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, 2020.

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, 2020, 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 CDMO that provides a comprehensive range of services from process development to 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.





Strategic Objectives

We have established and are currently executing on the following 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.










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First Quarter Highlights

The following summarizes select highlights from our first quarter ended July 31, 2020:

· Reported revenues of $25.4 million, an increase of 66%, or $10.1 million,

compared to the same prior year period;

· Reported net income attributable to common stockholders of $3.3 million, or

$0.06 per basic and diluted share;

· Appointed Nicholas (Nick) Green as President and Chief Executive Officer. Mr.

Green has more than 30 years of experience in the global pharmaceutical and

healthcare services industry with significant expertise in the contract

manufacturing of novel pharmaceutical products;

· Increased our customer base with the addition of three new customers to whom we

are initially providing for a range of services including technical transfer,

process development and scale-up, with a view towards anticipated future

manufacturing services;

· Validated remediation to the specific piece of equipment that caused an


   interruption of production in the second half of fiscal 2020. The validation
   process entailed the completion of multiple successful revenue-generating
   production campaigns using this equipment. All batches deferred from fiscal
   2020 have now been completed resulting in first quarter fiscal 2021 revenues of
   $4.3 million; and

· Continued to advance the pre-engineering, design and permitting work required


   to allow us to break ground on a facility expansion when we determine it is
   appropriate;




Impact of COVID-19 Pandemic

In March 2020, the World 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 employees who 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, please refer to "Part I, Item 1A-Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020.

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.









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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 unaudited condensed consolidated statements of operations for the three months ended July 31, 2020 and 2019 (in thousands):





                                          Three Months Ended July 31,
                                           2020                 2019          $ Change
Revenues                              $       25,392       $       15,254     $  10,138
Cost of revenues                              16,848               14,168         2,680
Gross profit                                   8,544                1,086         7,458
Operating expenses:
Selling, general and administrative            3,825                4,459          (634 )
Operating income (loss)                        4,719               (3,373 )       8,092
Interest and other income, net                    11                  209          (198 )
Net income (loss)                     $        4,730       $       (3,164 )   $   7,894

Three Months Ended July 31, 2020 Compared to Three Months Ended July 31, 2019





Revenues

Revenues for the three months ended July 31, 2020 were $25.4 million compared to $15.3 million for the same period in the prior year, an increase of $10.1 million, or 66%. The increase in revenues can be attributed to an $11.1 million increase in manufacturing revenues primarily due to an increase in the number and scale of manufacturing runs in-process and/or completed in the current year period compared to the prior year period, partially offset by a decrease in process development revenues. In addition, the current-year period increase in manufacturing revenues includes $3.1 million in fees received from a customer that had reached its inventory requirements with fewer manufacturing runs than expected, therefore not utilizing all their reserved capacity that had been scheduled for the third quarter of fiscal 2021. The increase in revenues was attributed to the following components of our revenue streams:





                                               $ millions

Net increase in manufacturing revenues $ 11.1 Net decrease in process development revenues (1.0 ) Total increase in revenues

$      10.1








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Additionally, growth in manufacturing revenues during the current-year period was supplemented by $4.3 million from the completion of certain manufacturing runs that had been previously postponed during the second half of fiscal 2020 as a result of a previously disclosed production interruption related to a problem with a specific piece of equipment. Further, the remediation activities that we implemented during the fourth quarter of fiscal 2020 to resolve this equipment issue were validated during the current-year period with the successful completion of multiple revenue-generating production campaigns using such equipment.





Gross Profit

Gross profit for the three months ended July 31, 2020 was $8.5 million compared to $1.1 million for the same period in the prior year, an increase of approximately $7.5 million, and gross margins for such periods were 34% and 7%, respectively. The $7.5 million increase in gross profit for the current-year period can primarily be attributed to increased revenues, which includes the aforementioned fees associated with a customer's unused capacity of $3.1 million, partially offset by planned growth costs associated with payroll and benefits, and increased facility and equipment related costs.

Selling, General and Administrative Expenses

SG&A expenses were $3.8 million for the three months ended July 31, 2020 compared to $4.5 million for the same period in the prior year, a decrease of approximately $0.6 million, or 14%. As a percentage of revenue, SG&A expenses for the three months ended July 31, 2020 and 2019 were 15% and 29%, respectively. The net decrease in SG&A expenses was attributed to the following components:





                                          $ millions

Decrease in separation related expenses $ (0.8 ) Increase in payroll and benefit costs

             0.4

Net decrease in all other SG&A expenses (0.2 ) Total decrease in SG&A expenses

$      (0.6 )




Operating Income (Loss)

Operating income was $4.7 million for the three months ended July 31, 2020 compared to an operating loss of $3.4 million for the same period in the prior year. This $8.1 million improvement in year-over-year operating income (loss) can primarily be attributed to a $7.5 million increase in gross profit combined with a decrease in SG&A expense of approximately $0.6 million.

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash and cash equivalents. As of July 31, 2020, we had cash and cash equivalents of $28.2 million. 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 of July 31, 2020, combined with our anticipated collection of existing accounts receivable and 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 Quarterly 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, 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. 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.









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The following table presents our cash flows from operating, investing and
financing activities for the three months ended July 31, 2020 and 2019 (in
thousands):



                                                     Three Months Ended July 31,
                                                      2020                 2019

Cash, cash equivalents and restricted cash (1) $ 28,561 $ 30,094 Net cash used in operating activities

                    (2,273 )             (2,468 )
Net cash used in investing activities                      (489 )                (38 )
Net cash used in financing activities                    (5,289 )               (901 )

___________

(1) As of July 31, 2020 and 2019, cash, cash equivalents and restricted cash


     included $0.4 million and $1.2 million, respectively, that 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 Used In Operating Activities

During the three months ended July 31, 2020, net cash used in operating activities decreased by $0.2 million to $2.3 million from $2.5 of net cash used in operating activities during the three months ended July 31, 2019.

Net cash used in operating activities for the three months ended July 31, 2020 was a result of a net change in operating assets and liabilities of $8.6 million, offset by $4.7 million of net income and non-cash adjustments to net income of $1.6 million related to depreciation and amortization and stock-based compensation.

Net cash used in operating activities for the three months ended July 31, 2019 was a result of a $3.2 million net loss, offset by non-cash adjustments to net loss of $1.3 million related to depreciation and amortization and stock-based compensation, and cash flows from the net change in operating assets and liabilities of $0.6 million.

Net Cash Used In Investing Activities

During the three months ended July 31, 2020, net cash used in investing activities increased by $0.5 million to $0.5 million from a nominal amount of net cash used in investing activities during the three months ended July 31, 2019.

Net cash used in investing activities for the three months ended July 31, 2020 consisted of $0.5 million used to acquire property and equipment primarily related to our manufacturing and development operations.

Net cash used in investing activities for the three months ended July 31, 2019 consisted of property and equipment acquisitions of less than $0.1 million.

Net Cash Used In Financing Activities

During the three months ended July 31, 2020, net cash used in financing activities increased by $4.4 million to $5.3 million from $0.9 million of net cash used in financing activities during the three months ended July 31, 2019.

Net cash used in financing activities for the three months ended July 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 (as further described in Note 3 of the Notes to the Condensed Consolidated Financial Statements) and $1.1 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 employee stock purchase plan of $0.2 million.









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Net cash used in financing activities for the three months ended July 31, 2019 consisted primarily of cash used to pay preferred dividends to holders of our Series E Preferred Stock of $1.1 million, partially offset by proceeds from the exercise of stock options of $0.3 million.





Contractual Obligations

During the three months ended July 31, 2020, 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, 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 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 three months ended July 31, 2020, 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, 2020.

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 July 31, 2020, our backlog was approximately $60 million, as compared to approximately $65 million as of April 30, 2020. 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 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.

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