. As of April 30, 2019, no development, regulatory or commercialization milestones have been
achieved by Oncologie. Oncologie is responsible for all future research, development and commercialization of r84, including all related intellectual property
costs and all other future liabilities and obligations arising out of the ownership of the transferred assets (i.e., we remain obligated for all liabilities associated
with the research and development assets associated with the September 2018 Purchase Agreement incurred or arising prior to September 13, 2018).
Discontinued Operations
As a result of the sale of our PS-targeting program and our r84 technology, the abandonment of our remaining research and development assets, and the
strategic shift in our corporate direction to focus solely on our CDMO business, the operating results from our former research and development segment and
the related assets and liabilities have been presented as discontinued operations in the accompanying consolidated financial statements for all periods
presented. During the fiscal years ended April 30, 2019 and 2018, we recorded a gain of $1,000 and $8,000, respectively, upon the completion of the
September 2018 Purchase Agreement and the February 2018 Purchase Agreement, which amounts are included in income (loss) from discontinued
operations, net of tax, in the accompanying Consolidated Statements of Operations and Comprehensive Loss for the fiscal years ended April 30, 2019 and
2018, respectively. The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect
the utilization of services provided to the former research and development segment. The allocations do not include amounts related to general corporate
administrative expenses or interest expense. Therefore, these results of operations do not necessarily reflect what the results of operations would have been
had the former research and development segment operated as a stand-alone segment.
The following table summarizes the results of discontinued operations for the fiscal years ended April 30, 2019, 2018 and 2017:
2019
2018
2017
$
– $
25
$
–
–
–
–
–
125
6,782
2,163
330
9,275
–
1,000
284
841 $
8,000
–
(1,250)
$
27,992
1,560
–
29,552
–
–
–
(29,552)
License revenue
Operating expenses:
Research and development
Selling, general and administrative
Restructuring charges
Total operating expenses
Other income
Gain on sale of research and development assets before
income taxes
Income tax expense
Income (loss) from discontinued operations, net of tax $
59
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
The following table includes the assets and liabilities of discontinued operations as of April 30, 2018. There were no assets or liabilities related to
discontinued operations as of April 30, 2019:
Assets:
Other receivables
Total assets of discontinued operations
Liabilities:
Accounts payable
Accrued clinical trial and related fees
Accrued payroll and related costs
Other liabilities
Total liabilities of discontinued operations
2018
5,000
5,000
32
3,613
614
291
4,550
$
$
$
$
The carrying value of the assets and liabilities deemed a component of the discontinued research and development segment were not classified as “held for
sale” in the accompanying Consolidated Balance Sheet at April 30, 2018 as Oncologie did not purchase or assume any of the reported assets or liabilities
under the aforementioned February 2018 Purchase Agreement and September 2018 Purchase Agreement.
Note 11 – Selected Quarterly Financial Data (Unaudited)
Selected quarterly financial information for each of the two most recent fiscal years is as follows:
Revenues
Gross profit
(Loss) income from continuing operations
Income from discontinued operations, net of tax (b)(c)
Net (loss) income
Net loss attributable to common stockholders
Basic and diluted net (loss) income per common share
attributable to common stockholders (d)
Continuing operations
Discontinued operations
Net loss per common share attributable to common
stockholders
First Quarter
12,589
1,192
(1,961)
–
(1,961)
(3,403)
(0.06)
–
(0.06)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
60
Third Quarter
Fiscal Year Ended April 30, 2019 (a)
Second Quarter
10,178
334
(2,190)
739
(1,451)
(2,893)
$
$
$
$
$
$
13,781 $
2,050 $
(1,139) $
– $
(1,139) $
(2,581) $
Fourth Quarter
17,055
3,648
234
102
336
(1,106)
(0.06)
0.01
(0.05)
$
$
$
(0.05) $
– $
(0.05) $
(0.02)
–
(0.02)
AVID BIOSERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share information)
Revenues
Gross profit (loss)
Income (loss) from continuing operations
(Loss) income from discontinued operations, net of tax (b)(c)
Net (loss) income
Net (loss) income attributable to common stockholders
Basic and diluted net income (loss) per common share
attributable to common stockholders (d)
Continuing operations
Discontinued operations
Net (loss) income per common share attributable to
common stockholders
________________
First Quarter
27,077
6,629
2,800
(4,005)
(1,205)
(2,647)
0.03
(0.09)
(0.06)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Third Quarter
Fiscal Year Ended April 30, 2018 (a)
Second Quarter
12,782
(3,460)
(8,301)
(4,323)
(12,624)
(14,066)
$
$
$
$
$
$
6,819 $
(4,132) $
(8,928) $
(2,076) $
(11,004) $
(12,446) $
Fourth Quarter
6,943
(1,961)
(6,134)
9,154
3,020
1,578
(0.21)
(0.10)
(0.31)
$
$
$
(0.23) $
(0.05) $
(0.28) $
(0.14)
0.17
0.03
(a)
(b)
(c)
(d)
On May 1, 2018, we adopted ASC 606 using the modified retrospective method applied to all contracts not completed as of May 1, 2018 (Note 2). Under the modified retrospective
method, results for the reporting periods beginning on or after May 1, 2018 are presented in accordance with ASC 606, while prior period amounts are not adjusted and continue to be
reported under the accounting standards that were in effect prior to May 1, 2018.
For all periods presented, the operating results of our former research and development segment are reported as income (loss) from discontinued operations, net of tax (Note 1).
Income from discontinued operations, net of tax, for the quarters ended October 31, 2018 and April 30, 2018 include a gain on sale of research and development assets before tax of
$1,000 and $8,000, respectively (Note 10).
Basic and diluted net income (loss) per common share attributable to common stockholders calculations for each of the quarters are based on the basic and diluted weighted average
common shares outstanding for each period. As such, the sum of the quarters may not necessarily equal the basic and diluted net income (loss) per common share amount for the fiscal
year.
Note 12 – Subsequent Events
On June 5, 2019, our Board of Directors declared a quarterly cash dividend of $0.65625 per share on our Series E Preferred Stock. The dividend payment is
equivalent to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference, accruing from April 1, 2019 through June 30,
2019. The cash dividend of $1,081 is payable on July 1, 2019 to holders of the Series E Preferred Stock of record on June 17, 2019.
61
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” defined in Rule 13a-15(e) under the Exchange Act refers to the controls and other procedures of a company
that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed,
summarized and reported within the required time periods. In designing and evaluating the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives,
and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Under the supervision and with the participation of our management, including our interim chief executive officer and chief
financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of April 30,
2019. Based on this evaluation, our interim president and chief executive officer and our chief financial officer concluded that our disclosure controls and
procedures were effective as of April 30, 2019 to ensure the timely disclosure of required information in our SEC filings.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of
internal control over financial reporting. The Company’s internal control over financial reporting is a process designed, as defined in Rule 13a-15(f) under the
Exchange Act, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for
external purposes in accordance with generally accepted accounting principles.
The Company’s internal control over financial reporting is supported by written policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii)
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have
a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of the Company’s annual consolidated financial statements, management of the Company has undertaken an assessment of
the effectiveness of the Company’s internal control over financial reporting based on criteria established in Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Management’s assessment included an evaluation of the design
of the Company’s internal control over financial reporting and testing of the operational effectiveness of the Company’s internal control over financial
reporting.
Based on this assessment, management has concluded that the Company’s internal control over financial reporting was effective as of April 30, 2019.
Our internal control over financial reporting as of April 30, 2019 has been audited by Ernst & Young LLP, an independent registered public accounting firm,
as stated in their report included herein.
62
Changes in Internal Control over Financial Reporting
Management has determined that, as of April 30, 2019, there were no significant changes in our internal control over financial reporting during the fourth
quarter of the fiscal year ended April 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B.
OTHER INFORMATION
On June 26, 2019 (the “Effective Date”), we entered into an employment agreement with our chief financial officer, Daniel R. Hart (the “Employment
Agreement”), who has served in this capacity since August 1, 2018. The Employment Agreement provides for an initial two-year term commencing on the
Effective Date, unless sooner terminated as provided in the Employment Agreement. On each anniversary of the Effective Date, the term of the Employment
Agreement will automatically be extended for an additional one (1) year period, unless either we or Mr. Hart gives to the other written notice at least ninety
(90) days prior to the expiration of the then current year period, of such party’s intent not to extend Employment Agreement.
Pursuant to the terms of the Employment Agreement, Mr. Hart is entitled to receive an annual base salary of $397,000 and is eligible for an annual
discretionary cash bonus of up to forty-five percent (45%) of his then in effect annual base salary as determined by the Compensation Committee of the Board
of Directors in accordance with the our cash bonus plan for executives then in effect and in its sole discretion.
Mr. Hart is eligible to participate in all benefits plans or arrangements which may be in effect from time to time and made available by us to our executive
management employees.
If Mr. Hart’s employment is terminated by us other than for cause or if he resigns for good reason (within the meaning given to such terms in the Employment
Agreement), Mr. Hart will be entitled to receive, subject to his execution of a general release of claims, (i) continued base salary for a period of twelve (12)
months, (i) COBRA continuation coverage for him and his family for a period of up to twelve (12) months paid by us, and (iii) 100% of his annual cash
bonus pro rata portion for the year in which his termination occurs and payable at the time other executive management employees receive their discretionary
bonuses. Mr. Hart will be subject to non-solicitation restrictions for a period of one year following any termination of his employment.
The foregoing description of the Employment Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the
Employment Agreement, a copy of which is filed as an exhibit to this Annual Report on Form 10-K and is incorporated herein by reference.
63
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Avid Bioservices, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Avid Bioservices, Inc.’s internal control over financial reporting as of April 30, 2019, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our
opinion, Avid Bioservices, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of April 30, 2019,
based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated
balance sheets of the Company as of April 30, 2019 and 2018, the related consolidated statements of operations and comprehensive loss, stockholders’ equity
and cash flows for each of the three years in the period ended April 30, 2019, and the related notes and our report dated June 27, 2019 expressed an
unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Irvine, California
June 27, 2019
64
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this Item regarding our directors, executive officers and committees of our board of directors is incorporated by reference to the
information set forth under the captions “Election of Directors,” “Executive Compensation” and “Corporate Governance” in our 2019 Definitive Proxy
Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2019 (the “2019 Definitive Proxy Statement”).
Information required by this Item regarding Section 16(a) reporting compliance is incorporated by reference to the information set forth under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance” in our 2019 Definitive Proxy Statement.
Information required by this Item regarding our code of ethics is incorporated by reference to the information set forth under the caption “Corporate
Governance” in our 2019 Definitive Proxy Statement.
ITEM 11.
EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the information set forth under the captions “Director Compensation,” “Compensation
Discussion and Analysis” and “Executive Compensation” in our 2019 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year
ended April 30, 2019.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Other than as set forth below, the information required by this Item is incorporated by reference to the information set forth under the caption “Security
Ownership of Certain Beneficial Owners, Directors and Management” in our 2019 Definitive Proxy Statement to be filed within 120 days after the end of our
fiscal year ended April 30, 2019.
Equity Compensation Plan Information
The following table summarizes our compensation plans under which our equity securities are authorized for issuance as of April 30, 2019:
(a)
Number of Securities
to be Issued Upon
the Exercise of
Outstanding
Options, Warrants
and Rights
3,462,587
12,003
–
3,474,590
(b)
Weighted-Average
Exercise Price of
Outstanding
Options, Warrants
and Rights ($/share)
7.49
14.10
–
7.51 (3)
(c)
Number of Shares
Remaining
Available for Future
Issuance Under
Equity
Compensation Plans
(Excluding
Securities Reflected
in Column (a))
3,790,123
–
1,196,261
4,986,384
Plan Category
Equity compensation plans approved by stockholders (1)
Equity compensation plans not approved by stockholders (2)
Employee Stock Purchase Plan approved by stockholders
Total
____________________
(1) Represents stock options and restricted stock units under our stockholder approved equity compensation plans referred to as the 2018 Omnibus Incentive Plan, the 2011 Stock Incentive
Plan, the 2010 Stock Incentive Plan, the 2009 Stock Incentive Plan, the 2005 Stock Incentive Plan and the 2003 Stock Incentive Plan.
(2) Represents stock options under our 2002 Stock Incentive Plan (the “2002 Plan”), which was not submitted for stockholder approval. The 2002 Plan, which expired in June 2012, was a
broad-based non-qualified stock option plan for the issuance of up to 85,714 stock options. The 2002 Plan provided for the granting of options to purchase shares of our common stock at
prices not less than the fair market value of our common stock at the date of grant and generally expired ten years after the date of grant. No additional grants of stock options can be
granted under the 2002 Plan, however, the terms of the 2002 Plan remain in effect with respect to the outstanding options granted under the 2002 Plan until they are exercised, canceled or
expired
(3) Represents the weighted-average exercise price of outstanding stock options as there is no exercise price for restricted stock units.
65
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item is incorporated by reference to the information set forth under the captions “Certain Relationships and Related
Transactions,” “Director Independence” and “Compensation Committee Interlocks and Insider Participation” in our 2019 Definitive Proxy Statement to be
filed within 120 days after the end of our fiscal year ended April 30, 2019.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to the information set forth under the caption “Independent Registered Public Accounting
Firm Fees” in our 2019 Definitive Proxy Statement to be filed within 120 days after the end of our fiscal year ended April 30, 2019.
66
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a)
(1)
Documents filed as part of this report on Form 10-K:
Consolidated Financial Statements
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of April 30, 2019 and 2018
Consolidated Statements of Operations and Comprehensive Loss for each of the three years in the period ended April 30, 2019
Consolidated Statements of Stockholders’ Equity for each of the three years in the period ended April 30, 2019
Consolidated Statements of Cash Flows for each of the three years in the period ended April 30, 2019
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Page
35
36
37
38
39
40
All schedules are omitted as the required information is inapplicable, or the information is presented in the consolidated financial statements or related notes.
(3) Exhibits
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this report on Form 10-K.
ITEM 16.
FORM 10-K SUMMARY
None.
67
EXHIBIT INDEX
Exhibit
Number
3.1
3.2
3.3
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
Description
Certificate of Incorporation of Avid Bioservices, Inc., a Delaware corporation, as amended through October 4, 2018 (Incorporated by
reference to Exhibit 3.1 to Registrant’s Quarterly Report on Form 10-Q as filed with the Commission on December 10, 2018).
Amended and Restated Bylaws of Avid Bioservices, Inc., a Delaware corporation (Incorporated by reference to Exhibit 3.2 to Registrant’s
Current Report on Form 8-K as filed with the Commission on November 14, 2014).
Amendment No. 1 to Amended and Restated Bylaws of Avid Bioservices, Inc., a Delaware corporation (Incorporated by reference to
Exhibit 3.2 to Registrant’s Current Report on Form 8-K as filed with the Commission on March 13, 2018).
Form of Certificate for Common Stock (Incorporated by reference to Exhibit 4.1 to Registrant’s Annual Report on Form 10-K for the year
end April 30, 1988).
Avid Bioservices, Inc. 2002 Non-Qualified Stock Option Plan (Incorporated by reference to Exhibit 4.17 to Registrant’s Registration
Statement on Form S-8 (File No. 333-106385) as filed with the Commission on June 23, 2006). *
Form of 2002 Non-Qualified Stock Option Agreement (Incorporated by reference to Exhibit 4.18 to Registrant’s Registration Statement on
Form S-8 (File No. 333-106385) as filed with the Commission on June 23, 2006). *
Amended and Restated Rights Agreement, dated March 16, 2016, between Avid Bioservices, Inc. and Broadridge Corporate Issuer
Solutions, Inc., as Rights Agent (Incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K as filed with the
Commission on March 17, 2016).
2003 Stock Incentive Plan Non-qualified Stock Option Agreement (Incorporated by reference to Exhibit 10.95 to Registrant’s Registration
Statement on Form S-8 (File No. 333-121334) as filed with the Commission on December 16, 2004). *
2003 Stock Incentive Plan Incentive Stock Option Agreement (Incorporated by reference to Exhibit 10.96 to Registrant’s Registration
Statement on Form S-8 (File No. 333-121334) as filed with the Commission on December 16, 2004). *
2010 Stock Incentive Plan (Incorporated by reference to Exhibit A to Registrant’s Definitive Proxy Statement as filed with the
Commission on August 27, 2010). *
Form of Stock Option Award Agreement under 2010 Stock Incentive Plan (Incorporated by reference to Exhibit 4.17 to Registrant’s
Registration Statement on Form S-8 (File No. 333-171067) as filed with the Commission on December 9, 2010). *
2010 Employee Stock Purchase Plan (Incorporated by reference to Exhibit B to Registrant’s Definitive Proxy Statement filed with the
Commission on August 27, 2010). *
4.10
Amendment to the 2010 Employee Stock Purchase Plan (Incorporated by reference to Exhibit B to Registrant’s Definitive Proxy Statement
4.11
as filed with the Commission on August 26, 2016). *
2011 Stock Incentive Plan (Incorporated by reference to Exhibit A to Registrant’s Definitive Proxy Statement as filed with the
Commission on August 26, 2011). *
4.12
Form of Stock Option Award Agreement under 2011 Stock Incentive Plan (Incorporated by reference to Exhibit 4.20 to Registrant’s
Registration Statement on Form S-8 (File No. 333-178452) as filed with the Commission on December 12, 2011). *
4.13
First Amendment to the Avid Bioservices, Inc., 2011 Stock Incentive Plan (Incorporated by reference to Exhibit A to Registrant’s
Definitive Proxy Statement as filed with the Commission on August 27, 2012). *
4.14
Second Amendment to the Avid Bioservices, Inc. 2011 Stock Incentive Plan (Incorporated by reference to Exhibit A to Registrant’s
Definitive Proxy Statement as filed with the Commission on August 26, 2013). *
4.15
Third Amendment to the Avid Bioservices, Inc. 2011 Stock Incentive Plan dated April 24, 2015 (Incorporated by reference to Exhibit 4.24
to Registrant’s Annual Report on Form 10-K for the year ended April 30, 2015, as filed with the Commission on July 14, 2015). *
4.16
Form of Amendment to Stock Option Award Agreement Under the Avid Bioservices, Inc., 2011 Stock Incentive Plan related to Non-
Employee Director stock option awards (Incorporated by reference to Exhibit 4.27 to Registrant’s Annual Report on Form 10-K for the
year ended April 30, 2015, as filed with the Commission on July 14, 2015). *
68
Exhibit
Number
4.17
Description
Fourth Amendment to the Avid Bioservices, Inc. 2011 Stock Incentive Plan (Incorporated by reference to Exhibit B to Registrant’s
Definitive Proxy Statement filed with the Commission on August 28, 2015). *
4.18
Form of Indenture (Incorporated by reference to Exhibit 4.4 to Registrant’s Registration Statement on Form S-3 (File No.: 333-222548) as
filed with the Commission on January 12, 2018).
4.19
Avid Bioservices, Inc. 2018 Omnibus Incentive Plan (Incorporated by reference to Exhibit A to Registrant’s Definitive Proxy Statement
filed with the Commission on August 17, 2018). *
4.20
Form of Stock Option Award Agreement under 2018 Omnibus Incentive Plan (Incorporated by reference to Exhibit 4.2 to Registrant’s
Registration Statement on Form S-8 (File No. 333-228735) as filed with the Commission on December 10, 2018). *
4.21
Form of Restricted Stock Unit Award Agreement under 2018 Omnibus Incentive Plan (Incorporated by reference to Exhibit 4.3 to
10.1
10.2
Registrant’s Registration Statement on Form S-8 (File No. 333-228735) as filed with the Commission on December 10, 2018). *
Lease and Agreement of Lease between TNCA, LLC, as Landlord, and Avid Bioservices, Inc., as Tenant, dated as of December 24, 1998
(Incorporated by reference to Exhibit 10.48 to Registrant’s Quarterly Report on Form 10-Q as filed with the Commission on March 12,
1999).
First Amendment to Lease and Agreement of Lease between TNCA, LLC, as Landlord, and Avid Bioservices, Inc., as Tenant, dated
December 22, 2005 (Incorporated by reference to Exhibit 99.1 and 99.2 to Registrant’s Current Report on Form 8-K as filed with the
Commission on December 23, 2005).
10.3
Annual Bonus Plan for Executive Officers adopted July 12, 2011(Incorporated by reference to Exhibit 10.29 to Registrant’s Annual Report
10.4
10.5
10.6
10.7
23.1
24
31.1
31.2
32
on Form 10-K as filed with the Commission on July 14, 2011). *
Amended and Restated Employment Agreement by and between Avid Bioservices, Inc. and Mark R. Ziebell, effective December 27, 2012
(Incorporated by reference to Exhibit 10.38 to Registrant’s Quarterly Report on Form 10-Q as filed with the Commission on March 12,
2013). *
Asset Assignment and Purchase Agreement by and between Avid Bioservices, Inc. and Oncologie, Inc., dated February 12, 2018
(Incorporated by reference to Exhibit 10.11 to Registrant's Annual Report on Form 10-K as filed with the Commission on July 16, 2018).
**
Separation Agreement and Release of Claims between Roger J. Lias, Ph.D. and Avid Bioservices, Inc. dated June 12, 2019. ***
Employment Agreement by and between Avid Bioservices, Inc. and Daniel R. Hart, effective June 26, 2019. (*) (***)
Consent of Independent Registered Public Accounting Firm. ***
Power of Attorney (included on signature page of Annual Report). ***
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended.
***
Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended. ***
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b)/15d-14(b) under the Securities Exchange
Act of 1934, as amended, and 18 U.S.C. Section 1350. ***
101.INS
XBRL Taxonomy Extension Instance Document. ***
101.SCH XBRL Taxonomy Extension Schema Document. ***
101.CAL
101.DEF
101.LAB XBRL Taxonomy Extension Label Linkbase Document. ***
101.PRE
XBRL Taxonomy Extension Calculation Linkbase Document. ***
XBRL Taxonomy Extension Definition Linkbase Document. ***
XBRL Presentation Extension Linkbase Document. ***
_______________________________
*
**
***
This Exhibit is a management contract or a compensation plan or arrangement.
Portions omitted pursuant to a request of confidentiality filed separately with the SEC.
Filed herewith.
69
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
SIGNATURES
Dated: June 27, 2019
AVID BIOSERVICES, INC.
By:
/s/ /Richard B. Hancock
Richard B. Hancock
Interim President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Richard B. Hancock, Interim
President and Chief Executive Officer, and Daniel R. Hart, Chief Financial Officer, and each of them, his true and lawful attorneys-in-fact and agents, with
the full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments to this report,
and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each
said attorney-in-fact and agent full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorney-
in-fact and agent, or either of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant
and in the capacities and on the dates indicated:
Name
Title
Interim President and Chief Executive Officer and Director
(Principal Executive Officer)
Date
June 27, 2019
/s/ Richard B. Hancock
Richard B. Hancock
/s/ Daniel R. Hart
Daniel R. Hart
/s/ Joseph Carleone, Ph.D.
Joseph Carleone, Ph.D.
/s/ Mark R. Bamforth
Mark R. Bamforth
/s/ Joel McComb
Joel McComb
/s/ Gregory P. Sargen
Gregory P. Sargen
/s/ Patrick D. Walsh
Patrick D. Walsh
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
June 27, 2019
Chairman of the Board of Directors
June 27, 2019
Director
Director
Director
Director
70
June 27, 2019
June 27, 2019
June 27, 2019
June 27, 2019
SEPARATION AGREEMENT AND RELEASE OF ALL CLAIMS
EXHIBIT 10.6
This Separation Agreement and Release of All Claims (“Agreement”) is made between Avid Bioservices, Inc. (“Company”) and Roger J. Lias, Ph.D.
(“Executive”) in the complete, final, and binding settlement of all claims and potential claims, if any, with respect to their employment relationship.
RECITALS
A.
B.
C.
Executive resigned as the President and Chief Executive Officer of the Company effective May 7, 2019 (the “Resignation Date”).
Executive’s employment was terminated effective on the Resignation Date as the result of a mutual agreement to resign.
Pursuant to the terms of Executive’s employment with the Company, Executive is entitled to certain severance benefits in exchange for a
general release of all claims. This Agreement is therefore entered into by the Company and Executive to document the parties’ agreement
regarding the terms of Executive’s separation from the Company.
NOW, THEREFORE, IN RELIANCE OF THE ABOVE RECITALS AND IN CONSIDERATION of the promises, covenants and agreements
herein contained, the Company and Executive agree as follows:
1. Except as provided below, Executive acknowledges the receipt of all wages, salary, bonuses, benefits, expense reimbursement or any
other monies owed by Company to Executive. Aside from the severance benefits described below, Executive acknowledges that he is not entitled to any
additional future compensation other than (i) his earned bonus for fiscal year 2019, the amount of which will be determined in connection with the audit of the
Company’s financial statements and which shall be paid to Executive concurrent with the Company’s payment of fiscal year 2019 bonuses to its other
executive officers, and (ii) the reimbursement of business expenses not submitted by Executive as of the Resignation Date. Executive agrees to submit all
such remaining business expenses for reimbursement within fourteen (14) days of the Resignation Date, which expenses shall be promptly reimbursed by the
Company.
2. Executive has returned all Company property remaining in Executive’s possession, including but not limited to credit cards, computer
hardware, memory or storage devices, software, keys, and documents regardless of medium (and all copies). Executive hereby represents that: (1) he has not
knowingly retained in his possession any such property, including backups thereof in any form (including, cloud-based, printed or electronic); (2) he did not
upload/download any such property for any reason other than for legitimate and proper purposes pursuant to his employment with the Company (and any
property so legitimately uploaded/downloaded has either been returned or destroyed); (3) he did not transfer such property to any other person or entity (who
at the time was not expressly authorized by the Company to have possession of such property) other than for legitimate and proper purposes pursuant to his
employment with the Company; and (4) any such property has either been returned to the Company or has been deleted/destroyed. Executive also agrees to
promptly return any subsequently discovered Company property.
3. In consideration for the general release and promises and representations of Executive as described in this Agreement, the Company
will provide Executive the following severance benefits: (i) Executive shall continue to be a paid his base salary less any applicable payroll taxes and
withholdings on the Company’s regular paydays for a period of twelve months from the Resignation Date; (ii) the Company shall provide and pay the cost of
COBRA continuation coverage for Executive and his family at his current coverage levels for a period of twelve (12) months until May 7, 2020 or until
Executive is eligible for coverage with another employer, whichever is earlier; (iii) per the terms of his employment, the Company shall (A) pay to Executive
the fifty thousand dollar ($50,000) relocation bonus, less required federal and California income tax withholdings and other payroll deductions within three
business days following written confirmation from Executive that his family has permanently relocated to Orange County, California and (B) subject to
Company’s receipt of invoices, reimburse Executive for actual relocation expenses incurred in an amount not to exceed fifty thousand dollars ($50,000) plus
the relocation of up to two cars from North Carolina to California, not to exceed $2,000 per car; (iv) Executive shall have until May 7, 2020 to exercise any
stock options that have vested as of Resignation Date; and (v) the Company shall continue to pay the monthly rent on Executive’s temporary residence in
Irvine, California, to September 12, 2019, which shall be grossed up for federal and California income taxes and included in his taxable earnings, consistent
with past practices (collectively the “Severance”). This Severance will only be paid (or received) if Executive signs and returns this Agreement and does not
exercise his right of revocation under paragraph 12 of this Agreement.
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4. In exchange for the Severance benefits and the promises contained herein, Executive hereby irrevocably and unconditionally releases,
acquits, and forever discharges the Company, and all parent, subsidiary, sister, and affiliated corporations and entities of the Company, as well as all of its
past, present or future agents, officers, directors, shareholders, employees, representatives, and attorneys, and all persons acting by, though, under or in
concert with any of them, and each of their respective heirs, successors, and assigns (collectively, “Releasees”), or any of them, from any and all charges,
complaints, claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts
and expenses (including attorneys’ fees and costs actually incurred) of any nature whatsoever, known or unknown, suspected or unsuspected that Executive
can lawfully release, including, but not limited to, rights arising out of alleged violations of any contracts, express or implied, any covenant of good faith and
fair dealing, express or implied, or any tort including defamation, or any legal restrictions on the Company’s right to terminate employees, or any federal,
state or other governmental statute, regulation or ordinance, including, without limitation: the Civil Rights Act of 1964, as amended; the Civil Rights Act of
1866; 42 U.S.C. § 1981; the California Fair Employment and Housing Act; Section 503 of the Rehabilitation Act of 1973; the Americans With Disabilities
Act, as amended; the Fair Labor Standards Act (including the Equal Pay Act); the California Constitution; the California Labor Code, including Labor Code
section 132a; the Family Medical Leave Act; the California Family Rights Act; the Genetic Information Non-Discrimination Act; the National Labor
Relations Act; the Lilly Ledbetter Fair Pay Ac of 2009; the Fair Credit Reporting Act; the False Claims Act; the Sarbanes-Oxley Act; the Uniformed Services
Employment and Reemployment Rights Act; the Labor Code Private Attorneys General Act of 2004; the California Business and Professions Code; the
Executive Retirement Income Security Act, as amended; the Workers Adjustment & Retraining Notification Act; the Age Discrimination in Employment Act;
the Older Workers Benefit Protection Act; wage claims of all types, whether for non-payment, late payment, overtime, rest periods, meal periods, bonuses,
deductions and/or penalties; wrongful termination in violation of public policy; and unfair business practices (collectively, “claim” or “claims”) which
Executive now has, or claims to have, or which Executive at any time heretofore had, or claimed to have, or which Executive at any time hereafter may have,
own or hold, claim to have, own or hold against any of the Releasees, including but not limited to claims which arise out of or relate to Executive’s
employment by the Company or any matter or thing that was or could have been alleged as of the date this Agreement is fully executed. This release
expressly waives any and all claims Executive may now have against the Company regardless of the nature, source, or basis for any such claim, including but
not limited to claims for wages, salary, bonuses, commissions, expense reimbursement or any other monies owed by the Company to Executive. Executive
may participate in any manner in any charge or complaint, or any investigation of a charge or complaint by any local, state, or federal agency, including the
Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, and the Securities and
Exchange Commission (“SEC”). This includes providing documents or other information, without notice to the Company. Executive waives any claim or
right to receive damages or compensation on the basis of any such charge, complaint or investigation, excluding an award for information provided to the
SEC under SEC Rule 21F-17. This release however does not waive Executive’s rights to unemployment or any rights that may not be released by private
agreement. Nothing in this Agreement affects any vested rights Executive has in any retirement, welfare or benefit plans or programs of the Company as of
Executive’s termination date. Further, this release does not cover any claims the Executive may have arising from the Company’s breach of this Agreement,
or any of the representations or warranties contained herein.
5. During the period in which Executive is receiving Severance, Executive agrees that, without the prior written consent of the Board of
Directors of the Company, he will not (i) engage in or have any direct interest in, as an employee, officer, director, agent, subcontractor, consultant, security
holder, partner, creditor or otherwise, any business in direct competition with the Company other than as a 5% or less equity stakeholder; (ii) cause or attempt
to cause any person who is, or was at any time during the six months immediately preceding the Resignation Date, an employee of the Company to leave the
employment of the Company; or (iii) solicit, divert or take away, or attempt to take away, the business or patronage of any client, customer or account, or
prospective client, customer or account, of the Company. For purposes of this paragraph, a business will be deemed to be in competition with the Company if
it is in the business of providing services for contract development relating to and/or manufacturing of recombinant protein/monoclonal bulk drug substance.
Executive acknowledges that this paragraph survives the termination of Executive's employment and is enforceable by the Company at any time as long as it
remains in effect. For the avoidance of doubt, Executive and Company agree that Executive may go to work for a business deemed to be a competitor with the
Company, provided that Executive does not use any of the Company’s proprietary or competitive information. In the event that Executive does go to work for
a competitor, Company shall have no further obligation to continue to provide to Executive the severance benefits set forth in clauses (i) and (ii) of Section 3
above.
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(i) Executive and the Company agree that the covenant set forth in Section 5 above is a reasonable covenant under the circumstances with
respect to both scope and duration, and further agree that if in the opinion of any court of competent jurisdiction such restraint is not reasonable in any
respect, such court will have the right, power and authority to excise or modify such provision or provisions of this covenant as to what the court determines
is not reasonable and to enforce the remainder of the covenant as so amended.
(ii) Executive agrees that any breach of the covenants contained in this paragraph 5 and in paragraph 6 below would irreparably injure the
Company. Accordingly, Executive agrees that the Company may, in addition to pursuing any other remedies it may have in law and equity, obtain an
injunction, without the posting of a bond or other security, against Executive from any court having jurisdiction over the matter restraining any further
violation of this Agreement by Executive and cease making any payments otherwise required by this Agreement.
6. Executive acknowledges that he continues to be bound by his ongoing obligations under the terms of his employment not to use or
disclose Company confidential information or trade secrets so long as the same have not become generally known to the public. Confidential information
includes all nonpublic information and material which is proprietary to the Company relating to its past, present or future business activities. Trade secrets
means any scientific or technical data, information, design, process, procedure, formula or improvement that is commercially available to the Company and is
not generally known in the industry.
7. Executive understands that the severance benefits are additional benefits for which Executive is not eligible unless Executive elects to
sign this Agreement. Executive further acknowledges and agrees that the payment (or receipt) of the Severance satisfies any obligations Company may have
had to Executive pursuant to the terms of his employment.
8. Executive hereby agrees and acknowledges that Executive may have had access to confidential and proprietary information relating to
the Company, including but not limited to customer lists, business strategies and plans, financial projections and budgets, capital raising activities,
confidential board of director and executive management deliberations and other material non-public information, computer programs, source codes and other
computer-stored data, accounts payable data, payroll information, personnel information, pricing and other contract terms, as well as the existence of this
Agreement and its terms. Executive acknowledges that this information is confidential and proprietary and Executive agrees not to disclose it, nor allow it to
be disclosed, communicated or otherwise conveyed to any third parties except as may be required by law, excepting only necessary communication to
Executive’s attorney, accountant, or tax advisor, each of whom Executive agrees to notify of this confidentiality provision and receive their agreement thereto
before providing the necessary confidential or proprietary information. Executive further agrees to immediately inform the Company in writing of any
unauthorized disclosure of, or access to, the Company’s confidential or proprietary information described above. Executive hereby agrees that the disclosure
of the Company’s confidential or proprietary information shall cause serious damage to the Company. The foregoing shall supplement any existing
confidentiality agreement between the parties hereto and shall survive the full payment of all sums paid hereunder.
9. Executive acknowledges and agrees that Executive has no pending lawsuit, administrative charge, or complaint against the Company or
any of the other Releasees, in any court or with any governmental agency. Executive also agrees that, to the extent permitted by law, Executive will not allow
any lawsuit, administrative charge, or complaint to be pursued on Executive’s behalf. Executive further agrees that Executive will not participate, cooperate,
or assist in any litigation against the Releasees in any manner, to the extent permitted by law. If lawfully subpoenaed by a court of this jurisdiction, Executive
agrees to provide the Company written notice of such a subpoena within five (5) days of receipt.
10. Executive affirms and warrants that, except as set forth in Section 1, he has appropriately received all compensation, wages, overtime
pay, breaks, benefits and other payments to which he was entitled, including, but not limited to, those under the Fair Labor Standards Act and any other
federal, state, or local wage and hour law, regulation or ordinance. Executive further affirms and warrants that he has appropriately received any leave (paid
and unpaid) to which he was entitled, including, but not limited to, leave under the Family and Medical Leave Act and any other federal, state, or local leave
or disability accommodation law, regulation or ordinance.
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11. It is understood and agreed that this is a full, complete and final general release of any and all claims described as aforesaid, and that
Executive agrees that it shall apply to all unknown, unanticipated, unsuspected and undisclosed claims, demands, liabilities, actions or causes of action, in
law, equity or otherwise, as well as those which are now known, anticipated, suspected or disclosed. This release includes a release under § 1542 of the Civil
Code of the State of California, which reads as follows:
A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor
at the time of executing the release, which if known by him or her must have materially affected his or her
settlement with the debtor.
Executive hereby expressly waives and relinquishes all rights and benefits under that section and any law or legal principle of similar effect in any jurisdiction
with respect to the release granted in this Agreement.
12. This Agreement is intended to release and discharge any claims of Executive under the Age Discrimination in Employment Act. To
satisfy the requirements of the Older Workers’ Benefit Protection Act, 29 U.S.C. section 626(f), the parties agree as follows:
A.
B.
C.
D.
Executive acknowledges that Executive has read and understands the terms of this Agreement.
Executive acknowledges that Executive has been advised to consult with an attorney, if desired, concerning this
Agreement and has received all advice Executive deems necessary concerning this Agreement.
Executive acknowledges that Executive has been given twenty-one (21) days to consider whether or not to enter into this
Agreement, has taken as much of this time as necessary to consider whether to enter into this Agreement, and has chosen
to enter into this Agreement freely, knowingly, and voluntarily. The Parties agree that any changes to the Agreement,
whether material or immaterial, do not restart this twenty-one (21) day consideration period.
For a seven day period following the execution of this Agreement by Executive, Executive may revoke this Agreement by
delivering a written notice of revocation within that time to Lorna Larson at 2642 Michelle Drive, Tustin, California
92780, if Executive so chooses. This Agreement shall not become effective until the seven days have passed without a
revocation being received. This Agreement will be revoked in its entirety if such notice is given, and the Company will
have no obligation to take any of the actions and/or make any payment provided by this Agreement.
13. The terms of the Agreement shall be confidential. Accordingly, Executive agrees to not make any public statement about, not disclose
to any third party, the fact of, or contents or terms of this Agreement, unless necessary to implement or enforce its terms, or to seek tax or legal advice
regarding this Agreement. Executive further agrees that Executive will not disparage, defame, or otherwise detrimentally comment upon the Releasees,
including their business practices or products in any manner. Similarly, the Company agrees that it will not disparage, defame, or otherwise detrimentally
comment upon Executive in any manner. Each of Company and Executive acknowledges that such comment shall cause serious damage to the other party.
Notwithstanding the foregoing, Executive acknowledges and agrees that the Company has certain disclosure obligations under the Securities and Exchange
Act of 1934, as amended, and intends to promptly file a Current Report on Form 8-K to disclose certain of the Severance benefits provided Executive
hereunder.
14. It is understood and agreed that this Agreement is not an admission of liability by the Company or any Releasee and shall not be used or
construed as such in any proceeding.
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15. Executive is not aware, to the best of Executive’s knowledge, of any conduct on Executive’s part or on the part of another Company
employee that violated the law or otherwise exposed the Company to any liability, whether criminal or civil, whether to any government, individual or other
entity. Further, Executive acknowledges that Executive is not aware of any material violations by the Company and/or its employees, officers, directors and
agents of any statute, regulation or other rules that have not been addressed by Company through appropriate compliance and/or corrective action.
16. This Agreement is intended to comply with Section 409A of the Code, or with an exemption thereto, and, to the maximum extent
permitted, this Agreement shall be interpreted and administered consistent with that intent. Notwithstanding anything in this Agreement to the contrary, if the
Company concludes that the payments described in paragraph 3 are subject to Section 409A of the Code, no such payments will be made prior to Executive’s
“separation from service” as defined in Treasury Regulation Section 1.409A-1(h)(applying the default rules of Treasury Regulation Section 1.409A-1(h)). In
addition, if the payments described paragraph 3 are subject to Section 409A of the Code, and if Executive is a “specified employee” as defined in Treasury
Regulation Section 1.409A-1(i)(1) on the date of his termination of employment, such payments shall not begin until the first day of the seventh month
following his “separation from service.” Installment payments shall be treated as separate payments for purposes of Treasury Regulation Section 1.409A-2(b)
(2)(iii). Executive acknowledges that the Company makes no representations or warranties regarding the tax treatment or tax consequences of any
compensation, benefits or other payments made pursuant to this Agreement, including by operation of Section 409A of the Code. Neither the time nor
schedule of any payment under this Agreement may be accelerated or subject to further deferral except as permitted by Section 409A of the Code and
Executive does not have any right to make any election regarding the time or form of any payment due under this Agreement. Any expenses that are to be
reimbursed pursuant to this Agreement that are subject to Section 409A of the Code shall: (i) be paid no later than the last day of Executive’s tax year
following the tax year in which the expense was incurred; (ii) not affect or be affected by any other expenses that are eligible for reimbursement in any other
tax year of Executive; and (iii) not be subject to liquidation or exchange for any other benefit.
17. This Agreement shall be construed under the laws of the State of California.
18. If any disagreement, controversy, claim, action, proceeding or dispute between Executive and any Releasee, is brought to interpret or
enforce the provisions of this Agreement, the prevailing party or parties shall recover his, her or its reasonable attorneys’ fees and costs.
19. Executive agrees that this Agreement has been negotiated and that no provision contained herein shall be interpreted against any party
because that party drafted the provision.
20. In the event that any provision of this Agreement shall be found to be unenforceable, that provision shall be deemed deleted, and the
validity and enforceability of the remaining provisions shall not be affected.
21. This Agreement contains the entire agreement between the parties on the subjects addressed in this Agreement and replaces any other
prior agreements between the parties with the exception of Executive’s confidentiality agreements with the Company. This Agreement may only be modified
in a written in a written document signed by an officer of the Company.
22. Executive certifies that Executive has read and understands all of this Agreement, has received any advice or counsel Executive deems
necessary regarding this Agreement, and is entering into this Agreement freely and voluntarily, intending to be bound by its terms.
By signing this Agreement before the twenty-one (21) day period described above in paragraph 12(C) expires, Executive waives his right
under the ADEA and the OWBPA to twenty-one (21) days to consider the terms of this Agreement. In any case, however, Executive retains the right
to revoke this Agreement within seven days, as described above in paragraph 12(D).
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the dates set forth below.
Dated: June 12, 2019
/s/ Roger J. Lias
Roger J. Lias, Ph.D.
Dated: June 12, 2019
Avid Bioservices, Inc.
/s/ Richard B. Hancock
Name: Richard B. Hancock
Title: Interim President and Chief Executive Officer
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EMPLOYMENT AGREEMENT
EXHIBIT 10.7
THIS EMPLOYMENT AGREEMENT (“Agreement”) is by and between Avid Bioservices, Inc., a Delaware corporation (“Employer” or the
“Company”) and Daniel R. Hart (“Executive”).
WHEREAS, Executive has served as the Company’s Chief Financial Officer since August 1, 2018.
In consideration of the promises and mutual covenants contained herein, and for other good and valuable consideration, receipt of which is hereby
acknowledged, the parties hereto do hereby agree as follows:
1. Employment. Upon the terms and conditions hereinafter set forth, Employer hereby agrees to continue to employ Executive to serve as
Chief Financial Officer, and Executive hereby accepts such continued employment under the terms and conditions set forth herein.
2. Effective Date. The effective date of the Agreement shall be June 26, 2019(the “Effective Date”). The employment relationship pursuant to
this Agreement shall be for an initial two-year period commencing on the Effective Date (“Initial Term”), unless sooner terminated in accordance with
paragraph 7 below. On each anniversary of the Effective Date, the term of this Agreement will automatically be extended for an additional one (1) year period
(in each instance, as so extended, the “Subsequent Term”), unless either party gives to the other written notice at least ninety (90) days prior to the expiration
of the then current year period, of such party’s intent not to extend this Agreement.
3. Duties. Executive shall perform such duties as are customarily performed by a Chief Financial Officer, and such other duties and
responsibilities that may be assigned to him by the Chief Executive Officer of the Company (the “CEO”). Specifically, Executive shall manage the
Company’s accounting and finance departments, and perform such duties and responsibilities as set forth in the Chief Financial Officer job description.
Executive shall report to the CEO and have such authority as is delegated by the CEO. Executive shall be governed by the policies and practices
established by the Company. Employer requires that: (i) Executive will devote his utmost knowledge and best skill to the performance of his duties; (ii)
Executive shall devote his full business time (not less than 40 hours per week) to the rendition of such services, subject to absences for customary vacations
and for temporary illness; and (iii) Executive will not engage in any other gainful occupation which requires his personal attention and/or creates a conflict of
interest with his job responsibilities under this Agreement without the prior written consent of the CEO, with the exception that Executive may personally
trade in stock, bonds, securities, commodities or real estate investments for his own benefit to the extent permitted by the provisions herein and applicable
law.
Executive’s job performance will be reviewed by the CEO annually. Executive acknowledges and understands that performance reviews do not
necessitate or correlate with salary increases and that a favorable performance review neither guarantees continued employment nor increased compensation.
4. At-Will Employment. Executive and Employer agree that Executive’s employment may be terminated by Executive or by Employer, with
or without Cause (as defined below) in accordance with paragraph 7 of this Agreement. Executive and Employer expressly agree that this provision is
intended by Executive and Employer to be the complete and final expression of their understanding regarding the terms and conditions under which
Executive’s employment may be terminated. Executive and Employer further understand and agree that no representation contrary to this provision is valid,
and that this provision may not be augmented, contradicted or modified in any way, except in writing signed by Executive and CEO.
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5. Compensation.
5.1 Base Salary. Executive shall be paid an annual base salary of Three Hundred Ninety Six Thousand Five Hundred Forty Nine Dollars
and Ninety Two Cents ($396,549.92), payable according to Employer's payroll schedule and subject to applicable state and federal withholdings and other
payroll deductions.
5.2 Annual Bonus. In addition to Executive’s base salary, Executive may be eligible to receive an additional discretionary bonus of up to
forty-five percent (45%) of his then in effect base salary, prorated for partial years of service, as determined by the Compensation Committee of the Board of
Directors in accordance with the Company’s cash bonus plan for executives then in effect and in its sole discretion (“Target Bonus”). Executive acknowledges
that although a discretionary bonus may be provided by the Company, any such bonus is neither required nor guaranteed by this Agreement.
5.3 Equity Awards. Executive may also be eligible to receive equity awards as determined by the Compensation Committee of the Board in
its sole discretion. Any such equity award will be granted pursuant to, and will be subject to the terms of Company’s equity incentive plan then in effect, as
such may be amended from time to time, or any successor plan thereto and the award agreement that you must execute as a condition to receive such awards.
6. Fringe Benefits.
6.1 Benefits. Executive shall, in accordance with Company policy and the terms of the applicable plan documents, be eligible to participate
in benefits under any Company benefit plan or arrangement which may be in effect from time to time and made available to its executive management
employees. The terms and conditions of Executive’s participation in such plans shall be set forth in the relevant benefit plan documents.
6.2 Paid-Time-Off (PTO). Executive shall earn and accrue paid-time-off covering vacation and sick time benefits at the initial rate of
twenty (20) days per year for employment periods of up to five (5) years of service. The PTO accrual rate shall automatically increase by five (5) additional
days for each additional five (5) years of service up to maximum of thirty (30) days per year after ten (10) years of service. For example, after five years of
service, the annual PTO accrual rate shall increase to twenty-five (25) days. Accrued and unused PTO shall governed by the Employee Handbook, as such
may be amended from time to time in the Company’s sole discretion. Accrued and unused PTO days which are not in excess of maximum amount accruable
under the Employee Handbook shall be paid in a cash lump sum payment promptly after Executive’s termination of employment.
6.3 Expenses. Employer shall reimburse Executive for travel and other business expenses incurred by Executive in the performance of
Executive’s duties hereunder, consistent with Employer’s normal expense reimbursement policy.
7. Termination.
7.1 Termination With Cause. If Executive (a) breaches in any material respect or fails to fulfill in any material respect fiduciary duty owed
to Employer; (b) breaches in any material respect this Agreement or any other confidentiality or non-solicitation, non-competition agreement between
Employer and Executive; (c) pleads guilty to or is convicted of a felony; (d) is found to have engaged in any reckless, fraudulent, dishonest or grossly
negligent misconduct, (e) fails to perform his duties to the Company, provided that Executive fails to cure any such failure within thirty (30) days after written
notice from Employer of such failure, provided further, however, that such right to cure shall not apply to any repetition of the same failure previously cured
hereunder; or (f) violates any material rule, regulation or policy of the Company that may be established and made known to Employer's employees from time
to time, including without limitation, the Company Employee Handbook, a copy of which has been provided to Executive (collectively, “Cause”), Employer
may terminate immediately his employment and Executive shall have no right to receive any compensation or benefit hereunder after such termination other
than base salary and PTO earned or accrued but unpaid as of the date of termination (collectively “Standard Entitlements”). Notwithstanding the foregoing,
Executive shall not be terminated for Cause pursuant to paragraph 7.1, unless and until Executive has received written notice of the proposed termination for
Cause, including details of the bases for such termination, and Executive has had an opportunity to be heard before at least a majority of the Board. Executive
shall be deemed to have had such an opportunity if written notice is given to him at least ten (10) days in advance of a meeting and Executive has the actual
opportunity to be heard, at that meeting, by no less than a majority of the Board on the issues of his proposed termination. For the avoidance of doubt,
Executive shall not be entitled to any bonus, or proration thereof, if terminated for Cause under this paragraph.
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7.2 Termination without Cause. As stated in paragraph 4 of this Agreement, Executive or the Company may at any time terminate
Executive’s employment with or without Cause. If the Company terminates Executive’s employment without Cause during the Initial Term or any Subsequent
Term, Executive shall receive the Standard Entitlements. In addition, subject to Executive’s execution (and non-revocation) of the general release as described
in paragraph 7.6, Executive shall be entitled receive: (a) a cash severance equal to the sum of twelve (12) months of Executive’s base salary in effect on the
date of termination plus twelve (12) times the monthly amount that is charged to COBRA qualified beneficiaries under the Company’s group health plan for
the same medical and dental coverage options elected by Executive and his family immediately prior to the date of termination, with such severance payable
in substantially equal installments over twelve (12) months according to Employer's payroll schedule; (b) 100% of the Target Bonus pro rata portion for the
year in which his termination occurs and payable at the time other executive management employees receive their discretionary bonuses; and (c) any stock
options that are vested and outstanding as of the date of Executive’s termination of employment shall be amended to provide that such options will remain
exercisable until the earlier of the scheduled expiration date of the option or twelve (12) months following the date of Executive’s termination of employment.
All other Company obligations to Executive pursuant to this Agreement will become automatically terminated and completely extinguished.
7.3 Voluntary Resignation for Good Reason. If, within ninety (90) days of the initial existence of the condition(s) that constitute Good
Reason, Executive: (a) provides written notice to the Board of his intention to resign his employment for Good Reason; (b) provides written notice to the
Board of the grounds that Executive believes he has to resign for Good Reason and within thirty (30) days of receipt of such written notice, the Board has not
cured by eliminating the condition(s) that constitute Good Reason; and (c) Executive actually terminates his employment within twelve (12) months
following the initial existence of the Good Reason condition, then, subject to Executive’s execution (and non-revocation) of the general release as described
in paragraph 7.6, Executive shall be entitled to receive the Standard Entitlements and the severance and benefits described in paragraphs 7.2(a), (b), and (c)
above, payable at the times set forth in paragraphs 7.2(a), (b), and (c) above. Executive will be deemed to have resigned for “Good Reason” in the following
circumstances: (a) provided Executive shall have relocated to Orange County, California, Company relocates Executive’s principal place of work to a location
more than fifty (50) miles from the original location, without Executive’s prior written approval; (b) Executive’s position and/or duties are modified so that
Executive’s duties are no longer consistent with the position of Chief Financial Officer; (c) Executive’s Base Salary as set forth in paragraph 5.1, as adjusted
from time to time, is reduced without Executive’s written authorization. All other Company obligations to Executive pursuant to this Agreement will become
automatically terminated and completely extinguished.
7.4 Termination Upon Death or Disability. Executive’s employment shall terminate upon his death or Disability (with "Disability" defined
as any mental or physical condition which, in the reasonable opinion of a mutually agreed upon licensed physician and/or psychiatrist (as the case may be),
renders Executive unable or incompetent to carry out Executive's duties under this Agreement, with or without reasonable accommodation, for a period of at
least six (6) months). In the event of a termination of Executive’s employment for death or Disability, Executive shall receive the Standard Entitlements and a
cash payment equal to twelve (12) times the monthly amount that is charged to COBRA qualified beneficiaries under the Company’s group health plan for the
same medical and dental coverage options elected by Executive and his family immediately prior to the date of termination, with such amount paid in a single
lump sum within thirty (30) days following Executive’s termination for death or Disability. All other Company obligations to Executive pursuant to this
Agreement will become automatically terminated and completely extinguished.
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7.5 Change of Control. If Executive incurs a termination without Cause or terminates his employment for Good Reason during the three (3)
month period preceding or twenty-four (24) months following a “Change in Control” as defined below, then subject to Executive’s execution (and non-
revocation) of the general release as described in paragraph 7.6, Executive shall be entitled receive: (a) a cash severance payment equal to the sum of twenty
four (24) months of Executive’s base salary in effect on the date of termination and twenty four (24) times the monthly amount that is charged to COBRA
qualified beneficiaries under the Company’s group health plan for the same medical and dental coverage options elected by Executive and his family
immediately prior to the date of termination, with such severance payable in substantially equal installments over twenty four (24) months according to
Employer's payroll schedule; (b) 100% of the Target Bonus for the year in which his termination occurs, with the amount payable at the time other executive
management employees receive their discretionary bonuses; and (c) any stock options that are vested and outstanding as of the date of Executive’s
termination of employment shall be amended to provide for full vesting and that such options will remain exercisable until the earlier of the scheduled
expiration date of the option or twenty four (24) months following the date of Executive’s termination of employment. All other Company obligations to
Executive pursuant to this Agreement will become automatically terminated and completely extinguished. For purposes of this Agreement, “Change in
Control” shall mean the (i) acquisition by any one person, or more than one person acting as a group (as determined in accordance with Treasury Regulation
Section 1.409A-3(i)(5)), of stock of the Company that, together with stock held by such person or group, constitutes more than 50% of the total fair market
value or total voting power of the stock of the Company, (ii) consummation of a merger, consolidation or similar transaction involving (directly or indirectly)
the Company and, immediately after the consummation of such merger, consolidation or similar transaction, the stockholders of the Company immediately
prior thereto do not own, directly or indirectly, either (A) outstanding voting securities representing more than 50% of the combined outstanding voting power
of the surviving entity in such merger, consolidation or similar transaction or (B) more than 50% of the combined outstanding voting power of the parent of
the surviving entity in such merger, consolidation or similar transaction, in each case in substantially the same proportions as their ownership of the
outstanding voting securities of the Company immediately prior to such transaction, or (iii) sale of all or substantially all of the consolidated assets of the
Company and its subsidiaries, other than a sale of all or substantially all of the consolidated assets of the Company and its subsidiaries to an entity, more than
50% of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their
ownership of the outstanding voting securities of the Company immediately prior to such sale.
7.6 Release Required. In order to be entitled to the severance and other benefits described in paragraphs 7.2, 7.3, and 7.5, as applicable,
Executive must, no later than sixty (60) days following his termination date, sign (and not revoke) a general release of all claims known and unknown, against
Employer, its officers and directors, agents and employees and any related entities or persons. Notwithstanding anything in this Agreement to the contrary, if
the consideration period described in the release, plus the revocation period described in the release spans two (2) calendar years, the severance payments
described in paragraphs 7.2, 7.3, and 7.5 that are subject to Section 409A of the Section 409A of the Internal Revenue Code of 1986, as amended (the
“Code”) shall not begin to be paid until the second calendar year. Nothing herein will be construed to limit or modify the duty of Executive to mitigate
Executive’s damages in the event Employer terminates Executive’s employment without Cause.
8. Trade Secrets, Confidential Information and Inventions.
8.1 Trade Secrets In General. During the course of Executive's employment, Executive will have access to various trade secrets,
confidential information and inventions of Employer as defined below.
(i) “Confidential Information” means all information and material which is proprietary to the Company, whether or not marked as “confidential”
or “proprietary” and which is disclosed to or obtained from the Company by the Executive, which relates to the Company’s past, present or future research,
development or business activities. Confidential Information is all information or materials prepared by or for the Company and includes, without limitation,
all of the following: designs, drawings, specifications, techniques, models, data, source code, object code, documentation, diagrams, flow charts, research,
development, processes, systems, methods, machinery, procedures, “know-how”, new product or new technology information, formulas, patents, patent
applications, product prototypes, product copies, cost of production, manufacturing, developing or marketing techniques and materials, cost of production,
development or marketing time tables, customer lists, strategies related to customers, suppliers or personnel, contract forms, pricing policies and financial
information, volumes of sales, and other information of similar nature, whether or not reduced to writing or other tangible form, and any other Trade Secrets,
as defined by subparagraph (iii), or non-public business information. Confidential Information does not include any information which (1) was in the lawful
and unrestricted possession of the Executive prior to its disclosure by the Company, (2) is or becomes generally available to the public by acts other than
those of the Executive after receiving it, (3) becomes generally available to the public by acts of the Executive necessary to performing duties associated with
Executive’s job description, or (4) has been received lawfully and in good faith by the Executive from a third party who did not derive it from the Company.
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(ii) “Inventions” means all discoveries, concepts and ideas, whether patentable or not, including but not limited to, processes, methods, formulas,
compositions, techniques, articles and machines, as well as improvements thereof or “know-how” related thereto, relating at the time of conception or
reduction to practice to the business engaged in by the Company, or any actual or anticipated research or development by the Company.
(iii) “Trade Secrets” shall mean any scientific or technical data, information, design, process, procedure, formula or improvement that is
commercially available to the Company and is not generally known in the industry.
This paragraph includes not only information belonging to Employer which existed before the date of this Agreement, but also information developed by
Executive for Employer or its employees during his employment and thereafter.
8.2 Restriction on Use of Confidential Information. Executive agrees that his use of Trade Secrets and other Confidential Information is
subject to the following restrictions during the term of the Agreement and for an indefinite period thereafter so long as the Trade Secrets and other
Confidential Information have not become generally known to the public.
8.2.1 Non-Disclosure. Except as required by the performance of the Executive’s services to the Company under the terms of
this Agreement, neither the Executive nor any of his agents or representatives, shall, directly or indirectly, publish or otherwise disclose, or permit others to
publish, divulge, disseminate, copy or otherwise disclose the Company’s Trade Secrets, Confidential Information and/or Inventions as defined above.
8.2.2 Use Restriction. Executive shall use the Trade Secrets, other Confidential Information and/or Inventions only for the
limited purpose for which they were disclosed. Executive shall not disclose the Trade Secrets, other Confidential Information and/or Inventions to any third
party without first obtaining written consent from the Board of Directors and shall disclose the Trade Secrets, other Confidential Information and/or
Inventions only to Employer's own employees having a need know. Executive shall promptly notify the Board of Directors of any items of Trade Secrets
prematurely disclosed.
8.2.3 Surrender Upon Termination. Upon termination of his employment with Employer for any reason, Executive will
surrender and return to Employer all documents and materials in his possession or control which contain Trade Secrets, Inventions and other Confidential
Information. Executive shall immediately return to the Company all lists, books, records, materials and documents, together with all copies thereof, and all
other Company property in his possession or under his control, relating to or used in connection with the past, present or anticipated business of the Company,
or any affiliate or subsidiary thereof. Executive acknowledges and agrees that all such lists, books, records, materials and documents, are the sole and
exclusive property of the Company.
reason, Executive will not engage in competition with Employer while making use of the Trade Secrets of Employer.
8.2.4 Prohibition Against Unfair Competition. At any time after the termination of his employment with Employer for any
8.2.5 Patents and Inventions. The Executive agrees that any inventions made, conceived or completed by him during the term
of his service, solely or jointly with others, which are made with the Company’s equipment, supplies, facilities or Confidential Information, or which relate at
the time of conception or reduction to purpose of the invention to the business of the Company or the Company’s actual or demonstrably anticipated research
and development, or which result from any work performed by the Executive for the Company, shall be the sole and exclusive property of the Company. The
Executive promises to assign such inventions to the Company. The Executive also agrees that the Company shall have the right to keep such inventions as
trade secrets, if the Company chooses. The Executive agrees to assign to the Company the Executive’s rights in any other inventions where the Company is
required to grant those rights to the United States government or any agency thereof. In order to permit the Company to claim rights to which it may be
entitled, the Executive agrees to disclose to the Company in confidence all inventions which the Executive makes arising out of the Executive’s service and
all patent applications filed by the Executive within one year after the termination of his service. The Executive shall assist the Company in obtaining patents
on all inventions, designs, improvements and discoveries patentable by the Company in the United States and in all foreign countries, and shall execute all
documents and do all things necessary to obtain letters patent, to vest the Company with full and extensive title thereto.
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8.3 This Agreement does not limit Executive’s ability to communicate with any government agencies regarding matters within their
jurisdiction or otherwise participate in any investigation or proceeding that may be conducted by any government agency, including providing documents or
other information, without notice, to the government agencies. Nothing in this Agreement shall prevent Executive from the disclosure of Confidential
Information or Trade Secrets that: (a) is made: (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney;
and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document filed in a lawsuit or
other proceeding, if such filing is made under seal. In the event that Executive files a lawsuit alleging retaliation by Company for reporting a suspected
violation of law, Executive may disclose Confidential Information or Trade Secrets related to the suspected violation of law or alleged retaliation to
Executive’s attorney and use the Confidential Information or trade secrets in the court proceeding if Executive or Executive’s attorney: (a) files any document
containing Confidential Information or trade secrets under seal; and (b) does not disclose the Confidential Information or Trade Secrets, except pursuant to
court order. The Company provides this notice in compliance with, among others, the Defend Trade Secrets Act of 2016.
9. Solicitation of Employees or Customers.
9.1 Information About Other Employees. Executive will be called upon to work closely with employees of Employer in performing
services under this Agreement. All information about such employees which becomes known to Executive during the course of his employment with
Employer, and which is not otherwise known to the public, including compensation or commission structure, is a Trade Secret of Employer and shall not be
used by Executive in soliciting employees of Employer at any time during or after termination of his employment with Employer.
9.2 Solicitation of Employees Prohibited. During Executive’s employment and for one year following the termination of Executive’s
employment, Executive shall not, directly or indirectly ask, solicit or encourage any employee(s) of Employer to leave their employment with Employer.
Executive further agrees that he shall make any subsequent employer aware of this non-solicitation obligation.
9.3 Solicitation of Customers Prohibited. For a period of one year following the termination of Executive’s employment, Executive shall
not, directly or indirectly solicit the business of any of Employer's customers in any way competitive with the business or demonstrably anticipated business
of the Company. Executive further agrees that he shall make any subsequent employer aware of this non-solicitation obligation.
10. Non-Competition. During the course of Executive’s employment with the Company, Executive shall not directly or indirectly own any
interest in (other than owning less than 5% of a publicly held company), manage, control, participate in (whether as an officer, director, employee, partner,
agent, representative, volunteer or otherwise), consult with, render services for or in any manner engage (whether or not during business hours) in any
business activity that is in any way competitive with the business or demonstrably anticipated business of the Company. Further, Executive will not during the
course of his employment with the Company, assist any other person or organization in competing or in preparing to compete with any business or
demonstrably anticipated business of the Company.
11. Unfair Competition, Misappropriation of Trade Secrets and Violation of Solicitation/Noncompetition Clauses. Executive acknowledges that
unfair competition, misappropriation of trade secrets or violation of any of the provisions contained in paragraphs 8 through 10 would cause irreparable injury
to Employer, that the remedy at law for any violation or threatened violation thereof would be inadequate, and that Employer shall be entitled to temporary
and permanent injunctive or other equitable relief without the necessity of proving actual damages.
12. Representation Concerning Prior Agreements. Executive represents to Employer that he is not bound by any non-competition and/or non-
solicitation agreement that would preclude, limit or in any manner affect his employment with Employer. Executive further represents that he can fully
perform the duties of his employment without violating any obligations he may have to any former employer, including but not limited to, misappropriating
any proprietary information acquired from a prior employer. Executive agrees that he will indemnify and hold Employer harmless from any and all liability
and damage, including attorneys’ fees and costs, resulting from any breach of this provision.
13. Personnel Policies and Procedures. The Employer shall have the authority to establish from time to time personnel policies and procedures to
be followed by its employees. Executive agrees to comply with the policies and procedures of the Employer. To the extent any provisions in Employer's
personnel policies and procedures differ with the terms of this Agreement, the terms of this Agreement shall apply.
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14. Amendments. No amendment or modification of the terms or conditions of this Agreement shall be valid unless in writing and signed by the
parties hereto.
15. Successors and Assigns. The rights and obligations of the Employer under this Agreement shall inure to the benefit of and shall be binding
upon the successors and assigns of Employer. Executive shall not be entitled to assign any of his rights or delegate any of his obligations under this
Agreement.
16. Governing Law. This Agreement shall be interpreted, construed, governed and enforced in accordance with the laws of the State of
California.
17. Severability. Each term, condition, covenant or provision of this Agreement shall be viewed as separate and distinct, and in the event that
any such term, covenant or provision shall be held by a court of competent jurisdiction to be invalid, the remaining provisions shall continue in full force and
effect.
18. Survival. The provisions in paragraphs 8 through 11, 14 through 23, inclusive, of this Agreement shall survive termination of Executive's
employment, regardless of who causes the termination and under what circumstances.
19. Waiver. Neither party's failure to enforce any provision or provisions of this Agreement shall be deemed or in any way construed as a waiver
of any such provision or provisions, nor prevent that party thereafter from enforcing each and every provision of this Agreement. A waiver by either party of
a breach of provision or provisions of this Agreement shall not constitute a general waiver, or prejudice the other party's right otherwise to demand strict
compliance with that provision or any other provisions in this Agreement.
20. Notices. Any notice required or permitted to be given under this Agreement shall be sufficient, if in writing, sent by mail to Executive's
residence in the case of Executive, or hand delivered to the Executive, and, in the case of Employer, to the Board of Directors at the principal corporate office.
21. Arbitration. The parties agree that disputes concerning the terms of this Agreement and Executive's employment under this Agreement are
subject to arbitration in accordance with the Employee Arbitration Agreement attached hereto as Exhibit "A" and incorporated by this reference as though
fully set forth herein.
22. Entire Agreement. Executive acknowledges receipt of this Agreement and agrees that this Agreement represents the entire agreement with
Employer concerning the subject matter hereof, and supersedes any previous oral or written communications, representations, understandings or agreements
with Employer or any officer or agent thereof through the date the Agreement is executed by the parties, except the Employee Arbitration Agreement which is
incorporated herein as set forth in paragraph 21 of this Agreement and attached hereto as Exhibit "A." Executive understands that no representative of the
Employer has been authorized to enter into any agreement or commitment with Executive which is inconsistent in any way with the terms of this Agreement.
23. Construction. This Agreement shall not be construed against any party on the grounds that such party drafted the Agreement or caused it to
be drafted.
24. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed to be an
original, but all of which together shall constitute one and the same instrument. Further, facsimiles of signatures may be taken as the actual signatures, and
each party agrees to furnish the other with documents bearing the original signatures within ten days of the facsimile transmission.
25. Acknowledgment. Executive acknowledges that he has been advised by Employer to consult with independent counsel of his own choice, at
his expense, concerning this Agreement, that he has had the opportunity to do so, and that he has taken advantage of that opportunity to the extent that he
desires. Executive further acknowledges that he has read and understands this Agreement, is fully aware of its legal effect, and has entered into it freely based
on his own judgment.
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26. Code Section 280G.
26.1 Sections 280G and 4999 of the Code may place significant tax burdens on both Executive and the Company if the total payments
made to Executive due to certain change in control events described in Section 280G of the Code (the “Total Change in Control Payments”) equal or exceed
Executive’s 280G Cap. For this purpose, Executive’s “280G Cap” is equal to Executive’s average annual compensation in the five (5) calendar years
preceding the calendar year in which the change in control event occurs (the “Base Period Income Amount”) times three (3). If the Total Change in Control
Payments equal or exceed the 280G Cap, Section 4999 of the Code imposes a 20% excise tax (the “Excise Tax”) on all amounts in excess of one (1) times
Executive’s Base Period Income Amount. In determining whether the Total Change in Control Payments will equal or exceed the 280G Cap and result in the
imposition of an Excise Tax, the provisions of Sections 280G and 4999 of the Code and the applicable Treasury Regulations will control over the general
provisions of this paragraph 26. All determinations and calculations required to implement the rules set forth in this paragraph 26 shall take into account all
applicable federal, state, and local income taxes and employment taxes (and for purposes of such calculations, Executive shall be deemed to pay income taxes
at the highest combined federal, state and local marginal tax rates for the calendar year in which the Total Change in Control Payments are to be made, less
the maximum federal income tax deduction that could be obtained as a result of a deduction for state and local taxes (the “Assumed Taxes”)).
26.2 Subject to the “best net” exception described in paragraph 26.3), in order to avoid the imposition of the Excise Tax, the total
payments to which Executive is entitled under this Agreement or otherwise will be reduced to the extent necessary to avoid equaling or exceeding the 280G
Cap, with such reduction first applied to the cash severance payments that Executive would otherwise be entitled to receive pursuant to this Agreement and
thereafter applied in a manner that will not subject Executive to tax and penalties under Section 409A of the Code.
26.3 If Executive’s Total Change in Control Payments minus the Excise Tax and the Assumed Taxes (payable with respect to the
amount of the Total Change in Control Payments) exceeds the 280G Cap minus the Assumed Taxes (payable with respect to the amount of the 280G Cap),
then the total payments to which Executive is entitled under this Agreement or otherwise will not be reduced pursuant to paragraph 26.2. If this “best net”
exception applies, Executive shall be fully responsible for paying any Excise Tax (and income or other taxes) that may be imposed on Executive pursuant to
Section 4999 of the Code or otherwise.
26.4 The Company will engage a law firm, a certified public accounting firm, and/or a firm of reputable executive compensation
consultants (the “Consultant”) to make any necessary determinations and to perform any necessary calculations required in order to implement the rules set
forth in this paragraph 26. The Consultant shall provide detailed supporting calculations to both the Company and Executive and all fees and expenses of the
Consultant shall be borne by the Company. If the provisions of Section 280G and 4999 of the Code are repealed without succession, this paragraph 26 shall
be of no further force or effect. In addition, if this provision does not apply to Executive for whatever reason, this paragraph shall be of no further force or
effect.
27. Code Section 409A. This Agreement is intended to comply with Section 409A of the Code, or with an exemption thereto, and, to the
maximum extent permitted, this Agreement shall be interpreted and administered consistent with that intent. Notwithstanding anything in this Agreement to
the contrary, if the Company concludes that the payments described in paragraph 7 are subject to Section 409A of the Code, no such payments will be made
prior to Executive’s “separation from service” as defined in Treasury Regulation Section 1.409A-1(h)(applying the default rules of Treasury Regulation
Section 1.409A-1(h)). In addition, if the payments described paragraph 7 are subject to Section 409A of the Code, and if Executive is a “specified
employee” as defined in Treasury Regulation Section 1.409A-1(i)(1) on the date of his termination of employment, such payments shall not begin until the
first day of the seventh month following his “separation from service.” Installment payments shall be treated as separate payments for purposes of Treasury
Regulation Section 1.409A-2(b)(2)(iii). Executive acknowledges that the Company makes no representations or warranties regarding the tax treatment or
tax consequences of any compensation, benefits or other payments made pursuant to this Agreement, including by operation of Section 409A of the Code.
Neither the time nor schedule of any payment under this Agreement may be accelerated or subject to further deferral except as permitted by Section 409A
of the Code and Executive does not have any right to make any election regarding the time or form of any payment due under this Agreement. Any
expenses that are to be reimbursed pursuant to this Agreement that are subject to Section 409A of the Code shall: (i) be paid no later than the last day of
Executive’s tax year following the tax year in which the expense was incurred; (ii) not affect or be affected by any other expenses that are eligible for
reimbursement in any other tax year of Executive; and (iii) not be subject to liquidation or exchange for any other benefit.
Signature page follows
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IN WITNESS HEREOF, the parties have executed this Agreement as of the date set forth below.
Signature page to Employment Agreement
Dated: June 26, 2019
Dated: June 26, 2019
EXECUTIVE
/s/ Daniel R. Hart
Daniel R. Hart
AVID BIOSERVICES, INC.
By: /s/ Richard B. Hancock
Name: Richard B. Hancock
Title: Interim President and Chief Executive Officer
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EXHIBIT A
EXECUTIVE ARBITRATION AGREEMENT
THIS ARBITRATION AGREEMENT (“Agreement”) is made by and between Avid Bioservices, Inc. (“Employer”) and Daniel R. Hart
(“Executive”).
The purpose of this Agreement is to establish final and binding arbitration for all disputes arising out of Executive’s relationship with Employer,
including without limitation Executive’s employment or the termination of Executive’s employment. Executive and Employer desire to arbitrate their disputes
on the terms and conditions set forth below to gain the benefits of a speedy, impartial dispute-resolution procedure. Executive and Employer agree to the
following:
1. Claims Covered by the Agreement. Executive and Employer mutually consent to the resolution by final and binding arbitration of all
claims or controversies (“claims”) that Employer may have against Executive or that Executive may have against Employer or against its officers, directors,
partners, employees, agents, pension or benefit plans, administrators, or fiduciaries, or any subsidiary or affiliated company or corporation (collectively
referred to as “Employer”), relating to, resulting from, or in any way arising out of Executive’s relationship with Employer, Executive’s employment
relationship with Employer and/or the termination of Executive’s employment relationship with Employer, to the extent permitted by law. The claims covered
by this Agreement include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract or covenant (express or
implied); tort claims; claims for unfair competition, misappropriation of trade secrets, breach of fiduciary duty, usurpation of corporate opportunity or similar
claims; claims for discrimination and harassment (including, but not limited to, race, sex, religion, national origin, age, marital status or medical condition,
disability, sexual orientation, or any other characteristic protected by federal, state or local law); claims for benefits (except where an employee benefit or
pension plan specifies that its claims procedure shall culminate in an arbitration procedure different from this one); and claims for violation of any public
policy, federal, state or other governmental law, statute, regulation or ordinance.
2. Required Notice of Claims and Statute of Limitations. Executive may initiate arbitration by serving or mailing a written notice to the Board
of Directors. Employer may initiate arbitration by serving or mailing a written notice to Executive at the last address recorded in Executive’s personnel file.
The written notice must specify the claims asserted against the other party. Notice of any claim sought to be arbitrated must be served within the limitations
period established by applicable federal or state law.
3. Arbitration Procedures.
a. After demand for arbitration has been made by serving written notice under the terms of paragraph 2 of this Agreement, the
party demanding arbitration shall file a demand for arbitration with the American Arbitration Association (“AAA”) in Orange County.
b. Except as provided herein, all rules governing the arbitration shall be the then applicable rules set forth by the AAA. If the
dispute is employment-related, the dispute shall be governed by the AAA’s then current version of the national rules for the resolution of employment
disputes. The AAA’s then applicable rules governing the arbitration may be obtained from the AAA’s website which currently is www.adr.org.
c. The arbitrator shall apply the substantive law (and the law of remedies, if applicable) of the state in which the claim arose, or
federal law, or both, as applicable to the claim(s) asserted. The arbitrator shall have exclusive authority to resolve any dispute relating to the interpretation,
applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable.
10
d. Either party may file a motion for summary judgment with the arbitrator. The arbitrator is entitled to resolve some or all of the
asserted claims through such a motion. The standards to be applied by the arbitrator in ruling on a motion for summary judgment shall be the applicable laws
as specified in paragraph 4(c) of this Agreement.
e. Discovery shall be allowed and conducted pursuant to the then applicable arbitration rules of the AAA. The arbitrator is
authorized to rule on discovery motions brought under the applicable discovery rules.
4. Application for Emergency Injunctive and/or Other Equitable Relief. Claims by Employer or Executive for emergency injunctive and/or
other equitable relief relating to unfair competition and/or the use and/or unauthorized disclosure of trade secrets or confidential information shall be subject
to the then current version of the AAA’s Optional Rules for Emergency Measures of Protection set forth within the AAA’s Commercial Dispute Resolution
Procedures. The AAA shall appoint a single emergency arbitrator to handle the claim(s) for emergency relief. The emergency arbitrator selected by the AAA
shall be either a retired judge or an individual experienced in handling matters involving claims for emergency injunctive and/or other equitable relief relating
to unfair competition and the use or unauthorized disclosure of trade secrets and/or confidential information.
5. Arbitration Decision. The arbitrator’s decision will be final and binding. The arbitrator shall issue a written arbitration decision revealing
the essential findings and conclusions upon which the decision and/or award is based. A party’s right to appeal the decision is limited to grounds provided
under applicable federal or state law.
6. Place of Arbitration. The arbitration will be at a mutually convenient location that must be within 50 miles of Executive’s last company
employment location. If the parties cannot agree upon a location, then the arbitration will be held at the AAA’s office nearest to Executive’s last employment
location.
7. Administrative Agencies. Nothing in this Agreement is intended to prohibit Employee from filing a claim or communicating with the
United States Equal Employment Opportunity Commission (“EEOC”), the National Labor Relations Board (“NLRB”) or the California Department of Fair
Employment and Housing (“DFEH”).
8. Construction. Should any portion of this Agreement be found to be unenforceable, such portion will be severed from this Agreement, and
the remaining portions shall continue to be enforceable.
9. Representation, Fees and Costs. Each party may be represented by an attorney or other representative selected by the party. Except as
otherwise provided for by statute, the arbitrator shall award reasonable attorneys’ fees and costs (including without limitation, costs for depositions, experts,
etc.) to Executive provided Executive is the prevailing party except that Employer shall be responsible for the arbitrator’s fees and costs, or any fees or costs
charged by the AAA, to the extent they exceed any fee or cost that Executive would be required to bear if the action were brought in court. In no event shall
Executive be responsible for attorneys’ fees and costs of Employer.
10. Waiver of Jury Trial/Exclusive Remedy. EXECUTIVE AND EMPLOYER KNOWINGLY AND VOLUNTARILY WAIVE ANY
CONSTITUTIONAL RIGHT TO HAVE ANY DISPUTE BETWEEN THEM DECIDED BY A COURT OF LAW AND/OR BY A JURY IN COURT.
11. Sole and Entire Agreement. This Agreement expresses the entire Agreement of the parties and shall supersede any and all other agreements,
oral or written, concerning arbitration. This Agreement is not, and shall not be construed to create, any contract of employment, express or implied.
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12. Requirements for Modification or Revocation. This Agreement to arbitrate shall survive the termination of Executive’s employment. It can
only be revoked or modified by a writing signed by the Chairperson of the Compensation Committee of the Board of Directors of Employer and Executive
that specifically states an intent to revoke or modify this Agreement.
13. Voluntary Agreement. EXECUTIVE ACKNOWLEDGES THAT EXECUTIVE HAS CAREFULLY READ THIS AGREEMENT,
UNDERSTANDS ITS TERMS, AND AGREES THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN EMPLOYER AND EXECUTIVE
RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT. EXECUTIVE HAS KNOWINGLY AND
VOLUNTARILY ENTERED INTO THE AGREEMENT WITHOUT RELIANCE ON ANY PROVISIONS OR REPRESENTATIONS BY EMPLOYER,
OTHER THAN THOSE CONTAINED IN THIS AGREEMENT.
EXECUTIVE FURTHER ACKNOWLEDGES THAT EXECUTIVE HAS BEEN GIVEN THE OPPORTUNITY TO DISCUSS THIS
AGREEMENT WITH EXECUTIVE’S PRIVATE LEGAL COUNSEL AND EXECUTIVE HAS UTILIZED THAT OPPORTUNITY TO THE EXTENT
DESIRED.
EXECUTIVE:
EMPLOYER:
/s/ Daniel R. Hart
Daniel R. Hart
AVID BIOSERVICES, INC., a Delaware corporation
By: /s/ Richard B. Hancock
Name: Richard B. Hancock
Title: Interim President and Chief Executive Officer
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EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
(1) Registration Statement (Form S-8 No. 333-228735) pertaining to the 2018 Omnibus Incentive Plan of Avid Bioservices, Inc.,
(2) Registration Statement (Form S-8 No. 333-208466, No. 333-192794, No. 333-185423, No. 333-178452) pertaining to the 2011 Stock Incentive Plan of
Avid Bioservices, Inc.,
(3) Registration Statement (Form S-8 No. 333-171067) pertaining to the 2011 Stock Incentive Plan and 2010 Employee Stock Purchase Plan of Avid
Bioservices, Inc.,
(4) Registration Statement (Form S-8 No. 333-215053) pertaining to the 2010 Employee Stock Purchase Plan of Avid Bioservices, Inc.,
(5) Registration Statement (Form S-8 No. 333-164026) pertaining to the 2009 Stock Incentive Plan of Avid Bioservices, Inc.,
(6) Registration Statement (Form S-8 No. 333-130271) pertaining to the 2005 Stock Incentive Plan of Avid Bioservices, Inc.,
(7) Registration Statement (Form S-8 No. 333-121334) pertaining to the 2003 Stock Incentive Plan of Avid Bioservices, Inc.,
(8) Registration Statement (Form S-8 No. 333-106385) pertaining to the 2002 Non-Qualified Stock Option Plan of Avid Bioservices, Inc., and
(9) Registration Statement (Form S-3 No. 333-222548) of Avid Bioservices, Inc.;
of our reports dated June 27, 2019 with respect to the consolidated financial statements of Avid Bioservices, Inc. and the effectiveness of internal control over
financial reporting of Avid Bioservices, Inc., included in this Annual Report on Form 10-K for the year ended April 30, 2019.
/s/ Ernst & Young LLP
Irvine, California
June 27, 2019
Certification of Chief Executive Officer
EXHIBIT 31.1
I, Richard B. Hancock, certify that:
1. I have reviewed this annual report on Form 10-K of Avid Bioservices, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: June 27, 2019
Signed:
/s/ Richard B. Hancock
Richard B. Hancock
Interim President and Chief Executive Officer
Certification of Chief Financial Officer
EXHIBIT 31.2
I, Daniel R. Hart, certify that:
1. I have reviewed this annual report on Form 10-K of Avid Bioservices, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure
that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision,
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal
quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect,
the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Dated: June 27, 2019
Signed:
/s/ Daniel R. Hart
Daniel R. Hart
Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32
I, Richard B. Hancock, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that the Annual Report of Avid Bioservices, Inc. on Form 10-K for the fiscal year ended April 30, 2019 fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report of Avid Bioservices, Inc. on Form 10-K fairly
presents in all material respects the financial condition and results of operations of Avid Bioservices, Inc. at the dates and for the periods indicated.
Date: June 27, 2019
By:
/s/ Richard B. Hancock
Richard B. Hancock
Interim President and Chief Executive Officer
I, Daniel R. Hart, certify, as of the date hereof, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that the Annual Report of Avid Bioservices, Inc. on Form 10-K for the fiscal year ended April 30, 2019 fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report of Avid Bioservices, Inc. on Form 10-K fairly presents
in all material respects the financial condition and results of operations of Avid Bioservices, Inc. at the dates and for the periods indicated.
Date: June 27, 2019
By:
/s/ Daniel R. Hart
Daniel R. Hart
Chief Financial Officer
A signed original of this written statement required by Section 906 has been provided to Avid Bioservices, Inc. and will be retained by Avid Bioservices, Inc.
and furnished to the Securities and Exchange Commission or its staff upon request.