“One of the worst own goals I’ve ever seen in public markets”

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Have you ever been confused?

Avid Biosciences, a small-cap pharmaceutical company based in California, messed up.

In 2021, Avid issued nearly $144 million worth of convertible bonds with a 1.25 percent coupon, with a maturity date of March 2026.

The bonds were issued under Rule 144A of the Securities and Exchange Commission, which prevents buyers of securities issued in a private placement from reselling those securities in the public markets. In the bond indentures, Avid said it would lift that restriction by March 17, 2022.

As Matt Sweeney, managing partner at Laughing Water Capital, a New York-based private equity firm, put it in his Q1 letter to LPs published in April:

There was nothing unusual about this arrangement—many securities go to market under 144A restrictions, and removing the legend is usually as easy as the company emailing the transfer agent and requesting that the 144A legend be removed. .

So far, so good. The money collected, all Avid had to do was remember to contact the transfer agent twelve months later and remove 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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LexisNexis:

In February. 29, 2024, Avid Bioservices Inc. received an acceleration notice from a holder of the 1.25% Senior Convertible Notes due 2026. Such event resulted in an indirect default under a credit agreement with Bank of America NA. On March 12, 2024, Avid entered into an amendment waiving events of default under the credit agreement. On March 12, 2024, Avid completed a private offering of 7% senior convertible notes due 2029. The reclassification of the 2026 notes to a current liability resulted in negative working capital and created substantial doubt about the company’s ability to to continue as a continuation. The fundamental doubt has been resolved through the subsequent issuance of the 2029 notes.

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Sweeney:

The market, the company’s CFO, the company’s banker, the company’s legal counsel and unfortunately yours truly were unaware of this oversight until early last month when someone who had purchased more than 25% of bond (probably around 80 cents on the dollar) notified the company that their failure to remove the 144A legend constituted an event of default under the bond indenture and they were seeking immediate repayment.

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Avid was forced to raise emergency funds by issuing a new $160 million 7 percent convertible that matures in 2029. At least one law firm is now lurking 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 its net income was changed from a $11 million profit to $6 million loss.

All told, not a great episode for Avid. So – aside from the benefits of using scheduled emails for your delivery, or calendar alerts – what are the lessons to be learned here? Sweeney, who called the incident “one of the worst ‘own goals’ I’ve ever seen in the public markets”, says:

There’s a lot to unpack there, and none of it is good, and there’s a lot of blame to go into how this could have happened. From my perspective, removing a 144A legend is so routine that it’s not something I’ve ever seen on any investor’s due diligence checklist (although I’ve added it to mine). Before this event, I would no more have asked a CFO if he had cleared his company’s bonds than I would have asked him if he washes his hands after going to the bathroom, or if he looks both ways before crossing the street . These are things that one simply expects to be done, especially when there is a CFO, internal legal, external legal and the bankers who structured and sold the bonds all involved. Not to mention I’m told that for the original conversion Avid used documents that were “off the shelf” from Morgan Stanley, and these documents did not allow for a cure period. If a cure period had been specified, Avid could have simply written off the bonds when they realized their mistake and paid some sort of penalty instead of resorting to emergency financing. I assure you that Morgan Stanley has since updated their boilerplate in this regard.

We’ve reached out to Avid for comment and will update if they respond.

“[You] you’ll be more disappointed by the things you didn’t do than by the things you did,” says one of the many, many quotes that can be mistakenly attributed to Mark Twain. Avid would surely agree.

Further reading
— Norwegian sovereign wealth fund’s $92 million Excel error