See accompanying notes to condensed consolidated financial statements.

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and comprehensive loss (UNAUDITED)INCOME (loss)

(Unaudited) (In thousands, except per share information)

(1) All share and per share amounts of our common stock for all prior fiscal year periods presented have been retroactively adjusted to reflect the one-for-seven reverse stock split of our issued and outstanding common stock, which took effect on July 10, 2017 (Note 1).

See accompanying notes to condensed consolidated financial statements.

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)of STOCKHOLDERs’ EQUITY

(Unaudited) (In thousands, except per share information)

See accompanying notes to condensed consolidated financial statements.

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) (In thousands)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown above:

See accompanying notes to condensed consolidated financial statements.

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE nine MONTHS ENDED january 31, 2018 (unaudited) (UNAUDITED)

1.       ORGANIZATION AND BUSINESSNote 1 – Description of Company and Basis of Presentation

Business Description—We are a dedicated contract development and manufacturing organization (“CDMO”) that provides a comprehensive range of services from process development to currentCurrent Good Manufacturing Practices (“cGMP”CGMP”) clinical and commercial manufacturing, focused on biopharmaceutical productsdrug substances derived from mammalian cell culture for biotechnology and pharmaceutical companies.

Sale of Research and Development Assets—On February 12, 2018, we entered into an Asset Assignment and Purchase Agreement with a third-party oncology therapeutics company pursuant to which we sold to the third-party oncology therapeutics company the majority of our research and development assets, which included the assignment of certain exclusive licenses related to our former phosphatidylserine (PS)-targeting program (Note 10). As a result of (i) the sale of our PS-targeting program, (ii) the held for sale classification of our R84 technology, (iii) the abandonment of our remaining research and development assets (including our intent to return the exosome technology back to the original licensor), and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business, the operating results from our research and development segment are reported as a loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 2).

Corporate Name Change—Effective January 5, 2018, we changed our name from Peregrine Pharmaceuticals, Inc. to Avid Bioservices, Inc. in connection with the strategic shift in our corporate direction.

Reverse Stock Split—On July 7, 2017, we effected a reverse stock split of our outstanding shares of common stock at a ratio of one-for-seven pursuant to our filed Certificate of Amendment to our Certificate of Incorporation with the Secretary of State of the State of Delaware. The reverse stock split took effect with the opening of trading on July 10, 2017. The primary purpose of the reverse stock split, which was approved by our stockholders at our 2016 Annual Meeting on October 13, 2016, was to enable us to regain compliance with the $1.00 minimum bid price requirement for continued listing on The NASDAQ Capital Market. Pursuant to the reverse stock split, every seven shares of our issued and outstanding shares of common stock were automatically combined into one issued and outstanding share of common stock, without any change in the par value per share of our common stock. All share and per share amounts of our common stock included in the accompanying unaudited condensed consolidated financial statements have been retrospectively adjusted to give effect to the reverse stock split for all periods presented, including reclassifying an amount equal to the reduction in par value to additional paid-in capital. No fractional shares were issued in connection with the reverse stock split. Any fractional share of common stock created by the reverse stock split was rounded up to the nearest whole share. The number of authorized shares of our common stock remained unchanged.

The reverse stock split affected all issued and outstanding shares of our common stock, as well as the shares of common stock underlying our stock options, employee stock purchase plan, warrants and the general conversion right with respect to our 10.50% Series E Convertible Preferred Stock (the “Series E Preferred Stock”).

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) related to quarterly reports on Form 10-Q. Accordingly,10-Q, and accordingly, they do not include all of the information and disclosures required by U.S. GAAP for a complete set ofannual financial statements. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2017. The condensed consolidated balance sheet at April2020, as filed with the SEC on June 30, 2017 has been derived from audited financial statements at that date.2020. The unaudited financial information for the interim periods presented herein reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial condition and results of operations for the periods presented, with such adjustments consisting only of normal recurring adjustments. Results of operations for interim periods covered by this Quarterly Report on Form 10-Q may not necessarily be indicative of results of operations for the full fiscal year or any other interim period.

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

The unaudited condensed consolidated financial statements include the accounts of Avid Bioservices, Inc., and its subsidiaries. All intercompany accounts and transactions among the consolidated entities have been eliminated in the unaudited condensed consolidated financial statements.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts, as well as disclosures of commitments and contingencies in the financial statements and accompanying notes. Actual results could differ materially from those estimates and assumptions.

Discontinued OperationsNote 2 – Summary of Significant Accounting Policies

AsInformation regarding our significant accounting policies is contained in Note 2, “Summary of January 31, 2018, our research and development segment met allSignificant Accounting Policies”, of the conditions to be classified as a discontinued operation (Note 1). Accordingly, the operating results of our research and development segment are reported as a loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented. For additional information, see Note 10, “Sale of Research and Development Assets”.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of liabilities that may be necessary should it be determined that we are unable to continue as a going concern.

We have expended substantial funds on our contract manufacturing business and, historically, on the research and development of pharmaceutical product candidates. As a result, we have historically experienced losses and negative cash flows from operations since our inception and, although we have discontinued our research and development segment (Note 1), we expect negative cash flows from operations to continue for the foreseeable future until we can generate sufficient revenue to achieve profitability. Therefore, unless and until we are able to generate sufficient revenue, we expect such losses to continue during the remainder of fiscal year 2018 and in the foreseeable future.

Our ability to fund our operations is dependent on the amount of cash on hand and our ability to generate sufficient revenue to cover our operations. At January 31, 2018, we had $17,938,000 in cash and cash equivalents and during February 2018, we raised $23,163,000 in gross proceeds from the sale of our common stock pursuant to an underwritten public offering (Note 13). In addition, we expect to receive an aggregate of $8,000,000 in upfront payments over the next six (6) months from the recent sale of certain of our research and development assets (Note 10).

In the event we are unable to secure sufficient business to support our operations beyond the next twelve months, we may need to raise additional capital in the future. Our ability to raise additional capital in the equity markets to fund our obligations in future periods 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, negative economic conditions, adverse market conditions, and adverse financial results. If we are unable to either raise sufficient capital in the equity markets or generate additional revenue, we may need to further 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.

As a result, we have concluded that there is substantial doubt about our ability to continue as a going concern within one year after the date that our accompanying unaudited condensed consolidated financial statements are issued.

Reclassification

Certain prior year amounts related to other assets have been reclassified to property and equipment in our accompanying condensed consolidated balance sheetAnnual Report on Form 10-K for the fiscal year ended April 30, 20172020.

Revenue Recognition

Revenue recognized from services provided under our customer contracts are disaggregated into manufacturing and in our accompanying unaudited condensed consolidated statementprocess development revenue streams.

Manufacturing revenue

Manufacturing revenue generally represents revenue from the manufacturing of cash flowscustomer 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 nine months ended January 31, 2017 to conformentire cost of the performance obligation. Under a manufacturing contract, a quantity of manufacturing runs are ordered and the product is manufactured according to the current period presentation. This reclassification hadcustomer’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 effect on previously reported net loss.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.

avid bioservices, inc.INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED) (UNAUDITED)

Process development revenue

In addition, certain amounts relatedProcess 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 corporate overhead costs that were allocateddate to the researchmost 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 segment have been reclassified from researchprojects are customized to each customer to meet its specifications and development expensetypically only one performance obligation is included. Each process represents a distinct service that is sold separately and has stand-alone value to selling, generalthe customer. The customer also retains control of its product as the product is being created or enhanced by our services and administrative expense in our accompanying unaudited condensed consolidated statementscan make changes to its process or specifications upon request. Under these agreements, we are entitled to consideration for progress to date that includes an element of operations and comprehensive loss for all periods presented (Note 10). This reclassification had no effect on previously reported net loss.profit margin.

RestructuringThe following table summarizes our manufacturing and process development revenue streams (in thousands):

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 receivable on the 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.

Restructuring charges consistDuring the three months ended July 31, 2020 and 2019, we recognized revenue of one-time termination benefits, including severance$16.4 million and other employee related costs related to$6.2 million, respectively, for which the contract liability was recorded in a workforce reduction pursuant to a restructuring plan we implemented in August 2017 (Note 9). One-time termination benefits are expensed at the date we notified the employee, unless the employee was required to provide future service, in which case the benefits are expensed ratably over the future serviceprior period.

CashThe transaction price for services provided under our customer contracts reflects our best estimates of the amount of consideration to which we are entitled in exchange for providing goods and Cash Equivalentsservices 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 consider all short-term investments readily convertibleapply the practical expedient available under ASC 606 that permits us not to cashdisclose the value of unsatisfied performance obligations for contracts with an initial maturityoriginal expected length of three monthsone year or less to be cash equivalents.

Restricted Cash

Under the termsless. As of three separate operating leases related to our facilities,July 31, 2020, we are required to maintain, as collateral, letters of credit during the terms of such leases. At January 31, 2018 and April 30, 2017, restricted cash of $1,150,000 was pledged as collateral under these letters of credit.

Concentrations of Credit Risk and Customer Base

Financial instruments that potentially subject us to a significant concentration of credit risk consist of cash and cash equivalents, restricted cash and trade receivables. We maintain our cash and restricted cash balances primarily with one major commercial bank and our deposits held with the bank exceed the amount of government insurance limits provided on our deposits. We are exposed to credit risk in the event of default by the major commercial bank holding our cash and restricted cash balances to the extent of the cash and restricted cash amounts recorded on the accompanying unaudited condensed consolidated balance sheet.

Our trade receivables from amounts billed for contract manufacturing services have historically been derived from a small customer base. Most contracts require up-front payments and installment payments during the service period. We perform periodic evaluations of the financial condition of our customers and generally do not require collateral, butbelieve we can terminatehave any contract if a material default occurs. At January 31, 2018 and April 30, 2017, approximately 94% and 93%, respectively, of our trade receivables were due from four customers.

In addition, contract manufacturing revenue has historically been derived from a small customer base. Historically, these customers have not entered into long-termunsatisfied performance obligations for contracts because their need for drug supply depends on a variety of factors, including the product’s stage of development, the timing of regulatory filings and approvals, the product needs of their collaborators, if applicable, their financial resources and the market demand with respect to commercial products. During the three and nine months ended January 31, 2018, approximately, 53% and 78%, respectively, of our contract manufacturing revenue was derived from our two largest customers.

Based on our current commitments for manufacturing services from our two largest customers, we expect our future results of operations to be adversely affected until we are able to further expand and diversify our customer base.

Comprehensive Loss

Comprehensive loss is defined as the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive loss is equal to our net loss for all periods presented.greater than one year.

avid bioservices, inc.INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED) (UNAUDITED)

Restricted Cash

Under the terms of an operating lease related to our facilities (Note 4), we are required to maintain, as collateral, a letter of credit, during the term of such lease. At July 31, 2020 and April 30, 2020, restricted cash of $0.4 million was pledged as collateral under the letter of credit.

Leases

We determine if an arrangement is or contains a lease at inception. Our operating leases with a term greater than one year are included in operating lease right-of-use assets, operating lease liabilities and operating lease liabilities, less current portion in our condensed consolidated balance sheets. Right-of-use assets represent our right to use an underlying asset during the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date, based on the present value of lease payments over the lease term. In determining the net present value of lease payments, we use our incremental borrowing rate which represents an estimated rate of interest that we would have to pay to borrow equivalent funds on a collateralized basis at the lease commencement date.

Our operating leases may include options to extend the lease which are included in the lease term when it is reasonably certain that we will exercise a renewal option. Operating lease expense is recognized on a straight-line basis over the expected lease term.

We elected the post-transition practical expedient to not separate lease components from non-lease components for all existing leases. We also elected a policy to not apply the recognition requirements of ASC 842 for short-term leases.

Inventory

Inventory consists of raw materials inventory and is valued at the lower of cost, determined by the first-in, first-out method, or net realizable value. We periodically review raw materials inventory for potential impairment and adjust inventory to its net realizable value based on the estimate of future use and reduce the carrying value of inventory as deemed necessary.

Property and Equipment

Property and equipment is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related assets, which are generally as follows:

Construction-in-progress, which represents direct costs related to the construction of various equipment and leasehold improvements primarily associated with our manufacturing facilities, is not depreciated until the asset is completed and placed into service. No interest was incurred or capitalized as construction-in-progress as of July 31, 2020 and April 30, 2020. All of our property and equipment are located in the U.S. Property and equipment consist of the following (in thousands):

Depreciation and amortization expense for the three months ended July 31, 2020 and 2019 was $0.8 million and $0.7 million, respectively.

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Impairment

Long-lived assets are reviewed for impairment in accordance with authoritative guidance for impairment or disposal of long-lived assets. Long-lived assets are reviewed for events or changes in circumstances whichthat indicate that their carrying value may not be recoverable. Long-lived assets are reported at the lower of carrying amount or fair value less cost to sell.sell if impairment indicators exist. For the ninethree months ended JanuaryJuly 31, 20182020 and 2017,2019, there were no indicators of impairment of the value of our long-lived assets.assets and no cumulative impairment losses recognized as of July 31, 2020.

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. 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 of July 31, 2020 and April 30, 2020, there were no outstanding stock-based awards with market or performance conditions.

Comprehensive Income (Loss)

Comprehensive income (loss) is the change in equity during a period from transactions and other events and circumstances from non-owner sources. Comprehensive income (loss) is equal to our net income (loss) for all periods presented.

Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The guidance prioritizes the inputs used in measuring fair value into the following hierarchy:

As of JanuaryJuly 31, 20182020 and April 30, 2017,2020, we do not have any Level 2 or Level 3 financial assets or liabilities and our cash equivalents, which are primarily invested in money market funds with one major commercial bank, are carried at fair value based on quoted market prices for identical securities (Level 1 input). In addition, there were no transfers between any Levels of the fair value hierarchy during the three and nine months ended January 31, 2018 and 2017.

Customer Deposits

Customer deposits primarily represent advance billings and/or payments received for services or raw materials from our third-party customers prior to the initiation of contract manufacturing services.

Revenue Recognition

We derive revenue from contract manufacturing services provided to our third-party customers. We recognize revenue in accordance with the authoritative guidance for revenue recognition when all of the following criteria are 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. We also comply with the authoritative guidance for revenue recognition regarding arrangements with multiple elements.

Revenue arrangements with multiple elements are divided into separate units of accounting if certain criteria are met, including whether the delivered element has stand-alone value to the customer. When deliverables are separable, consideration received is allocated among the separate units based on their respective fair values, and the applicable revenue recognition criteria are applied to each of the separate units, which may require the use of significant judgement. Deliverables are considered separate units of accounting if (1) the delivered item(s) has value to the customer on a stand-alone basis and (2) the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control.

Arrangement consideration is allocated at the inception of the agreement to all identified units of accounting based on their relative selling price. The relative selling price for each deliverable is determined using vendor specific objective evidence (“VSOE”) of selling price or third-party evidence of selling price if VSOE does not exist. If neither VSOE nor third-party evidence of selling price exists, we use our best estimate of the selling price for the deliverable. The amount of allocable arrangement consideration is limited to amounts that are fixed or determinable. The consideration received is allocated among the separate units of accounting, and the applicable revenue recognition criteria are applied to each of the separate units. Changes in the allocation of the sales price between delivered and undelivered elements can impact revenue recognition but do not change the total revenue recognized under any agreement.

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

On occasion, we receive requests from customers to hold product that we have manufactured on a “bill-and-hold” basis. Revenue is recognized for these “bill-and-hold” arrangements in accordance with the authoritative guidance, which requires, among other things, the existence of a valid business purpose for the arrangement; the “bill-and-hold” arrangement is at the request of the customer; title and risk of ownership must pass to the customer; the product is complete and ready for shipment; a fixeddelivery date that is reasonable and consistent with the customer’s business practices; the product has been separated from our inventory; and no further performance obligations by us exist.

In addition, we also follow the authoritative guidance when reporting revenue as gross when we act as a principal versus reporting revenue as net when we act as an agent. For transactions in which we act as a principal, have discretion to choose suppliers, bear credit and inventory risk and perform a substantive part of the services, revenue is recorded at the gross amount billed to a customer and costs associated with these reimbursements are reflected as a component of cost of sales for contract manufacturing services.

Any amounts received prior to satisfying our revenue recognition criteria are recorded as deferred revenue or customer deposits in the accompanying unaudited condensed consolidated financial statements. We also record a provision for estimated contract losses, if any, in the period in which they are determined.

Share-based Compensation

We account for stock options and other share-based awards granted under our equity compensation plans in accordance with the authoritative guidance for share-based compensation. The estimated fair value of share-based payments 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. The fair value of modifications to share-based awards, if any, is generally estimated using a Black-Scholes option valuation model, unless a lattice model is required. Forfeitures are recognized as a reduction of share-based compensation expense as they occur. As of January 31, 2018, there were no outstanding share-based awards with market or performance conditions.

Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from the maximum federal statutory rate of 35% to 21%. The Tax Act states that the 21% U.S. federal corporate tax rate is effective for tax years beginning on or after January 1, 2018. However, existing tax law, which was not amended under the Tax Act, governs when a change in tax rate is effective. Existing tax law provides that if the taxable year includes the effective date of any rate change (unless the change is the first date of the taxable year), taxes should be calculated by applying a blended rate to the taxable income for the year. Section 15 of the Internal Revenue Code stipulates that our blended federal rate is 29.73% for fiscal year 2018. We have not yet determined the impact the rate reduction will have on our gross deferred tax asset and liabilities and offsetting valuation allowance. However, we have a full allowance against the deferred tax asset and as a result there was no impact to income tax expense for the quarter ended January 31, 2018.

In conjunction with the tax law changes, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The ultimate impact, which is expected to be recorded by April 30, 2018, may differ from any provisional amounts, due to, among other things, additional analysis, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the tax Act, and the fact that we cannot definitively predict what our deferred tax balance will ultimately be as of April 30, 2018.

avid bioservices, inc.INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED) (UNAUDITED)

Recent Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses of Financial Instruments (“ASU 2016-13”). The standard changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. As a smaller reporting company, ASU 2016-13 and its subsequent updates are effective for fiscal years beginning after December 15, 2022, which will be our fiscal year 2024 beginning May 1, 2023; however, early adoption is permitted. We are currently evaluating the impact this standard will have on our condensed consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which eliminates, adds and modifies certain disclosure requirements of fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. We adopted ASU 2018-13 on May 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and other Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (“ASU 2018-15”). The new guidance aligns the requirement for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirement for capitalizing implementation costs incurred to develop or obtain internal-use-software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 14, 2019. We adopted ASU 2018-15 on May 1, 2020. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions and improving consistent application in certain areas of Topic 740. ASU 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020, which will be our fiscal year 2022 beginning May 1, 2021. Early adoption is permitted. We are currently evaluating the timing and impact of adopting ASU 2019-12 on our condensed consolidated financial statements and related disclosures.

Note 3 – Note Payable

On April 17, 2020, we entered into a promissory note (the “Note”) with City National Bank, the lender, evidencing an unsecured loan pursuant to the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) of approximately $4.4 million (the “PPP Loan”). We applied for and received the PPP Loan pursuant to the then published PPP qualification and certification requirements.

On April 23, 2020, the SBA, in consultation with the Department of Treasury, issued new guidance that created uncertainty regarding the qualification requirements for a PPP Loan (the “New Guidance”). In light of the New Guidance, we determined it appropriate to pay off the entire amount of the PPP Loan. Accordingly, on May 12, 2020, we paid off in full the principal and interest on the PPP Loan, resulting in the termination of the Note.

Note 4 – Leases

We currently lease office, manufacturing, laboratory and warehouse space in four buildings under three separate non-cancellable operating lease agreements. All of our leased facilities are located in close proximity in Tustin, California, have original lease terms ranging from 7 to 12 years, contain two multi-year renewal options, and scheduled rent increases of 3% on either an annual or biennial basis. A multi-year renewal option was included in determining the right-of-use asset and lease liability for two of our leases as we considered it reasonably certain that we would exercise such renewal options. In addition, two of our leases provide for periods of free rent, lessor improvements and tenant improvement allowances, of which certain of these improvements have been classified as leasehold improvements and are being amortized over the shorter of the estimated useful life of the improvements or the remaining life of the lease. The operating lease right-of-use assets and liabilities included in our accompanying condensed consolidated balance sheets primarily relate to these facility leases.

Certain of our facility leases require us to pay property taxes, insurance and common area maintenance. While these payments are not included as part of our lease liabilities, they are recognized as variable lease cost in the period they are incurred.

Basic

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The components of lease cost included in our accompanying unaudited condensed consolidated statements of operations and Dilutivecomprehensive income (loss) for the three months ended July 31, 2020 and 2019 were as follows (in thousands):

Supplemental consolidated balance sheet and other information related to our operating leases as of July 31, 2020 and April 30, 2020 were as follows (in thousands, expect weighted average data):

Cash paid for amounts included in the measurement of lease liabilities for the three months ended July 31, 2020 and 2019 was $0.7 million and $0.8 million, respectively, and is included in net cash used in operating activities in our accompanying unaudited condensed consolidated statements of cash flows.

As of July 31, 2020, the maturities of our operating lease liabilities, which includes those derived from lease renewal options that we considered it reasonably certain that we would exercise, were as follows (in thousands):

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 5 – Stockholders’ Equity

Series E Preferred Stock

Each share of issued and outstanding 10.50% Series E Convertible Preferred Stock $0.001 par value per share (“Series E Preferred Stock”) is convertible at any time, at the option of the holder, into a number of shares of our common stock determined by dividing the liquidation preference of $25.00 per share Series E Preferred Stock, plus any accrued and unpaid dividends (whether or not earned or declared), by the then-current conversion price per share, currently $21.00 per share, rounded down to the nearest whole number. As of July 31, 2020, if all of our issued and outstanding shares of Series E Preferred Stock were converted at the conversion price of $21.00 per share, the holders of our Series E Preferred Stock would receive an aggregate of 1,978,783 shares of our common stock. However, because the conversion price of our Series E Preferred Stock is subject to adjustment from time to time in accordance with the applicable provisions of our certificate of incorporation, we have reserved the maximum number of shares of our common stock that could be issued upon the conversion of our Series E Preferred Stock upon a change of control event, assuming our shares of common stock are acquired for consideration of $5.985 per share or less. In this scenario, each outstanding share of our Series E Preferred Stock would be converted into 4.14 shares of our common stock, or 6,826,435 shares in the aggregate.

The Series E Preferred Stock has no stated maturity date or mandatory redemption and is senior to all of our other securities. We may redeem the Series E Preferred Stock for cash, in whole or in part, by paying the redemption price of $25.00 per share, plus any accrued and unpaid dividends to the redemption date. Holders of the Series E Preferred Stock have no voting rights, except as defined in the Certificate of Designations of Rights and Preferences filed with the Secretary of State of the State of Delaware on February 12, 2014.

Holders of our Series E Preferred Stock are entitled to receive cumulative dividends at the rate of 10.50% per annum based on the liquidation preference of $25.00 per share, or $2.625 per annum per share, and are payable quarterly in cash, on or about the first day of each January, April, July and October. For each of the three months ended July 31, 2020 and 2019, we paid aggregate cash dividends of $1.1 million for issued and outstanding shares of our Series E Preferred Stock.

Note 6 – Equity Compensation Plans

Stock Incentive Plans

As of July 31, 2020, we had an aggregate of 6,853,052 shares of our common stock reserved for issuance under our stock incentive plans, of which 4,190,908 shares were subject to outstanding stock options and restricted stock units (“RSUs”) and 2,662,144 shares were available for future grants of stock-based awards.

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Stock Options

The following summarizes our stock option transaction activity for the three months ended July 31, 2020:

Restricted Stock Units

The following summarizes our RSUs transaction activity for the three months ended July 31, 2020:

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Employee Stock Purchase Plan

The Avid Bioservices, Inc. 2010 Employee Stock Purchase Plan (the “ESPP”) is a stockholder-approved plan under which eligible employees can purchase shares of our common stock, based on a percentage of their compensation, subject to certain limits. The purchase price per share is equal to the lower of 85% of the fair market value of our common stock on the first trading day of the offering period or on the last trading day of the six-month offering period. During the three months ended July 31, 2020, a total of 32,197 shares of our common stock were purchased under the ESPP at a purchase price of $5.58 per share. As of July 31, 2020, we had 1,116,538 shares of our common stock reserved for issuance under the ESPP.

Stock-Based Compensation

Stock-based compensation expense for the three months ended July 31, 2020 and 2019 was comprised of the following (in thousands):

As of July 31, 2020, the total estimated unrecognized compensation cost related to non-vested stock options and non-vested RSUs was $6.9 million and $3.5 million, respectively. These costs are expected to be recognized over weighted average vesting periods of 3.02 years and 3.39 years, respectively.

Note 7 – Net LossIncome (Loss) Per Common Share

Basic net lossincome (loss) per common share is computed by dividing our net lossincome (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period excluding the dilutive effects of stock options, shares of common stock expected to be issued under our Employee Stock Purchase Plan (the “ESPP”), warrants, and Series E Preferred Stock outstanding during the period. Diluted net lossincome (loss) per common share is computed by dividing our net lossincome (loss) attributable to common stockholders by the sum of the weighted average number of shares of common stock outstanding during the period plus the potential dilutive effects of stock options, unvested RSUs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period.

Net lossincome (loss) attributable to common stockholders represents our net lossincome (loss) plus Series E Preferred Stock accumulated dividends. Series E Preferred Stock accumulated dividends include dividends declared for the period (regardless of whether or not the dividends have been paid) and dividends accumulated for the period (regardless of whether or not the dividends have been declared).

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The potential dilutive effect of stock options, unvested RSUs, and shares of common stock expected to be issued under our ESPP and warrants outstanding during the period are calculated in accordance with the treasury stock method, but are excluded if their effect is anti-dilutive. The potential dilutive effect of our Series E Preferred Stock outstanding during the period wasis calculated using the if-converted method assuming the conversion of Series E Preferred Stock as of the earliest period reported or at the date of issuance, if later, but are excluded if their effect is anti-dilutive. However, because the impact of stock options, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock are anti-dilutive during periods of net loss, there was no difference between basic and diluted loss per common share amounts for the three and nine months ended January 31, 2018 and 2017.

The calculation of weighted average diluted shares outstanding for the three and nine months ended January 31, 2018 and 2017 excludes the dilutive effectA reconciliation of the following weighted average outstanding stock optionsnumerators and sharesthe denominators of common stock expected to be issued under our ESPP as their impact are anti-dilutive during periods of net loss:

The calculation of weighted average diluted shares outstanding for the three and nine months ended January 31, 2018 and 2017 also excludes the following weighted average outstanding stock options, warrants, shares of common stock expected to be issued under our ESPP, and Series E Preferred Stock (assuming the if-converted method), as their exercise price, purchase price and/or conversion price were greater than the average market price of our common stock during the respective periods, resulting in an anti-dilutive effect:

During February 2018, we sold an aggregate of 10,294,445 shares of our common stock in connection with an underwritten public offering (Note 13), which are not included in the calculation of basic and dilutive net lossincome (loss) per common share computations for the three and nine months ended January 31, 2018.

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

Recently Adopted Accounting Pronouncements

Effective May 1, 2017, we adopted Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330):Simplifying the Measurement of Inventory.  ASU 2015-11 requires that inventory should be measured at the lower of cost and net realizable value for entities that measure inventory using the first-in, first-out method. ASU 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation.  The adoption of ASU 2015-11 did not have a material impact on our condensed consolidated financial statements.

Effective May 1, 2017, we adopted ASU 2015-17, Income Taxes (Topic 740):Balance Sheet Classification of Deferred Taxes. Under existing standards, deferred taxes for each tax-paying jurisdiction are presented as a net current asset or liability and net long-term asset or liability. To simplify presentation, the new guidance will require that all deferred tax assets and liabilities, along with related valuation allowances, be classified as long-term on the balance sheet. As a result, each tax-paying jurisdiction will now only have one net long-term deferred tax asset or liability. The new guidance does not change the existing requirement that prohibits offsetting deferred tax liabilities from one jurisdiction against deferred tax assets of another jurisdiction. Due to the full valuation allowance on our U.S. deferred tax assets, the adoption of ASU 2015-17 did not have a material impact on our condensed consolidated financial statements.

Effective May 1, 2017, we adopted ASU 2016-09, Compensation - Stock Compensation (Topic 718):Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 changes certain aspects of accounting for share-based payments to employees and involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Specifically, ASU 2016-09 requires that all income tax effects of share-based awards be recognized as income tax expense or benefit in the reporting period in which they occur. Additionally, ASU 2016-09 amends existing guidance to allow forfeitures of share-based awards to be recognized as they occur. Previous guidance required that share-based compensation expense include an estimate of forfeitures. Upon adoption of ASU 2016-09, we made a policy election to recognize forfeitures as they occur. The adoption of ASU 2016-09 did not have a material impact on our condensed consolidated financial statements.

Pending Adoption of Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606):Revenue from Contracts with Customers, which, along with subsequent amendments issued in 2015 and 2016, will replace substantially all current US GAAP revenue recognition guidance. ASU 2014-09, as amended, is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services utilizing a new five-step revenue recognition model. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09, as amended, is effective for our annual reporting period beginning May 1, 2018. The new guidance permits adoption either by using (i) a full retrospective approach for all periods presented in the period of adoption or (ii) a modified retrospective approach where the new standard is applied in the financial statements starting with the year of adoption. Under both approaches, cumulative impact of the adoption is reflected as an adjustment to retained earnings (accumulated deficit) as of the earliest date presented in accordance with the new standard. We are continuing to assess the impact of the new guidance on our accounting policies and procedures and are evaluating the new requirements as applied to existing manufacturing contracts. While we continue to assess the impact of the new guidance, we believe the adoption of ASU 2014-09 will modify the way we analyze contracts. We have identified our revenue streams and based on our preliminary assessment, we believe the most significant impact may relate to the recognition of contract manufacturing revenue over a period of time rather than at a point in time. We plan to adopt ASU 2014-09, as amended, on May 1, 2018, on a modified retrospective basis.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-2 requires an entity to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, which will be our fiscal year 2020 beginning May 1, 2019. Early adoption is permitted. We are currently in the process of evaluating the impact of adoption of ASU 2016-02 on our condensed consolidated financial statements and related disclosures.

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230):Restricted Cash, which addresses diversity in practice related to the classification and presentation of changes in restricted cash on the statement of cash flows. ASU 2016-18 will require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, which will be our fiscal year 2019 beginning May 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-18 to have a material impact on our condensed consolidated financial statements and related disclosures.

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718):Scope of Modification Accounting, which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017, which will be our fiscal year 2019 beginning May 1, 2018. Early adoption is permitted. We do not expect the adoption of ASU 2016-09 to have a material impact on our condensed consolidated financial statements and related disclosures.

3.       Trade and other RECEIVABLEs

Trade receivables are recorded at the invoiced amount net of an allowance for doubtful accounts, if necessary. Other receivables are reported at amounts expected to be collected net of an allowance for doubtful accounts, if necessary. Trade and other receivables consist of the following:

______________

(1)            Represents amounts billed for contract manufacturing services.

We continually monitor our allowance for doubtful accounts for all receivables. We apply judgment in assessing the ultimate realization of our receivables and we estimate an allowance for doubtful accounts based on various factors, such as, the aging of accounts receivable balances, historical experience, and the financial condition of our customers. Based on our analysis of our receivables as of January 31, 2018 and April 30, 2017, we determined no allowance for doubtful accounts was necessary.

4.       PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the related asset, generally ranging from three to ten years. Amortization of leasehold improvements is calculated using the straight-line method over the shorter of the estimated useful life of the asset or the remaining lease term. Construction-in-progress, which represents direct costs related to the construction of various equipment and leasehold improvements associated with our manufacturing facilities, are not depreciated until the asset is completed and placed into service. No interest was incurred or capitalized as construction-in-progress as of January 31, 2018.

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

Property and equipment, net, consists of the following:

Depreciation and amortization expense for the three and nine months ended January 31, 2018 was $645,000 and $1,945,000, respectively. Depreciation and amortization expense for the three and nine months ended January 31, 2017 was $631,000 and $1,850,000, respectively.

5.       INVENTORIES

Inventories are recorded at the lower of cost or market (net realizable value) and primarily include raw materials, work-in-process (comprised of raw materials, direct labor and overhead costs associated with in-process manufacturing services), and finished goods (representing manufacturing services completed and ready for shipment) associated with contract manufacturing services. Overhead costs allocated to work-in-process inventory are based on the normal capacity of our production facilities and do not include costs from abnormally low production or idle capacity, which are expensed directly to cost of contract manufacturing in the period incurred. During the three and nine months ended January 31, 2018, we expensed $5,344,000 and $11,182,000, respectively, in idle capacity costs directly to cost of contract manufacturing in the accompanying condensed consolidated financial statements. No idle capacity costs were incurred during the same prior year periods. Cost is determined by the first-in, first-out method. Inventories consist of the following:

6.       STOCKHOLDERS’ EQUITY

Our ability to continue to fund our operations is highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity.

On January 12, 2018, we filed a universal shelf registration statement with the SEC on Form S-3, File number 333-222548 (“January 2018 Shelf”), which was declared effective by the SEC on January 25, 2018, under which we may issue, from time to time, in one or more offerings, offer and sale either individually or in combination up to $125,000,000 of our securities, including common stock, preferred stock, debt securities and warrants. As of January 31, 2018, we had not issued any of our securities under the January 2018 Shelf. Subsequent to January 31, 2018, we issued securities under the January 2018 Shelf as further discussed in Note 13, “Subsequent Events”.

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

Sale of Common Stock

On August 7, 2015, we entered into an At Market Issuance Sales Agreement (“AMI Sales Agreement”) with MLV & Co. LLC (“MLV”), pursuant to which we were able to sell shares of our common stock through MLV, as agent, for aggregate gross proceeds of up to $30,000,000, in registered transactions from our shelf registration statement on Form S-3 (File No. 333-201245), which was declared effective by the SEC on January 15, 2015. Sales of our common stock through MLV were made by any method that was deemed an “at the market offering” as defined in Rule 415 of the Securities Act. We paid MLV a commission equal to 2.5% of the gross proceeds from the sale of our common stock pursuant to the AMI Sales Agreement. During the quarter ended July 31, 2017, we sold 1,051,258 shares of our common stock at market prices under the AMI Sales Agreement, for aggregate gross proceeds of $4,304,000 before deducting commissions2020 and other issuance costs of $111,000. As of July 31, 2017, we had raised the full amount of gross proceeds available to us under the AMI Sales Agreement.2019, are as follows (in thousands, expect per share amounts):

Series E Preferred Stock Dividend

The following table summarizespresents the Series E Preferred Stock quarterly dividend activity duringsecurities excluded from the ninecalculation of diluted net income (loss) per share for the three months ended JanuaryJuly 31, 2018:2020 and 2019, as the effect of their inclusion would have been anti-dilutive (in thousands):

Shares of Common Stock Authorized and Reserved for Future Issuance

We are authorized to issue up to 500,000,000 shares of our common stock. As of January 31, 2018, 45,257,180 shares of our common stock were issued and outstanding. In addition, our common stock outstanding as of January 31, 2018 excluded the following shares of our common stock reserved for future issuance:

      _____________

7.       equity compensation plans

Stock Incentive Plans

As of January 31, 2018, we had an aggregate of 5,433,646 shares of our common stock reserved for issuance under our stock incentive plans, of which, 3,989,356 shares were subject to outstanding options and 1,444,290 shares were available for future grants of share-based awards.

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

The following summarizes our stock option transaction activity for the nine months ended January 31, 2018:

Employee Stock Purchase Plan (ESPP)

We have reserved a total of 2,142,857 shares of our common stock to be purchased under our ESPP, of which 1,303,770 shares remained available to purchase at January 31, 2018, and are subject to adjustment as provided in the ESPP for stock splits, stock dividends, recapitalizations and other similar events. Under the ESPP, we sell shares to participants at a price equal to the lesser of 85% of the fair market value of our common stock at the (i) beginning of a six-month offering period, or (ii) end of the six-month offering period. The ESPP provides for two six-month offering periods each year; the first offering period begins on the first trading day on or after each May 1; the second offering period begins on the first trading day on or after each November 1. During the nine months ended January 31, 2018, 55,966 shares of our common stock were purchased under the ESPP at a purchase price of $3.87 per share.

Share-Based Compensation

Total share-based compensation expense related to share-based awards issued under our equity compensation plans is included in the accompanying unaudited condensed consolidated statements of operations as follows:

As of January 31, 2018, the total estimated unrecognized compensation cost related to non-vested employee stock options was $2,605,000. This cost is expected to be recognized over a weighted average vesting period of 2.67 years based on current assumptions.

8.       WARRANTS

No warrants were issued or exercised during the three and nine months ended January 31, 2018. As of January 31, 2018, warrants to purchase 39,040 shares of our common stock at an exercise price of $17.29 were outstanding and are exercisable through August 30, 2018.

avid bioservices, inc.INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED) (UNAUDITED)

Note 8 – Commitments and Contingencies

In March 2020, the World Health Organization declared the global novel coronavirus disease (“COVID-19”) outbreak a pandemic and recommended containment and mitigation measures worldwide. Since the announcement we have been monitoring this closely, and although the COVID-19 pandemic has not had a significant impact on our operations to date, the ultimate duration and severity of the outbreak and its impact on the economic environment and our business is highly uncertain. Accordingly, we cannot provide any assurance that the COVID-19 pandemic will not have a material adverse impact on our operations or future results. The extent to which the COVID-19 pandemic may impact our future business, strategic initiatives, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity and resurgence of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our customers, vendors, and employees and the remedial actions and stimulus measures adopted by local and federal governments, and the extent to which normal economic and operating conditions can resume.

9.       RESTRUCTURING

Note 9 – Subsequent Events

On August 9, 2017, our Board of Directors approved, and our management implemented, a restructuring plan intended to reduce operating costs and improve cost efficiencies while we pursued strategic options for our research and development assets and focus our efforts on growing our CDMO business. Under this restructuring plan, which we completed in October 2017, we reduced our overall workforce by 57 employees. As a result, during the quarter ended October 31, 2017, we incurred an aggregate of $1,588,000 in restructuring costs consisting of one-time termination benefits, including severance, and other employee-related costs, of which $330,000 related to our research and development segment and $1,258,000 related to our contract manufacturing services segment. The restructuring costs associated with our research and development segment are included in loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for the nine months ended January 31, 2018 (Note 10). The restructuring costs associated with our contract manufacturing services segment are included in operating expenses in the accompanying unaudited condensed consolidated financial statements for the nine months ended January 31, 2018. All restructuring costs were paid as of January 31, 2018.

10.       Sale of research and development assets

Asset Assignment and Purchase Agreement

On February 12, 2018, we entered into an Asset Assignment and Purchase Agreement (the “Purchase Agreement”) with a third-party oncology therapeutics company (the “Buyer”) pursuant to which we sold to the Buyer the majority of our research and development assets, which included the assignment of certain exclusive licenses related to our former PS-targeting program, as well as certain other licenses and assets useful and/or necessary for the potential commercialization of bavituximab. 

Pursuant to the Purchase Agreement, we expect to receive an aggregate of $8 million from the Buyer, payable in three installments over a period of approximately six and one-half months following the date of the Purchase Agreement, the first of which is due by March 14, 2018. We are also eligible to receive up to an additional $95 million in the event that the Buyer achieves certain development, regulatory and commercialization milestones with respect to bavituximab. In addition, we are eligible to receive royalties on net sales that are upward tiering into the mid-teens in the event that the Buyer commercializes and sells products utilizing bavituximab or the other transferred assets. The Buyer is responsible for all future research, development and commercialization of bavituximab, including all related intellectual property costs and all other future liabilities and obligations arising out of the ownership of the transferred assets (i.e., we remain obligated for all liabilities associated with the research and development assets associated with the Purchase Agreement incurred or arising prior to February 13, 2018). In addition, as part of the transaction, we and the Buyer agreed to diligently work in good faith to negotiate and enter into, within 90 days after the date of the Purchase Agreement, an agreement for us to provide future contract development and manufacturing activities to the Buyer in support of bavituximab.

Discontinued Operations

As a result of (i) the sale of our PS-targeting program, (ii) the held for sale classification of our R84 technology, (iii) the abandonment of our remaining research and development assets (including our intent to return the exosome technology back to the original licensor), and (iv) the strategic shift in our corporate direction to focus solely on our CDMO business that will have a major effect on our operations and financial results as we will no longer incur costs associated with research and development, the operating results from our research and development segment are reported as a loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 1). Accordingly, the accompanying unaudited condensed consolidated financial statements for the three and nine months ended January 31, 2018 and 2017 reflect the operations of our research and development segment as a discontinued operation. The results of operations presented below include certain allocations that management believes fairly reflect the utilization of services to the research and development segment. The allocations do not include amounts related to general corporate administrative expenses or interest expense. Therefore, the results of operations from the research and development segment do not necessarily reflect what the results of operations would have been had the research and development segment operated as a stand-alone segment.

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

The following table summarizes the results of discontinued operations for the three and nine months ended January 31, 2018 and 2017:

We will complete the accounting for the Purchase Agreement during the fourth quarter of our current fiscal year ending April 30, 2018. In addition, we expect to use a portion of our net operating losses to offset the taxable gain from the Purchase Agreement, if any, which could result in a partial release of our valuation allowance.

Assets Held for Sale

The carrying value of the assets and liabilities deemed a component of the discontinued research and development segment were not classified as “assets held for sale” in the accompanying unaudited condensed consolidated balance sheets at January 31, 2018 and April 30, 2017 since there were no related assets reported as of the respective balance sheet dates and the Buyer did not assume any liabilities under the Purchase Agreement.

11.       SEGMENT REPORTING

Changes in our Organizational Structure

Historically, our business had been organized into two reportable operating segments: (i) our research and development segment, and (ii) our contract manufacturing services segment. However, as a result of the aforementioned discontinued operation (Note 10),management has determined that the Company now operates in only one operating segment. Accordingly, effective January 31, 2018, we reported our financial results for one reportable segment to reflect this new organizational structure.The accounting policies of our one reportable segment are the same as those described in Note 2.In addition, the financial results of our discontinued research and development segment are reflected as a loss from discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 10).

12.       commitments and contingencies

Legal Proceedings – In the ordinary course of business, we are at times subject to various legal proceedings and disputes. We make provisions for liabilities when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated.  Such provisions are reviewed at least quarterly and adjusted to reflect the impact of any settlement negotiations, judicial and administrative rulings, advice of legal counsel, and other information and events pertaining to a particular case.

avid bioservices, inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JANUARY 31, 2018 (unaudited) (CONTINUED)

On October 10, 2013, a derivative and class action complaint, captionedMichaeli v. Steven W. King, et al., C.A. No. 8994-VCL, was filed in the Court of Chancery of the State of Delaware (the “Court”), purportedly on behalf of the Company, which was named a nominal defendant, against certain of our executive officers and our three former non-employee directors (collectively, the “Defendants”). On December 1, 2015, the plaintiffs filed an amended and supplemental derivative and class action complaint (the “Amended Complaint”). The Amended Complaint alleged that the Defendants breached their respective fiduciary duties in connection with certain purportedly improper compensation decisions made by our board of directors during the past four fiscal years ended April 30, 2015 and that our directors breached their fiduciary duty of candor by filing and seeking stockholder action on the basis of an allegedly materially false and misleading proxy statement for our 2013 annual meeting of stockholders. On May 15, 2017, the parties filed with the Court a Stipulation and Agreement of Compromise, Settlement and Release (the “Settlement”) setting forth the terms of the proposed settlement of the claims in the Amended Complaint. At a hearing on July 27, 2017, the Court issued an order approving the Settlement, which provided, among other things, that the three former non-employee directors agreed to pay or cause to be paid $1,500,000 to us, which amount is included as a reduction to selling, general and administrative expense in the accompanying unaudited condensed consolidated financial statements for the nine months ended January 31, 2018. We received such payment in full in August 2017.

13.       SUBSEQUENT EVENTS

Sale of Research and Development Assets

On February 12, 2018, we sold the majority of our research and development assets to a third-party oncology therapeutics company (Note 10).

Public Offering of Common Stock

On February 14, 2018, we entered into an underwriting agreement (the “Underwriting Agreement”) with Wells Fargo Securities, LLC, as representative for the underwriters identified therein (collectively, the “Underwriters”), relating to the issuance and sale in an underwritten public offering of 9,000,000 shares of our common stock, par value $0.001 per share, at a public offering price of $2.25 per share (the “Offering”). In addition, pursuant to the Underwriting Agreement, we also granted the Underwriters a 30-day option to purchase up to an additional 1,350,000 shares of our Common Stock under this Offering at the public offering price of $2.25 per share less the underwriting discounts and commissions to cover over-allotments, if any (the “Overallotment Option”).

On February 20, 2018, we completed the Offering pursuant to which we sold 10,294,445 shares of our Common Stock, including 1,294,445 shares sold pursuant to the Underwriter’s Overallotment Option at the public offering price of $2.25 per share. The aggregate gross proceeds we received from the Offering, including the shares sold pursuant to the Overallotment Option, was $23,163,000, before deducting underwriting discounts and commissions and other offering related expenses. We intend to use the net proceeds from the offering for the expansion of our contract manufacturing business and for general corporate purposes.

The Offering was made pursuant to a prospectus supplement filed with the SEC on February 14, 2018 under our January 2018 Shelf (Note 6). As of March 12, 2018, aggregate gross proceeds of up to $101,837,000 remained available to us under the January 2018 Shelf.

Series E Preferred Stock Dividend

On March 7, 2018,2020, our Board of Directors declared a quarterly cash dividend of $0.65625 per share on our outstanding Series E Preferred Stock. The dividend payment is equivalent to an annualized 10.50% per share, based on the $25.00 per share stated liquidation preference, accruing from JanuaryJuly 1, 20182020 through March 31, 2018.September 30, 2020. The cash dividend is payable on April 2, 2018October 1, 2020 to holders of the Series E Preferred Stock of record on March 19, 2018.September 14, 2020.

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”), which represent our projections, estimates, expectations or beliefs concerning among other things, financial items that relate to management’s future plans or objectives or to our future economic and financial performance.  In some cases, you can identify these. Forward-looking statements are often identified by terminologythe use of words such as, “may”, “should”, “plans”, “believe”, “will”, “anticipate”, “estimate”, “expect” “project”,but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or “intend”, including their opposites or similar phrases or expressions. You should be aware that thesevariations intended to identify forward-looking statements. These statements are projections or estimates asbased on the beliefs and assumptions of our management based on information currently available to future events andmanagement. These forward-looking statements are subject to a number of factors that may tend to influencenumerous risks and uncertainties, including the accuracy ofrisks and uncertainties described under the statements. These forward-looking statements should not be regarded as a representation by us or any other person that our events or plans will be achieved. You should not unduly rely on these forward-looking statements, which speak only as of the date of this Quarterly Report. We undertake no obligation to publicly revise any forward-looking statement to reflect circumstances or events after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. You should, however, review the factors and risks we describesection titled “Risk Factors” in Part II, Section 1A of this Quarterly Report on Form 10-Q, Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended April 30, 2017,2020, those identified in this “Management’s Discussion and the reportsAnalysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q, and in other filings we file from time to timemay make with the Securities and Exchange Commission (“SEC”) afterfrom 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 dateimpact of this Quarterly Report. Actualall factors on our business or the extent to which any factor, or combination of factors, may cause actual results mayto differ materially from those contained in any forward lookingforward-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

Avid Bioservices, Inc., (“Avid”), formerly known as Peregrine Pharmaceuticals, Inc., isWe are a contract development and manufacturing organization (“CDMO”) committed to improving the lives of patients by manufacturing and delivering high quality pharmaceutical products. We providededicated CDMO that provides a comprehensive range of services from process development to current Good Manufacturing Practices (“cGMP”)CGMP clinical and commercial manufacturing, focused on biopharmaceutical productsdrug substances derived from mammalian cell culture. With 2527 years of experience producing monoclonal antibodies and recombinant proteins, in batch, fed-batch and perfusion modes, our services include cGMPCGMP clinical and commercial product manufacturing, bulk packaging, release and stability testing and regulatory strategy, submission andsubmissions support. We also provide a variety of process development services, including cell lineupstream and downstream development and optimization, cell culture and feed optimization, analytical methods development, testing and product characterization.

We have experience in performing process development and manufacturing of biologics since 1993 in our Franklin biomanufacturing facility, or Franklin Facility, located at our headquarters in Tustin, California. In March 2016, we expanded our manufacturing capacity through the launch of our Myford biomanufacturing facility, or Myford Facility, which more than doubled our manufacturing capacity. The 42,000 square foot facility, which is our second biomanufacturing facility, includes multiple single-use bioreactors up to the 2,000-liter manufacturing scale. The Myford Facility was designed to accommodate a fully disposable biomanufacturing process for products in clinical development to commercial. The Myford Facility is located adjacent to our Franklin Facility.

In February 2017, we leased an additional 42,000 square feet of vacant warehouse space within the same building as our existing Myford Facility to build a third biomanufacturing facility to support future revenue growth as demand warrants. The proximity of this space will allow us to utilize existing manufacturing infrastructure that we believe should enhance our manufacturing efficiencies and reduce the overall cost and timeframe to construct this third biomanufacturing facility.

In addition, we have a strong regulatory track record consisting of a 15-year inspection history with no significant impact on our business. We have been audited by several regulatory agencies, including the U.S. Food and Drug Administration (“FDA”), the European Medicines Agency, the Brazilian Health Surveillance Agency (“ANVISA”), the Canadian Health Authority and the California Department of Health. In addition, between 2005 and 2017, we completed six successful pre-approval inspections. We also completed four FDA inspections between 2013 to the most recently completed inspection in February 2018, none of which resulted in any Form 483 observations by the FDA. We have also been audited and qualified by large and small, domestic and foreign, pharmaceutical and biotechnology companies interested in the production of biologic material for clinical and commercial use.

Business Transition

In the fall of 2017, we announced our intent to cease our research and development activities and to transition our business to a dedicated CDMO. As part of our transition efforts, we have completed the following initiatives:

Strategic Objectives

Now that we have completed the transition of our business to a dedicated CDMO, weWe have established and are currently executing on the following near-term strategic objectives:

First Quarter Highlights

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

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.

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 from our continuing operations for the three and nine months ended January 31, 2018 and 2017.

Contract Manufacturing Revenue

Three Months:  The decrease in contract manufacturing revenue of $3,928,000 (37%) during the three months ended JanuaryJuly 31, 20182020 and 2019 (in thousands):

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, wasan 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 a decreasean increase in the number and scale of manufacturing runs in-process and/or completed and shipped in the current year period compared to the same period in the prior year which can primarily be attributed toperiod, partially offset by a decrease in process development revenues. In addition, the current-year period increase in manufacturing demandrevenues includes $3.1 million in fees received from our second largest customer.

Nine Months: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 contractrevenues was attributed to the following components of our revenue streams:

Additionally, growth in manufacturing revenue of $6,952,000 (17%)revenues during the ninecurrent-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 JanuaryJuly 31, 20182020 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 revenueincreased revenues, which includes the aforementioned fees associated with several manufacturing runs in the aggregate amounta customer’s unused capacity of $9,924,000 used to support the process validation of a customer product, which product was ready for shipment in fiscal year 2017, but was deferred to fiscal year 2018 due to a shipping delay. This increase was offset$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:

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 manufacturing demand from our two largest customers. Excluding any future potential new business, we expect contract manufacturing revenue for the full fiscal year ending April 30, 2018 to decline in comparison to fiscal year 2017. PartSG&A expense of this decline is due to lower anticipated commitments from Halozyme, Inc., our largest customer, based on its most recent committed forecast (covering the three quarters ending September 30, 2018). As we seek to expand and diversify our customer base, we have secured five new customers since January 2017. These new customers are predominately in an earlier stage of development and, therefore, we expect that contract manufacturing revenue from these new customers during fiscal year 2018 will only partially offset the anticipated decrease in revenue from our other existing customers.

Therefore, based on our current commitments for manufacturing services and the anticipated completion of in-process manufacturing runs, we continue to expect contract manufacturing for the fiscal year ending April 30, 2018 to range from $50 to $55approximately $0.6 million.

Gross Profit (Loss)Liquidity and Capital Resources

Three Months: 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.

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):

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Net Cash Used In Operating Activities

During the three months ended JanuaryJuly 31, 2018, gross margins declined2020, net cash used in operating activities decreased by $0.2 million to a negative 61% primarily driven by idle capacity costs$2.3 million from $2.5 of net cash used in operating activities during the current period, compared to gross margins of 26% for the same prior year three-month period, during which we incurred no idle capacity costs. Included within cost of contract manufacturing are idle capacity costs of $5,344,000, which negatively impacted gross margin by 78 percentage pointsthree months ended July 31, 2019.

Net cash used in operating activities for the three months ended JanuaryJuly 31, 2018. This current period decline2020 was further impacteda result of a net change in operating assets and liabilities of $8.6 million, offset by higher$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 costs associated with lower facility utilizationand development operations.

Net cash used in additioninvesting 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 variabilityPaycheck Protection Program (as further described in Note 3 of manufacturing coststhe 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 product to product.the issuance of common stock under our employee stock purchase plan of $0.2 million.