The following discussion and analysis of the financial condition and results of
our operations should be read together with the financial statements and related
notes of Avid Bioservices, Inc. included in Part I Item 1 of this Quarterly
Report on Form 10-Q and with our audited consolidated financial statements and
the related notes included in our Annual Report on Form 10-K for the fiscal

year
ended April 30, 2021.


Cautionary Statement Regarding Forward-Looking Statements





This Quarterly Report on Form 10-Q contains forward-looking statements,
including the anticipated future impact of the ongoing COVID-19 global pandemic
on our business operations, that involve risks and uncertainties, as well as
assumptions that, if they never materialize or prove incorrect, could cause our
results of operations to differ materially from those expressed or implied by
such forward-looking statements. The statements contained in this Quarterly
Report on Form 10-Q that are not purely historical are "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Forward-looking statements are often identified by the use of
words such as, but not limited to, "anticipate," "believe," "can," "continue,"
"could," "estimate," "expect," "intend," "may," "plan," "project," "seek,"
"should," "target," "will," "would" and similar expressions or variations
intended to identify forward-looking statements. These statements are based on
the beliefs and assumptions of our management based on information currently
available to management. These forward-looking statements are subject to
numerous risks and uncertainties, including the risks and uncertainties
described under the section titled "Risk Factors" in our Annual Report on Form
10-K for the fiscal year ended April 30, 2021, those identified in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this Quarterly Report on Form 10-Q, and in other
filings we may make with the Securities and Exchange Commission from time to
time. Moreover, we operate in an evolving environment. New risk factors and
uncertainties emerge from time to time and it is not possible for our management
to predict all risk factors and uncertainties, nor can we assess the impact of
all factors on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statement. We qualify all of our forward-looking statements
by these cautionary statements and, except as required by law, assume no
obligation and do not intend to update these forward-looking statements.



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 development and CGMP manufacturing of biologics for
the biotechnology and biopharmaceutical industries. With 28 years of experience
producing monoclonal antibodies and recombinant proteins, our services include
CGMP clinical and commercial drug substance manufacturing, bulk packaging,
release and stability testing and regulatory submissions support. We also
provide a variety of process development services, including upstream and
downstream development and optimization, analytical methods development, testing
and characterization.



Strategic Objectives


We have a growth strategy that seeks to align with the growth of the biopharmaceutical drug substance contract services market. That strategy encompasses the following 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; · Explore strategic opportunities both within our core business as well as in

adjacent and/or synergistic service offerings in order to enhance and/or

broaden our capabilities; and · Increase our operating profit margin to best in class industry standards.








  22






Second Quarter Highlights



The following summarizes select highlights from our second quarter ended October 31, 2021:

· Reported revenues of $26.1 million, an increase of 24%, or $5.0 million,

compared to the same prior year period; · Reported net income attributable to common stockholders of $3.5 million, or

$0.06 per basic and diluted share; · Continued to advance the two-phased expansion of our Myford facility as further

discussed in the "Facility Expansions" section below; and · Announced the expansion of our CDMO service offerings into the rapidly growing

cell and gene therapy market, which includes plans to construct a world-class,

purpose-built viral vector development and manufacturing facility as further


   discussed in the "Facility Expansions" section below.




Facility Expansions



During fiscal year 2021, we announced plans for a two-phased expansion of our
Myford facility. The first phase, which was initiated during the second quarter
of fiscal 2021, will expand the production capacity of our existing Myford North
facility by adding a second downstream processing suite. This phase is
mechanically complete and is expected to be online during fiscal 2022 following
completion of qualification and validation. The second phase, which was
initiated during the fourth quarter of fiscal 2021 and is anticipated to be
online during calendar 2022, will further expand our capacity through the build
out of a second manufacturing train, including both upstream and downstream
processing suites, within our Myford South facility. We estimate that the total
cost to complete these two phases of expansion will be approximately $70 to $75
million. Upon completion, we estimate that the first and second phases of this
expansion will result in a total revenue generating capacity of up to $270
million annually, depending on the mix of projects.



In October 2021, we announced plans to expand our CDMO service offerings into
viral vector development and manufacturing services for the rapidly growing cell
and gene therapy market. As part of this expansion, we plan to construct a
world-class, purpose-built viral vector development and CGMP manufacturing
facility within a building we are leasing in Costa Mesa, California (the "Viral
Vector Facility"). Based on current projections, we expect the entire build out
of our new Viral Vector Facility will take up to 18 months at an estimated cost
of approximately $65 million to $75 million. The Viral Vector Facility's
analytical and process development laboratories are expected to come online more
rapidly, with the potential to be operational within eight months. Upon
completion of the entire build out of the Viral Vector Facility, we estimate
this expansion, combined with the ongoing Myford facility expansions, has the
potential to bring our total revenue generating capacity to more than $350
million annually, depending on the mix of projects.



Impact of COVID-19 Pandemic



In March 2020, the World Health Organization declared the novel coronavirus
("COVID-19") outbreak a global 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 employees who can perform their job functions offsite,
implemented daily temperature checking, 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, please refer to "Part I, Item 1A-Risk
Factors" in our Annual Report on Form 10-K for the fiscal year ended April

30,
2021.





  23





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.





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,
project management 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, 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, 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 unaudited condensed consolidated statements of
operations for the three and six months ended October 31, 2021 and 2020 (in
thousands):



                                  Three Months Ended                          Six Months Ended
                                     October 31,                                October 31,
                          2021          2020         $ Change        2021          2020         $ Change

Revenues                $  26,109     $  21,064     $    5,045     $  56,863     $  46,456     $   10,407
Cost of revenues           16,923        14,646          2,277        36,286        31,494          4,792
Gross profit                9,186         6,418          2,768        20,577        14,962          5,615

Operating expenses:
Selling, general and
administrative              5,033         4,166            867         9,493         7,991          1,502
Total operating
expenses                    5,033         4,166            867         9,493         7,991          1,502
Operating income            4,153         2,252          1,901        11,084         6,971          4,113
Interest income                73            32             41           149            47            102
Interest expense             (704 )           -           (704 )      (1,407 )          (4 )       (1,403 )
Net income              $   3,522     $   2,284     $    1,238     $   9,826     $   7,014     $    2,812






  24





Three Months Ended October 31, 2021 Compared to Three Months Ended October 31, 2020





Revenues



Revenues for the three months ended October 31, 2021 were $26.1 million compared
to $21.1 million for the same period in the prior year, an increase of $5.0
million, or 24%. The increase in revenues can primarily be attributed to fees
received from a customer during the current-year period for unutilized reserved
capacity combined with an increase in process development revenues primarily
associated with services provided to new customers. In addition, revenues for
the prior-year period included the recognition of $1.7 million from changes in
estimated variable revenue consideration as a result of completing performance
obligations for certain projects, therefore increasing revenue recognized for
those projects during the prior-year period. The increase in revenues was
attributed to the following components of our revenue streams:



                                                $ millions

Net increase in manufacturing revenues $ 3.6 Net increase in process development revenues

            1.4
Total increase in revenues                     $        5.0




Gross Profit



Gross profit for the three months ended October 31, 2021 was $9.2 million
compared to $6.4 million for the same period in the prior year, an increase of
approximately $2.8 million, and gross margins for such periods were 35% and 30%,
respectively. The $2.8 million increase in gross profit for the current-year
period can primarily be attributed to increased revenues, partially offset by
planned growth costs associated with payroll and benefits, and increased
facility and equipment related costs. Additionally, the gross margin for the
prior-year period includes the additional variable revenue consideration of
$1.7
million as described above.


Selling, General and Administrative Expenses


SG&A expenses were $5.0 million for the three months ended October 31, 2021
compared to $4.2 million for the same period in the prior year, an increase of
approximately $0.9 million, or 21%. As a percentage of revenues, SG&A expenses
for the three months ended October 31, 2021 and 2020 were 19% and 20%,
respectively. The net increase in SG&A expenses was attributed to the following
components:



                                                   $ millions

Increase in stock-based compensation expense $ 0.6 Increase in facility and related expenses

                  0.2
Increase in advertising expenses                           0.1

Decrease in payroll and benefit related expenses (0.2 ) Net increase in all other SG&A expenses

                    0.2
Total increase in SG&A expenses                    $       0.9




Operating Income



Operating income was $4.2 million for the three months ended October 31, 2021
compared to $2.3 million for the same period in the prior year. This $1.9
million improvement in year-over-year operating income can primarily be
attributed to a $2.8 million increase in gross profit, partially offset by an
increase in SG&A expense of approximately $0.9 million.



Interest Expense



Interest expense was $0.7 million for the three months ended October 31, 2021
compared to no interest expense for the same period in the prior year. The
increase of $0.7 million can be attributed to interest expense related to our
outstanding Convertible Notes issued in March 2021 (as described in Note 3 of
the Notes to Unaudited Condensed Consolidated Financial Statements).





  25





Six Months Ended October 31, 2021 Compared to Six Months Ended October 31, 2020





Revenues



Revenues for the six months ended October 31, 2021 were $56.9 million compared
to $46.5 million for the same period in the prior year, an increase of $10.4
million, or 22%. The increase in revenues can primarily be attributed to an
increase in fees received from customers for unutilized reserved capacity
combined with a increase in process development revenues primarily associated
with services provided to new customers. In addition, revenues for the
prior-year period included the recognition of $1.1 million from changes in
estimated variable revenue consideration as a result of completing performance
obligations for certain projects, therefore increasing revenue recognized for
those projects during the prior-year period. The increase in revenues was
attributed to the following components of our revenue streams:



                                               $ millions

Net increase in manufacturing revenues $ 5.2 Net increase in process development revenues

           5.2
Total increase in revenues                     $      10.4




Gross Profit



Gross profit for the six months ended October 31, 2021 was $20.6 million
compared to $15.0 million for the same period in the prior year, an increase of
approximately $5.6 million, and gross margins for such periods were 36% and 32%,
respectively. The $5.6 million increase in gross profit for the current-year
period can primarily be attributed to increased revenues, partially offset by
planned growth costs associated with payroll and benefits, and increased
facility and equipment related costs. Additionally, gross margin for the
prior-year period includes the additional variable revenue consideration of
$1.1
million as described above.


Selling, General and Administrative Expenses





SG&A expenses were $9.5 million for the six months ended October 31, 2021
compared to $8.0 million for the same period in the prior year, an increase of
approximately $1.5 million, or 19%. As a percentage of revenues, SG&A expenses
for the six months ended October 31, 2021 and 2020 were both 17%. The net
increase in SG&A expenses was attributed to the following components:



                                                   $ millions

Increase in stock-based compensation expense $ 1.0 Increase in facility and related expenses

                  0.2
Increase in advertising expenses                           0.2
Increase in consulting expenses                            0.1

Decrease in payroll and benefit related expenses (0.3 ) Net increase in all other SG&A expenses

                    0.3
Total increase in SG&A expenses                    $       1.5




Operating Income



Operating income was $11.1 million for the six months ended October 31, 2021
compared to $7.0 million for the same period in the prior year. This $4.1
million improvement in year-over-year operating income can primarily be
attributed to a $5.6 million increase in gross profit, partially offset by an
increase in SG&A expense of approximately $1.5 million.





  26






Interest Expense



Interest expense was $1.4 million for the six months ended October 31, 2021
compared to an inconsequential amount for the same period in the prior year. The
increase of $1.4 million can be attributed to interest expense related to our
outstanding Convertible Notes issued in March 2021 (as described in Note 3 of
the Notes to Unaudited Condensed Consolidated Financial Statements).



Liquidity and Capital Resources

Our principal sources of liquidity are cash flows from operating activities as well as our cash and cash equivalents on hand.


As of October 31, 2021, we had cash and cash equivalents of $163.7 million. We
believe that our existing cash on hand and our anticipated cash from operating
activities will be sufficient to fund our operations for at least the next 12
months from the date of this Quarterly Report.



We currently expect to finance our operations with our existing cash on hand and
our anticipated cash flows from operations. If cash flows from operations are
not sufficient to support our operations or capital requirements, including our
ongoing two phases of expansion to our Myford facility and the planned build out
of our Viral Vector Facility, then we may need to obtain additional equity or
debt financing to fund our future operations and/or such expansions. We may
raise these funds at the appropriate time, accessing the form of capital that we
determine is most appropriate considering the markets available to us and their
respective costs of capital, such as through the issuance of debt or through the
public offering of securities. These financings may not 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, economic and market
conditions, and global financial crises and economic downturns, including those
caused by widespread public health crises such as the COVID-19 pandemic, which
may cause extreme volatility and disruptions in capital and credit markets. 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.



The following table presents our cash flows from operating, investing and
financing activities for the six months ended October 31, 2021 and 2020 (in
thousands):



                                                           Six Months Ended October 31,
                                                            2021                  2020

Cash, cash equivalents and restricted cash (1) $ 164,025

  $       36,014
Net cash provided by operating activities              $         3,661       $        8,133
Net cash used in investing activities                  $       (11,824 )     $       (2,980 )
Net cash provided by (used in) financing activities    $         1,923     
$       (5,751 )


_________________


(1) As of October 31, 2021 and 2020, cash, cash equivalents and restricted cash

included $0.4 million that was restricted from general use, related to cash

that was pledged as collateral under a letter of credit under the terms of a


     facility lease agreement.



Net Cash Provided By Operating Activities





During the six months ended October 31, 2021, net cash provided by operating
activities decreased by $4.5 million to $3.7 million from $8.1 million of net
cash provided by operating activities during the six months ended October 31,
2020.



Net cash provided by operating activities for the six months ended October 31,
2021 was a result of net income of $9.8 million combined with non-cash
adjustments to net income of $5.8 million related to depreciation and
amortization, stock-based compensation and amortization of debt issuance costs,
offset by cash flows from the net change in operating assets and liabilities of
$12.0 million.



Net cash provided by operating activities for the six months ended October 31,
2020 was a result of net income of $7.0 million combined with non-cash
adjustments to net income of $3.4 million related to depreciation and
amortization and stock-based compensation, offset by cash flows from the net
change in operating assets and liabilities of $2.3 million.





  27





Net Cash Used In Investing Activities

During the six months ended October 31, 2021, net cash used in investing activities increased by $8.8 million to $11.8 million from $3.0 million of net cash used in investing activities during the six months ended October 31, 2020.

Net cash used in investing activities for the six months ended October 31, 2021 and 2020 consisted of $11.8 million and $3.0 million, respectively, used to acquire property and equipment primarily related to our manufacturing and development operations.

Net Cash Provided By (Used In) Financing Activities





During the six months ended October 31, 2021, net cash provided by financing
activities increased by $7.7 million to $1.9 million from $5.8 million of net
cash used in financing activities during the six months ended October 31, 2020.



Net cash provided by financing activities for the six months ended October 31,
2021 consisted of proceeds from the issuance of common stock under our equity
compensation plans of $1.9 million.



Net cash used in financing activities for the six months ended October 31, 2020
consisted primarily of $4.4 million of cash used to repay in full a promissory
note issued pursuant to the Paycheck Protection Program and $2.2 million of cash
used to pay preferred dividends to holders of our Series E Preferred Stock,
partially offset by proceeds from the issuance of common stock under our equity
compensation plans of $0.9 million.



Capital Expenditures


During the six months ended October 31, 2021, our capital expenditures were $11.8 million. We currently anticipate that our capital expenditures for the fiscal year ending April 30, 2022 will be approximately $55 to $65 million, primarily related to the expansion of our Myford facility and the planned construction of our new Viral Vector Facility as further discussed in the "Facility Expansions" section above.





Contractual Obligations



Except as set forth below, during the six months ended October 31, 2021, there
were no material changes in our contractual obligations and commitments, as
described in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal
year ended April 30, 2021.



During the six months ended October 31, 2021, we entered into and/or amended
certain operating and finance leases, which leases resulted in $22.9 million of
total future minimum lease payments, of which, $0.2 million is expected to be
paid in fiscal 2022, $1.9 million is expected to be paid in fiscal 2023, $2.1
million is expected to be paid in fiscal 2024, $2.1 million is expected to be
paid in fiscal 2025, $2.2 million is expected to be paid in fiscal 2026, and
$14.4 million is expected to be paid thereafter.



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 in the
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. During the six months ended October 31, 2021, there were
no significant changes in our critical accounting policies as previously
disclosed by us in Part II, Item 7 of our Annual Report on Form 10-K for the
fiscal year ended April 30, 2021, except for our critical accounting policies
and estimates on stock-based compensation associated with performance stock
units granted under our equity compensation plans, as described in Note 2,
Summary of Significant Accounting Policies, in the accompanying notes to the
unaudited condensed consolidated financial statements.





  28





Recent Accounting Pronouncements





For a discussion of recent accounting pronouncements applicable to us, please
refer to Note 2, Summary of Significant Accounting Policies, in the accompanying
notes to our unaudited condensed consolidated financial statements.



Backlog



Our backlog represents, as of a point in time, future revenue from work not yet
completed under signed contracts. As of October 31, 2021, our backlog was
approximately $120 million, as compared to approximately $118 million as of
April 30, 2021. While we anticipate the majority of our backlog will be
recognized as revenue over the next twelve (12) months, our backlog is subject
to a number of risks and uncertainties, including but not limited to: the risk
that a customer timely cancels its commitments prior to our initiation of
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; the risk
that we may not successfully execute on all customer projects; and the risk of a
potential negative impact from the COVID-19 global pandemic, any of which could
have a negative impact on our liquidity, reported backlog and future revenue and
profitability.

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