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Have you ever messed up?
Avid Biosciences, a small pharmaceutical company from California, has made a mess of things.
In 2021, Avid issued nearly $144 million of convertible notes with a 1.25 percent coupon, maturing in March 2026.
The bonds were issued under Securities and Exchange Commission Rule 144A, which prohibits purchasers of securities issued in a private placement from reselling those securities in the public markets. In the bond contracts, Avid said it would lift this restriction by March 17, 2022.
As Matt Sweeney, managing partner at Laughing Water Capital, a New York-based private investment partnership, put it in his Q1 letter to LPs, published in April:
There was nothing at all unusual about this arrangement; many securities come to market under 144A restrictions, and removing the legend is typically as simple as the company sending an email to the transfer agent requesting that the 144A legend be removed.
So far, so good. All the money Avid had raised was to remember to contact the transfer agent twelve months later to lift the 144a restriction.
Reader, they didn’t. Sweeney:
However, in Avid’s case, they forgot to send that email and the legend was not removed.
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Lexis Nexis:
On February 29, 2024, Avid Bioservices Inc. a notice of accelerated payment from a holder of 1.25% exchangeable senior notes due 2026. Such event resulted in a cross default under a credit agreement with Bank of America NA. On March 12, 2024, Avid adopted an amendment waiving the events of default under the credit agreement. On March 12, 2024, Avid completed a private offering of 7% convertible senior notes due 2029. The reclassification of the 2026 Notes to a current liability resulted in negative working capital and created significant doubt about the company’s ability to continue as a a short-term debt. ongoing care. The substantial doubt has been resolved by the subsequent issuance of the 2029 bonds.
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Sweeney:
The market, the company’s CFO, the company’s banker, the company’s legal counsel, and unfortunately the undersigned, were all blissfully unaware of this oversight until early last month when someone bought more than 25% of the bond (probably about 80 cents in the bank) dollars) informed the company that their failure to remove the 144A legend constituted an event of default under the bond indenture, and they demanded immediate repayment.
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Avid was forced to obtain emergency financing by issuing a new 7 percent convertible loan worth $160 million, maturing in 2029. At least one law firm is now sniffing around the company.
On April 24, Avid issued an amendment to its annual report for the year ending April 2024. There were… some changes: current liabilities were adjusted from $71 million to $215 million, and net income was changed from a profit of $11 million to a profit of $6 million. loss.
All things considered, not a great episode for Avid. So – aside from the benefits of using scheduled emails or calendar alerts – what lessons can we learn here? Sweeney, who called the incident “one of the worst ‘own goals’ I’ve ever seen in public,” says:
There’s a lot to unpack, and none of it is good, and plenty of blame to go around as to how this happened. From my perspective, removing a 144A legend is so routine that I have never seen it on an investor’s diligence checklist (although I have added it to mine). Before this event, I would never have asked a CFO if he had scrubbed his company’s bonds, nor would I have asked him if he washed his hands after going to the bathroom, or if he looked both ways before he crosses the street. These are things you just expect to get done, especially when there’s a CFO, an internal legal department, an external legal department, and the bankers who structured and sold the bond all involved. Not to mention that I was told that Avid used “off the shelf” documents from Morgan Stanley for the original convert, and these documents did not allow for a recovery period. If a recovery period had been specified, Avid could have simply canceled the bonds when they realized their mistake, and paid some sort of penalty rather than having to resort to emergency financing. I assure you that Morgan Stanley has since updated their standard in this area.
We’ve reached out to Avid for comment and will update if they respond.
“[You] You will be more disappointed by the things you didn’t do than by the things you did do,” reads one of the many, many quotes probably wrongly attributed to Mark Twain. Avid would certainly agree.
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