The following discussion and analysis should be read in conjunction with "Item 6-Selected Financial Data" and our audited Consolidated Financial Statements and the related notes thereto set forth in "Item 8-Financial Statements and Supplementary Data". In addition to historical information, this discussion and analysis contains forward-looking statements, including statements regarding the anticipated impact of the ongoing COVID-19 global pandemic on our business operations that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors including, but not limited to, those set forth under "Item 1A-Risk Factors" and elsewhere in this Annual Report. For discussion related to changes in financial condition and our results of operations for fiscal year 2019 compared to fiscal year 2018, refer to "Part II, Item 7-Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year endedApril 30, 2019 , which was filed with theSEC onJune 27, 2019 . Overview We are a dedicated contract development and manufacturing organization ("CDMO") that provides a comprehensive range of services from process development to Current Good Manufacturing Practices ("CGMP") clinical and commercial manufacturing, focused on biopharmaceutical drug substances derived from mammalian cell culture. With 27 years of experience producing monoclonal antibodies and recombinant proteins, our services include CGMP clinical and commercial product manufacturing, bulk packaging, release and stability testing and regulatory submissions support. We also provide a variety of process development services, including upstream and downstream development and optimization, analytical methods development, testing and characterization. All our services are available as either stand-alone or bundled for full development and manufacturing programs. Strategic Objectives
The following are our near-term strategic objectives:
· Invest in additional manufacturing capacity and resources required for us to
achieve our long-term growth strategy and meet the growth-demand of our
customers' programs, moving from development through to commercial
manufacturing;
· Broaden our market awareness through a diversified yet flexible marketing
strategy;
· Continue to expand our customer base and programs with existing customers for
both process development and manufacturing service offerings; and
· Increase our operating profit margin to best in class industry standards.
Fiscal Year 2020 Highlights
Reported revenues of
Increased our customer base and expanded the scope of work with multiple existing customers to increase the number of manufacturing batches and/or scale of production, including entering into a new contract manufacturing agreement with one of the world's leading pharmaceutical companies to provide process transfer and clinical manufacturing services to the support the development
of a novel therapeutic candidate. 21 Personnel
Added key members to our executive leadership team with the appointments ofTimothy Compton as our Chief Commercial Officer andRichard Richieri as our Chief Operations Officer.Mr. Compton is focused on driving the continued growth of our CDMO business, including the ongoing expansion of our commercial and clinical customer base.Mr. Richieri oversees our process development, clinical and commercial manufacturing, technical support and facilities functions, and focuses on streamlining operations, building internal efficiencies and strategic planning for future growth.
Appointed
Facilities Initiated the pre-engineering, design and permitting work required that will allow us to break ground on a facility expansion when we determine it is appropriate. We expect that such expansion could take 12 to 18 months to complete. While a specific kick-off date has not yet been established for this expansion, we believe that customer demand will require additional capacity in the next 12 to 24 months and we expect to be prepared to accommodate that demand.
Advanced the construction stages of the installation of a pharmaceutical-grade water system within our Myford Facility. We expect the installation and validation of the pharmaceutical grade water system to take place in late calendar year 2020.
Completed the expansion of our total available process development laboratory space, upgraded the infrastructure and equipment within our existing process development laboratories, and implemented new state-of-the-art technologies and equipment designed to facilitate efficient, high-throughput development of innovative upstream and downstream manufacturing processes. Impact of COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared the global novel coronavirus disease ("COVID-19") outbreak a pandemic. To date, the COVID-19 pandemic has not had a significant impact on our operations, as we have been able to continue to operate our manufacturing facilities and provide essential services to our customers. Additionally, in an effort to protect the health and safety of our employees and in compliance with state regulations, we have instituted a work-from-home policy for employeeswho can perform their job functions offsite, implemented social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our manufacturing facilities, and suspended all non-essential employee travel. The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. We will continue to assess the potential impact of the COVID-19 pandemic on our business, financial condition, and results of operations. For a further discussion of potential risks to our business from the COVID-19 pandemic, see "Part I, Item 1A-Risk Factors" of
this Annual Report.
Performance and Financial Measures
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenues, gross profit, selling, general and administrative expenses and operating income.
22 We intend for this discussion to provide the reader with information that will assist in understanding our consolidated financial statements, the changes in certain key items in those consolidated financial statements from period to period and the primary factors that accounted for those changes. Revenues Revenues are derived from services provided under our customer contracts and are disaggregated into manufacturing and process development revenue streams. The manufacturing revenue stream generally represents revenue from the manufacturing of customer products derived from mammalian cell culture covering clinical through commercial manufacturing runs. The process development revenue stream generally represents revenue from services associated with the custom development of a manufacturing process and analytical methods for a customer's product. Gross Profit Gross profit is equal to revenues less cost of revenues. Cost of revenues reflects the direct cost of labor, overhead and material costs. Direct labor costs include personnel costs within the manufacturing, process and analytical 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.
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, finance and accounting, business development, legal, human resources, information technology, project management, and other centralized services. SG&A expenses include corporate legal fees, audit and accounting fees, investor relation expenses, non-employee director fees, corporate facility related expenses, and other expenses relating to our general management, administration, project management, 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 The following table compares the operating results from our continuing operations for the fiscal years endedApril 30, 2020 , 2019 and 2018 (in thousands): Fiscal Year Ended April 30, 2020 2019 2018 Revenues$ 59,702 $ 53,603 $ 53,621 Cost of revenues 55,770 46,379 56,545 Gross profit (loss) 3,932 7,224 (2,924 ) Operating expenses:
Selling, general and administrative 14,517 12,846
16,456 Loss on lease termination 355 - - Restructuring charges - - 1,258 Total operating expenses 14,872 12,846 17,714 Operating loss (10,940 ) (5,622 ) (20,638 )
Interest and other income, net 474 282
75
Loss from continuing operations before income taxes (10,466 ) (5,340 ) (20,563 ) Income tax benefit - 284
-
Loss from continuing operations, net of tax
$ (20,563 ) 23
Fiscal Year 2020 Compared to Fiscal Year 2019
Revenues Revenues were$59.7 million in fiscal 2020, compared to$53.6 million in fiscal 2019, an increase of approximately$6.1 million , or 11%. The increase in revenues can be attributed to a$8.6 million increase in manufacturing revenue primarily due to an increase in the number of manufacturing runs in-process and/or completed in fiscal 2020 compared to fiscal 2019, partially offset by a decrease in process development revenue. The increase in revenues was attributed to the following components of our revenue streams: $ millions
Net increase in manufacturing revenues
$ 6.1 Additionally, growth in manufacturing revenue during fiscal 2020 was impacted by a production interruption related to a problem with a specific piece of equipment, which resulted in the termination of certain in-process manufacturing runs and the postponement of other manufacturing runs scheduled to commence during fiscal 2020. During the fourth quarter of fiscal 2020, we implemented what we believe was the necessary remediation for the specific piece of equipment that resulted in the production interruption. We are currently progressing through the confirmation stage of this remediation during which we are running multiple revenue-generating production campaigns to confirm the successful remediation of the equipment issue. We expect the confirmation stage of this remediation to be completed in the coming months. Gross Profit Gross profit was$3.9 million in fiscal 2020, compared to$7.2 million in fiscal 2019, a decrease of approximately$3.3 million , and gross margins for fiscal 2020 and fiscal 2019 were 7% and 13%, respectively. The$3.3 million decrease in gross profit for fiscal 2020 was primarily attributed to higher facility and equipment related costs primarily related to the production interruption noted above, planned growth costs associated with payroll and related costs, and increased depreciation expense from the acquisition of new equipment, which were partially offset by an increase in revenues.
Selling, General and Administrative Expenses
SG&A expenses were$14.5 million in fiscal 2020, compared to$12.8 million in fiscal 2019, an increase of approximately$1.7 million , or 13%. As a percentage of revenue, SG&A expenses for the fiscal years 2020 and 2019 were both 24%. The net increase in SG&A expenses was attributed to the following components: $ millions
Increase in separation related expenses
0.6 Increase in stock-based compensation expense 0.5 Decrease in accrued bonus expense (0.5 ) Net increase in all other SG&A expenses 0.3 Total increase in SG&A expenses$ 1.7 24 Loss on Lease Termination
In the second quarter of fiscal 2020, we terminated an operating lease for one of our non-manufacturing facilities that was primarily utilized for warehouse space. The lease termination was primarily driven by our efforts to reduce costs by leveraging available warehouse space in our other facilities, which we expect will save us approximately$1.3 million in the aggregate over a period of four years. In connection with the termination of this lease, we removed the corresponding operating lease right-of-use asset and liability balances from our consolidated balance sheet and recognized a loss of$0.4 million . Additionally, the lease termination released$0.3 million of restricted cash that was pledged as collateral under a letter of credit required by the terminated lease. Operating Loss
Operating loss was$10.9 million for fiscal 2020, compared to an operating loss of$5.6 million for fiscal 2019. Of this$5.3 million increase in operating loss for fiscal 2020, approximately$3.3 million was attributable to a decrease in gross profit, combined with an increase in SG&A expenses of approximately$1.7 million and a$0.4 million loss recognized in connection with the termination of the operating lease discussed above. Income Tax Benefit In fiscal 2019, we recognized a$1.0 million gain in discontinued operations, before taxes, for the sale of our r84 technology (as described in Note 11 of the Notes to 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$0.3 million recorded in discontinued operations. Discontinued Operations
As a result of the sale of our PS-targeting and r84 technologies in fiscal 2018 and fiscal 2019, respectively (as described in Note 11 of the Notes to 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$1.0 million and$8.0 million that were recorded in connection with the aforementioned sales of our PS-targeting and r84 technologies, respectively, 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 endedApril 30, 2019 and 2018, respectively. There were no operating results from discontinued operations during the fiscal year endedApril 30, 2020 .
Critical Accounting Policies and Estimates
Our discussion and analysis of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP"). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We review our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. While our significant accounting policies are more fully described in Note 2 of the Notes to 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.
25 Revenue Recognition
OnMay 1, 2018 , we adopted Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), and its subsequent updates (codified as ASC 606), using the modified retrospective method. Accordingly, results for reporting periods afterMay 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 prior to our adoption of
ASC 606. Under ASC 606, we recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. To determine revenue recognition for contracts with customers we perform the following five steps: (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) we satisfy a performance obligation.
Revenue recognized from services provided under our customer contracts are disaggregated into manufacturing and process development revenue streams.
Manufacturing revenue Manufacturing revenue generally represents revenue from the manufacturing of customer products recognized over time, utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation. Under a manufacturing contract, a quantity of manufacturing runs is 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 products are manufactured exclusively for a specific customer and have no alternative use. The customer retains control of its product during the entire manufacturing process and can make changes to the process or specifications at its request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin. Process development revenue Process development revenue generally represents revenue from services associated with the custom development of a manufacturing process and analytical methods for a customer's product. Process development revenue is recognized over time, utilizing an input method that compares the cost of cumulative work-in-process to date to the most current estimates for the entire cost of the performance obligation. Under a process development contract, the customer owns the product details and process, which has no alternative use. These process development projects are customized to each customer to meet its specifications and typically 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 its product as the product is being created or enhanced by our services and can make changes to its process or specifications upon request. 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 accounts receivables on the consolidated balance sheet when our rights become unconditional. Contract liabilities represent customer deposits and deferred revenue billed and/or received in advance of our fulfillment of performance obligations. Contract liabilities convert to revenue as we perform our obligations under the contract. The transaction price for services provided under our customer contracts reflect our best estimates of the amount of consideration to which we are entitled in exchange for providing goods and services to our customers. In determining the transaction price, we considered the different sources of variable consideration including, but not limited to, discounts, credits, refunds, price concessions or other similar items. We have included in the transaction price some or all of an amount of variable consideration, utilizing the most likely method, only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The actual amount of consideration ultimately received may differ. Management may be required to exercise judgement in estimating revenue to be recognized. Judgement is required in identifying performance obligations, estimating the transaction price, estimating the stand-alone selling prices of identified performance obligations, and estimating the progress towards the satisfaction of performance obligations. If actual results in the future vary from our estimates, the estimates will be adjusted, which will affect revenues in the period that such variances become known. We apply the practical expedient available under ASC 606 that permits us not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. As ofApril 30, 2020 , we do not have any unsatisfied performance obligations for contracts greater than one
year. 26 Prior to our adoption of ASC 606 onMay 1, 2018 , revenue was generally recognized when all of the following criteria were 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, which is generally the vesting period. 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 ofApril 30, 2020 , there were no outstanding stock-based awards with market
or performance conditions. 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 onU.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.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash and cash equivalents. As ofApril 30, 2020 , we had cash and cash equivalents of$36.3 million . Excluding the cash loan proceeds of$4.4 million received inApril 2020 under a promissory note pursuant to the Paycheck Protection Program (the "PPP") established pursuant to the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the "CARES Act") administered by theU.S. Small Business Administration ("SBA"), which proceeds were subsequently repaid in full to the lender inMay 2020 (as described in Note 3 of the Notes to Consolidated Financial Statements), we would have had cash and equivalents of$31.9 million as ofApril 30, 2020 . 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 currently anticipate that our cash and cash equivalents as ofApril 30, 2020 , excluding the aforementioned$4.4 million in loan proceeds that were returned to the lender thereof inMay 2020 , combined with our projected cash receipts from services to be rendered under our existing customer contracts, will be sufficient to fund our operations for at least the next 12 months from the
date of this Annual Report.
In the event we are unable to generate sufficient cash flow to support our current operations, we may need to raise additional capital in the equity markets in order to fund our future operations. We may raise funds through the issuance of debt or through the public offering of securities. There can be no assurance that these financings will be available on acceptable terms, or at all. Our ability to raise additional capital in the equity and debt markets is dependent on a number of factors including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties including, but not limited to, our financial results and economic and market conditions. Further, global financial crises and economic downturns, including those caused by widespread public health crises such as the COVID-19 pandemic, may cause extreme volatility and disruptions in capital and credit markets, and may impact our ability to raise additional capital when needed on acceptable terms, if at all. If we are unable to fund our continuing operations through these sources, we may need to restructure, or cease, our operations. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us. Any of these actions could materially harm our business, financial condition, results of operations, and future prospects. 27 The following table presents our cash flows from operating, investing and financing activities for the fiscal years endedApril 30, 2020 , 2019 and 2018 (in thousands): Fiscal Year Ended April 30, 2020 2019 2018 Cash, cash equivalents and restricted cash (1)$ 36,612 $ 33,501 $ 43,415 Net cash provided by (used in) operating activities 5,827 (11,595 ) (25,992 ) Net cash (used in) provided by investing activities (3,812 ) 4,544 (793 ) Net cash provided by (used in) financing activities 1,096 (2,863 ) 22,251 ___________
(1) As of
cash included
was restricted from general use, related to cash that was pledged as
collateral under letters of credit under the terms of certain facility lease
agreements.
Net Cash Provided by (Used in) Operating Activities
During fiscal 2020, net cash provided by operating activities increased by
Net cash provided by operating activities during fiscal 2020 was a result of an$10.5 million net loss, as increased to account for non-cash adjustments to net loss of$5.6 million primarily related to depreciation and amortization and stock-based compensation, and cash flows from the net change in operating assets and liabilities of$10.7 million . Net cash used in operating activities during fiscal 2019 was a result of a$4.2 million net loss and a$1.0 million gain on the sale of certain research and development assets, offset by other non-cash adjustments to net loss of$4.5 million primarily related to depreciation and amortization and stock-based compensation, a$4.6 million net change in the assets and liabilities of discontinued operations, and a net change of certain other operating assets and liabilities of$6.3 million .
During fiscal 2020, net cash used in investing activities increased by
Net cash used in investing activities during fiscal 2020 consisted of
Net cash provided by investing activities during fiscal 2019 consisted primarily of proceeds of$6.0 million related to the sale of certain research and development assets associated with our discontinued research and development segment, offset by cash used to acquire property and equipment of$1.5 million .
Net Cash Provided by (Used in) Financing Activities
During fiscal 2020, net cash provided by financing activities increased by
28 Net cash provided by financing activities during fiscal 2020 consisted primarily of$4.4 million of loan proceeds received inApril 2020 from the PPP (which loan was subsequently repaid in full inMay 2020 , as described in Note 3 of the Notes to Consolidated Financial Statements),$0.9 million attributable from the exercise of stock options, and$0.2 million attributable from the issuance of common stock under our employee stock purchase plan, offset by$4.3 million of cash used to pay preferred dividends to holders of our Series E Preferred Stock. Net cash used in financing activities during fiscal 2019 consisted primarily of cash used to pay preferred dividends to holders of our Series E Preferred Stock of$4.3 million , partially offset by proceeds from the exercise of stock options of$1.3 million and proceeds from the issuance of common stock under our employee stock purchase plan of$0.3 million . Capital Expenditures
Our capital expenditures were
Contractual Obligations The following table summarizes our contractual obligations as ofApril 30, 2020 (in thousands): Payments Due by Period Less than 1 More than 5 Total year 1-3 years 3-5 years years
Operating leases (1)$ 34,001 $ 2,972 $ 6,005 $ 6,257 $ 18,767 Finance lease (2) 103 103 - - - Note payable (3) 4,379 4,379 - - -
Total contractual obligations
$ 6,257 $ 18,767 ______________
(1) Primarily represents future minimum lease payments under our facility
operating lease agreements as further described in Note 4 of the Notes to Consolidated Financial Statements.
(2) Represents our obligations under a capital lease agreement to finance certain
software.
(3) Represents our obligations under a promissory note entered into in April
2020, evidencing an unsecured loan of
PPP pursuant to the CARES Act. As further described in Note 3 of the Notes to
Consolidated Financial Statements, we elected to repay the PPP Loan in full
inMay 2020 .
Off-Balance Sheet Arrangements.
As ofApril 30, 2020 , we did not have any off-balance sheet arrangements, as defined in Item 303 of Regulation S-K, that have or are reasonably likely to have a current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. 29
Recently Issued Accounting Pronouncements
For a discussion of recent accounting pronouncements applicable to us, please see Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements.
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