Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 20182019

OR

or

o       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________

Commission file number:001-32839

(714) 508-6100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ý    No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesý Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one):

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso   No ý

As of September 5, 2018, there were 56,001,456August 31, 2019, the number of shares of registrant’s common stock $0.001 par value, outstanding.outstanding was 56,237,674.

AVID BIOSERVICES, INC.

Form 10-Q

For The Quarter Ended July 31, 2019

TABLE OF CONTENTS

Page
No.

The terms “we,” “us,” “our,” “the Company,” and “Avid,” asAs used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, the terms “we,” “us,” “our,” and the “Company” refer to Avid Bioservices, Inc. and its consolidated subsidiaries.

PART I - FINANCIAL INFORMATION

avid bioservices, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share information)

See accompanying notes to condensed consolidated financial statements.

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and comprehensive loss (UNAUDITED)

(in thousands, except share and per share information)

See accompanying notes to condensed consolidated financial statements.

PART I - FINANCIAL INFORMATION

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

BALANCE SHEETS

(in thousands)In thousands, except par value)

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets 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 OF OPERATIONS and comprehensive loss (UNAUDITED)

(inIn thousands, except share and per share information)

We are

See accompanying notes to condensed consolidated financial statements.

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS of STOCKHOLDERs’ EQUITY (UNAUDITED)

(In thousands)

See accompanying notes to condensed consolidated financial statements.

avid bioservices, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(In thousands)

See accompanying notes to condensed consolidated financial statements.

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Note 1 – Description of Company and Basis of Presentation

Avid Bioservices, Inc. is a contract development and manufacturing organization (“CDMO”) that provides a comprehensive range of services from process development to currentCurrent Good Manufacturing Practices (“cGMP”CGMP”) commercial manufacturing focused on biopharmaceutical products derived from mammalian cell culture for biotechnology and pharmaceutical companies.

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, 2018.2019, as filed with the SEC on June 27, 2019. The condensed consolidated balance sheet at April 30, 20182019 has been derived from audited financial statements at that date. 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.

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 Operations

For all periods presented, the operating results of our former research and development segment have been excluded from continuing operations and reported as a loss from discontinued operations inCertain prior period amounts within the accompanying unaudited condensed consolidated financial statements for all periods presented. In addition, the assets and liabilities related to our discontinued research and development segment are reported as assets and liabilities of discontinued operations in the accompanying unaudited condensed consolidated balance sheets at July 31, 2018 and April 30, 2018. For additional information on the discontinuation of our research and development segment, refer to Note 11, “Sale of Research and Development Assets”.

Segment Reporting

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 of our research and development segment (Note 11),management has determined that the Company now operates in only one operating segment. Accordingly, we reported our financial results for one reportable segment to reflect this new organizational structure.

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.

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)

At July 31, 2018, we had $37,484 in cash and cash equivalents. Our ability to fund our operations depends on the amount of cash on hand and our ability to generate sufficient revenue to cover our operations. 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 experienced losses and negative cash flows from operations since our inception, and although we have discontinued our research and development segment, we expect negative cash flows from operations to continue until we can generate sufficient revenue to generate positive cash flow from operations.

In the event we are unable to obtain sufficient business to support our operations beyond the next twelve months, we may need to raise additional capital. Our ability to raise additional capital in the equity markets to fund our obligations in future periods depends 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.

Reclassifications

Certain prior year amounts related to construction-in-progress included in other assets (investing activities) have been reclassified to property and equipment (investing activities) in our accompanying unaudited condensed consolidated statement of cash flows for the three months ended July 31, 2017 to conform to the current period presentation. This reclassification had no effect on previously reportedThese reclassifications did not affect our financial position, net loss.loss, cash flows as of and for the periods presented.

In addition, certain prior year amounts related to deferred revenue and customer deposits have been reclassified to contract liabilities in our accompanying consolidated balance sheet for the fiscal year ended April 30, 2018 and in our accompanying consolidated statementNote 2 – Summary of cash flows for the three months ended July 31, 2017 to conform to the current period presentation (Note 2). This reclassification had no effect on previously reported net loss.

Revenue from Contracts with CustomersSignificant Accounting Policies

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(“ASC 606”), which, along with subsequent amendments issued after May 2014, replaced substantially all then relevant U.S. GAAP revenue recognition guidance. ASC 606, as amended,Information regarding our significant accounting policies is based on the principle that revenue is recognized to depict the contractual 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, which steps include (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)

On May 1, 2018, we adopted ASC 606, as amended, to all contracts not completed as of May 1, 2018 using the modified retrospective method. Results for the reporting period beginning after May 1, 2018 are presented in accordance with ASC 606, while prior period amounts continue to be reported under the accounting standards that were in effect for the prior period. The accounting policy for revenue recognition for periods prior to May 1, 2018 is describedcontained in Note 2, “Summary of Significant Accounting Policies”, of the Notes to the Consolidated Financial Statements includedconsolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.2019.

The cumulative effect of adopting ASC 606 resulted in a one-time adjustment of $2,739 to the opening balance of accumulated deficit. The cumulative effect adjustment relates to the recognition of revenue and related costs forRevenue Recognition

Revenue is recognized from contract manufacturing services provided under our customer contracts, that transfer goods or services over time. Under ASC 606,which we have disaggregated into manufacturing and process development revenue streams:

Manufacturing revenue

Manufacturing revenue generally represents revenue from the timingmanufacturing of the recognition of contract manufacturing revenue and the related cost of contract manufacturing associated with goods or services provided to customers with no alternative use arecustomer product(s) derived from mammalian cell culture 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 entire cost of the performance obligation. By contrast, in the prior period, contract manufacturing revenue and the related costs were recognized upon completion of the performance obligation in accordance with accounting standards that were in effect in the prior period. Under these customer contracts the customer retains control of the product as it is being created or enhanced by our services and/or we are entitled to compensation for progress to date that includes an element of profit margin.

The following table summarizes the cumulative effect of the adoption of ASC 606 on amounts previously reported in our consolidated balance sheet at April 30, 2018:

The following table summarizes the effect of the adoption of ASC 606 on our unaudited condensed consolidated balance sheet at July 31, 2018:

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)

The following table summarizes the effect of the adoption of ASC 606 on our unaudited condensed consolidated statement operations and comprehensive loss for the three months ended July 31, 2018:

Revenue Recognition

We derive revenue from contract manufacturing services provided under our customer contracts, which we have disaggregated into the following revenue streams:

Manufacturing revenue

The manufacturing revenue stream represents revenue from the manufacturing of customer product(s) derived from mammalian cell culture covering clinical through commercial manufacturing runs. Under a manufacturing contract, a quantity of manufacturing runs are ordered and the product is manufactured according to the customer’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 product(s) are manufactured exclusively for a specific customer and have no alternative use. The customer retains control of their product during the entire manufacturing process and can make changes to the process or specifications at their request. Under these agreements, we are entitled to consideration for progress to date that includes an element of profit margin. Revenue

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Process development revenue

Process development revenue generally represents revenue from non-manufacturing related services associated with this streamthe 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 date to the most current estimates for the entire cost of the performance obligation.

Process development revenue

The process development revenue stream represents revenue from non-manufacturing related services associated with the custom development of a customer’s product. Under a process development contract, the customer owns the product details and process, andwhich has no alternative use. These process development projects are customized to each customer to meet their specifications and typically only one performance obligation is included. Each process represents a distinct service that is sold separately and has stand-alone value to the customer. The customer also retains control of their product as the product is being created or enhanced by our services and can make changes to their process or specifications upon request. Revenue associated with this stream is 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 entire cost of the performance obligation.

The following table disaggregatessummarizes our contract manufacturing and process development revenue for the three months ended July 31, 2018 by revenue stream:streams (in thousands):

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)

Contract balances

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 trade receivablesaccounts 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 will convert to contract manufacturing revenue as we perform our obligations under the contract.

We recognized $6,962 in contract manufacturing revenue for During the three months ended July 31, 2019 and 2018, we recognized revenue of $6,245 and $6,962, respectively, for which the contract liability was recorded in thea prior year period.

Practical expedients and contract costs

We apply the practical expedient available under ASC 606 that permits us not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. In addition, we currently do not have any unsatisfied performance obligations for contracts greater than one year.

Costs incurred

Leases

On May 1, 2019, we adopted the Accounting Standards Update (“ASU”) No. 2016-02,Leases (“ASC 842”) using the modified retrospective approach. Accordingly, prior period financial information and disclosures have not been adjusted and will continue to obtain or fulfillbe reported in accordance with our historic accounting under the previous lease standard. In addition, we elected the package of practical expedients available for existing contracts, which allowed us to carryforward our historical assessments of lease identification, lease classification, and initial direct costs. As a contract are not material. These costs are generally employee sales commissions,result of adopting ASC 842, we recognized right-of-use assets and lease liabilities of $23.3 million and $25.5 million, respectively, on May 1, 2019, which are expensed when incurredprimarily related to our facility operating leases (Note 3). The difference between the right-of-use assets and included in selling, general and administrative expense inlease liabilities is primarily attributed to the accompanying condensed consolidated statementselimination of operations and comprehensive loss.

Cash and Cash Equivalentsdeferred rent. There was no adjustment to the opening balance of accumulated deficit as a result of the adoption of ASC 842.

We consider all short-term investments readily convertibledetermine 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 sheet at July 31, 2019. Right-of-use assets represent our right to cash withuse an initial maturityunderlying 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 three months or lesslease 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 be cash equivalents.pay to borrow equivalent funds on a collateralized basis at the lease commencement date.

Restricted CashOur 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(s). Operating lease expense is recognized on a straight-line basis over the expected lease term.

Under

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

We elected the termspost-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 are valued at the lower of cost or net realizable value, determined by the first-in, first-out method. 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 asset, generally ranging from three separate operating leasesto 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 primarily associated with our manufacturing facilities, we are required to maintain,not depreciated until the asset is completed and placed into service. No interest was incurred or capitalized as collateral, lettersconstruction-in-progress as of credit during the terms of such leases. At July 31, 20182019 and April 30, 2019.

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, 2019 and 2018 restricted cash of $1,150 was pledged as collateral under these letters of credit.$0.7 million and $0.6 million, respectively.

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. For the three months ended July 31, 20182019 and 2017,2018, there were no indicators of impairment of the value of our long-lived assets.

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, 2019, there were no outstanding stock-based awards with market or performance conditions.

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)(unaudited)

Comprehensive Loss

Comprehensive loss is 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.

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 July 31, 20182019 and April 30, 2018,2019, 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 months ended July 31, 20182019 and 2017.2018.

Stock-based Compensation

We account for stock options, restricted stock rights 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. In addition, the fair value of restricted stock rights 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, 2018, there were no outstanding stock-based awards with market or performance conditions.

Income TaxesRecent Accounting Standards Not Yet Adopted

In December 2017,June 2016, the Tax Cuts and Jobs Act (the “Tax Act”Financial Accounting Standards Board (“FASB”) was enacted. The Tax Act includes a numberissued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of changesCredit Losses on Financial Instruments. This standard update requires that certain financial assets be measured at amortized cost net of an allowance for estimated credit losses such that the net receivable represents the present value of expected cash collection. In addition, this standard update requires that certain financial assets be measured at amortized cost reflecting an allowance for estimated credit losses expected to existing U.S. tax laws that impact us, most notably a reductionoccur over the life of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years, effective January 1, 2018. We performed a reviewassets. The estimate of credit losses must be based on all relevant information including historical information, current conditions and reasonable and supportable forecasts that affect the collectability of the Tax Act for the fiscal year ended April 30, 2018, and based on the information available at that time, recorded certain provisional amounts related to the revaluation of our deferred tax assets and liabilities, which were fully offset by a valuation allowance.

In December 2017, the SEC issued interpretive guidance under Staff Accounting Bulletin No. 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. As discussed above, for the fiscal year ended April 30, 2018, we recognized provisional tax impacts related to the revaluation of deferred tax assets and liabilities, which amounts were fully offset by a valuation allowance. The ultimate impact may differ from these 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. The accounting for these provisions is expected to be complete when our 2017 U.S. corporate income tax return is filed in calendar year 2018.

Adoption of Other Recent Accounting Pronouncements

In November 2016, FASB issuedamounts. ASU 2016-18, Statement of Cash Flows (Topic 230):Restricted Cash, which clarifies the presentation requirements of restricted cash within 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 2016-182016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. We adopted ASU 2016-18 on2019, which will be our fiscal year 2021 beginning May 1, 20182020; however, early adoption is permitted. We are currently evaluating the timing and the cash and cash equivalents at the beginning-of-period and end-of-period total amounts inimpact of adopting ASU 2016-13 on our condensed consolidated statements of cash flows have been adjusted to include $1,150 of restricted cash for each of the periods presented.

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)

financial statements.

In May 2017,August 2018, the FASB issued ASU 2017-09, Compensation - Stock Compensation2018-13, Fair Value Measurement (Topic 718)820):Scope of Modification Accounting,which provides guidance about which changesDisclosure Framework—Changes to the terms or conditions of a stock-based payment award require an entity to apply modification accountingDisclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements in Topic 718. This pronouncement is effective for annual reporting periods beginning after December 15, 2017. We adopted820 by removing certain disclosure requirements related to the fair value hierarchy, modifying existing disclosure requirements related to measurement uncertainty and adding new disclosure requirements, primarily surrounding Level 3 fair value measurements and transfers between Level 1 and Level 2. ASU 2017-09 on May 1, 2018. The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and related disclosures.

New Accounting Standards Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to recognize right-of-use assets and lease liabilities on its balance sheet for all leases with lease terms greater than 12 months 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 2016-022018-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018,2019, which will be our fiscal year 20202021 beginning May 1, 2019.2020. Early adoption is permitted.permitted for any removed or modified disclosures. We are currently in the process of evaluating the impact ofnew guidance and do not expect the adoption of ASU 2016-022018-13 to have a material impact on our condensed consolidated financial statements and related disclosures.

Trade receivables represent amounts billed for contract manufacturing services and 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:

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 July 31, 2018 and April 30, 2018, we determined no allowance for doubtful accounts was necessary.

Inventories are recorded at the lower of cost or market (net realizable value) and include raw materials and work-in-process (comprised of raw materials, direct labor and overhead costs associated with in-process manufacturing services) 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 months ended July 31, 2018 and 2017, we expensed $1,729 and $900, respectively, in idle capacity costs directly to cost of contract manufacturing in the accompanying condensed consolidated financial statements. Cost is determined by the first-in, first-out method. Inventories consist of the following:

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)(unaudited)

Note 3 – Leases

PropertyWe currently lease office, manufacturing and equipment is recorded at cost, less accumulated depreciation and amortization. Depreciation and amortizationwarehouse space in five buildings under four separate non-cancellable operating lease agreements. All of our leased facilities are computed using the straight-line method over the estimated useful lives of the related asset, generallylocated 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. With respect to multi-year renewal options, a multi-year renewal option was used 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, three to ten years. Amortization 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 is calculated using the straight-line methodand are being amortized over the shorter of the estimated useful life of the assetimprovements or the remaining lease term. Construction-in-progress,life of the lease. As collateral for three of our leases we are required to maintain letters of credit, which represents direct costs related toin aggregate is $1,150 and is included in restricted cash in 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-progressaccompanying condensed consolidated balance sheets as of July 31, 20182019 and April 30, 2018. All of2019. The operating lease right-of-use assets and liabilities on our property and equipment are located in the U.S.July 31, 2019 condensed consolidated balance sheets primarily relate to these facility leases.

Property and equipment, net, consists of the following:

Depreciation and amortizationOur operating lease expense for the three months ended July 31, 20182019 was $0.9 million and 2017 was $642 and $642, respectively.

In June 2018, we financed certain software under a capital lease agreement that bears interest at a rate of approximately 4.19% per annum. The gross value of software purchased under the capital lease of $245 and the related accumulated amortization of $14 are included in property and equipment, netour condensed consolidated statements of operations. Cash paid for amounts included in the accompanying unauditedmeasurement of lease liabilities for the three months ended July 31, 2019 was $0.8 million and was included in net cash used in operating activities in our condensed consolidated balance sheet at July 31, 2018.statements of cash flows.

Minimum future lease payments under the capital lease asAs of July 31, 2018 are2019, the maturities of our operating lease liabilities were as follows:follows (in thousands):

The balance sheet classification of our operating lease liabilities was as follows (in thousands):

As of July 31, 2019, the weighted average remaining lease term and weighted average discount rate of our operating leases was 10.8 years and 8.0%, respectively.

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)(unaudited)

Note 4–Stockholders’ Equity

Series E Preferred Stock Dividend

On June 6, 2018,5, 2019, our Board of Directors declared a quarterly cash dividend of $0.65625 per share on our 10.50% Series E Convertible Preferred Stock (the “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 April 1, 20182019 through June 30, 2018.2019. The cash dividend of $1,081$1.1 million was paid on July 2, 20181, 2019 to holders of the Series E Preferred Stock of record on June 18, 2018.17, 2019.

SharesEach share of CommonSeries E Preferred Stock Authorizedis convertible into a whole number of shares of our common stock determined by dividing the liquidation preference of $25.00 per share by the conversion price, currently $21.00 per share. As of July 31, 2019, if all of our issued and Reserved for Future Issuance

We are authorized to issue up to 500,000,000outstanding shares of Series E Preferred Stock were converted at the $21.00 per share conversion price, the holders of our Series E Preferred Stock would receive an aggregate of 1,961,619 shares of our common stock. AsHowever, we have reserved the maximum number of July 31, 2018, 55,990,274 shares of our common stock werethat could be issued and outstanding. In addition,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 asshare of July 31, 2018 excluded the followingour Series E Preferred Stock could be converted into 4.14 shares of our common stock, reserved for future issuance:or 6,826,435 in aggregate.

_____________Note 5–Equity Compensation Plans

Stock Incentive Plans

As of July 31, 2018,2019, we had an aggregate of 5,005,1427,161,429 shares of our common stock reserved for issuance under our stock incentive plans, of which 3,088,0843,908,148 shares were subject to outstanding stock options and restricted stock rightsunits and 1,917,0583,253,281 shares were available for future grants of stock-based awards.

Stock Options

The following summarizes our stock option transaction activity for the three months ended July 31, 2018:2019:

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)(unaudited)

Restricted Stock RightsUnits (“RSUs”)

On June 15, 2018, the Compensation Committee of the Board of Directors granted an aggregate of 128,050 restricted stock right (“RSR”) awards to substantially all of our employees, excluding executive officers, which entitles the employee the right to be issued a share of our common stock upon vesting of the RSR. The RSR’s were granted under our 2011 Stock Incentive Plan and vest annually in equal installments over a four-year period. The RSR’s have an aggregate grant date fair value of $464, based on the closing market price of our common stock on the date of grant, which is amortized as stock-based compensation expense on a straight-line basis over the period of vesting.

The following summarizes our restricted stock rightRSUs transaction activity for the three months ended July 31, 2018:2019:

Employee Stock Purchase Plan

We have reservedThe Employee Stock Purchase Plan (the “ESPP”) is a total of 2,142,857stockholder-approved plan under which eligible employees are allowed to purchase shares of our common stock to be purchased under our Employee Stock Purchase Plan (“ESPP”), of which 1,271,409 shares remained available to purchase at July 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 participantsthrough payroll deductions at a price equal to 85% of the lesser of 85%lower of the fair market value of our common stock atas of the (i) beginningfirst trading day of a six-monththe offering period or (ii) endon the last trading day 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.Employee participants are limited to purchase no more than $25,000 of stock in any one calendar year. No shares of our common stock were purchased under the ESPP during the three months ended July 31, 20182019 as the current six-month offering period ends on October 31, 2018.2019. As of July 31, 2019, we had 1,196,261 shares of our common stock reserved for issuance under the ESPP.

Stock-Based Compensation

Total stock-basedStock-based compensation expense for the three months ended July 31, 2019 and 2018 was comprised of the following (in thousands):

As of July 31, 2019, the total estimated unrecognized compensation cost related to stock-based awards issued under our equity compensation plans is included in the accompanying unaudited condensed consolidated statementsnon-vested employee stock options and non-vested RSUs was $4.9 million and $1.8 million, respectively. These costs are expected to be recognized over weighted average vesting periods of operations3.03 years and comprehensive loss as follows:3.55 years, respectively.

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)(unaudited)

As of July 31, 2018, the total estimated unrecognized compensation cost related to non-vested employee stock options and non-vested restricted stock rights was $2,370 and $449, respectively. These costs are expected to be recognized over a weighted average vesting periods of 2.81 years and 3.87 years, respectively, based on current assumptions.Note 6 – Net Loss Per Common Share

Basic net (loss) incomeloss per common share is computed by dividing our net (loss) incomeloss 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, unvested RSRs,RSUs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Diluted net (loss) incomeloss per common share is computed by dividing our net (loss) incomeloss 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 RSRs,RSUs, shares of common stock expected to be issued under our ESPP, warrants, and Series E Preferred Stock outstanding during the period. Net (loss) incomeloss attributable to common stockholders represents our net (loss) incomeloss 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).

The potential dilutive effect of stock options, unvested RSRs,RSUs, 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 was 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. A reconciliationHowever, because the impact of the numeratorsstock options, unvested RSUs, shares of common stock expected to be issued under our ESPP, warrants, and the denominatorsSeries E Preferred Stock are anti-dilutive during periods of thenet loss, there was no difference between basic and dilutive net (loss) incomediluted loss per common share computations is as follows (in thousands, expect share and per share amounts):

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)

Foramounts for the three months ended July 31, 2018, we excluded from the2019 and 2018.

The calculation of weighted average diluted net loss per share,shares outstanding excludes the potential dilutive effect of 112,225the following weighted average shares of outstanding stock options, unvested RSRsRSUs and shares of common stock expected to be issued under our ESPP becauseas their impact is anti-dilutive induring periods of net loss. In addition, theloss (in thousands):

The calculation of weighted average diluted shares outstanding for the three months ended July 31, 2018 and 2017also excludes the following weighted average outstanding stock options, unvested RSUs, warrants, and Series E Preferred Stock (assuming the if-converted method), as their exercise prices or conversion price were greater than the average market price of our common stock during the respective periods, resulting in an anti-dilutive effect:effect (in thousands):

No warrants were issued or exercised during the three months ended July 31, 2018. As of July 31, 2018, warrants to purchase 39,040 shares of our common stock at an exercise price of $17.29 were outstanding.Note 7 – Subsequent to July 31, 2018, these warrants expired unexercised on August 30, 2018.Events

Asset Assignment and Purchase Agreement

On February 12, 2018, we entered into an Asset Assignment and Purchase Agreement (the “Purchase Agreement”) with Oncologie, Inc. (“Oncologie”) pursuant to which we sold to Oncologie the majority of our research and development assets, which included the assignment of certain exclusive licenses related to our former phosphatidylserine (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 received an aggregate of $8,000 from Oncologie, paid over three installments, of which $3,000 was received in March 2018 (first installment), $3,000 was received in June 2018 (second installment) and $2,000 was received in September 2018 (third installment). We are also eligible to receive up to an additional $95,000 in the event that Oncologie 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 Oncologie commercializes and sells products utilizing bavituximab or the other transferred assets. As of July 31, 2018, no development, regulatory and commercialization milestones as defined in the Purchase Agreement have been achieved by Oncologie. Oncologie 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, during May 2018, we entered into a separate services agreement with Oncologie to provide contract development and manufacturing services, at our commercial rates, in support of the research and development assets sold under the Purchase Agreement. To date no services have been contracted under the separate services agreement.

avid bioservices, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(in thousands, except share and per share information)

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, the operating results from our former research and development segment and the related assets and liabilities have been presented as discontinued operations in the accompanying unaudited condensed consolidated financial statements for all periods presented (Note 1). The results of operations from discontinued operations presented below include certain allocations that management believes fairly reflect the utilization of services provided to the former 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 former research and development segment do not necessarily reflect what the results of operations would have been had the former research and development segment operated as a stand-alone segment.

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

The following table summarizes the assets and liabilities of discontinued operations as of July 31, 2018 and April 30, 2018:

The carrying value of the assets and liabilities deemed a component of discontinued operations were not classified as “held for sale” in the accompanying unaudited condensed consolidated balance sheets at July 31, 2018 and April 30, 2018 as Oncologie did not purchase or assume any of the reported assets or liabilities under the Purchase Agreement.

On September 5, 2018,4, 2019, 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 July 1, 20182019 through September 30, 2018.2019. The cash dividend is payable on October 1, 20182019 to holders of the Series E Preferred Stock of record on September 17, 2018.

16, 2019.

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, 2019.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements 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, 2018,2019, 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

We are a dedicated contract development and manufacturing organization (“CDMO”)CDMO that provides a comprehensive range of services from process development to current Good Manufacturing Practices (“cGMP”)CGMP commercial manufacturing focused on biopharmaceutical products derived from mammalian cell culture. With over 25 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, purification, bulk packaging, stability testing and regulatory submissions and support. We also provide a variety of process development services, including cell line development and optimization, cell culture and feed optimization, analytical methods development and product characterization.

We have experience in performing process development and manufacturing of biologics since 1993 in our Franklin biomanufacturing facility (“Franklin Facility”), located at our headquarters in Tustin, California. In March 2016, we expanded our manufacturing capacity through the commissioning of our Myford biomanufacturing facility (“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.Strategic Objectives

In addition, we continueWe have established and are currently executing on the following near-term strategic objectives:

First Quarter Highlights

The following summarizes select highlights from our manufacturing facilities and infrastructure to maximize our facility utilization and support our clients’ clinical and commercial development and manufacturing requirements. first quarter ended July 31, 2019:

We are also currently in the process of expanding and optimizing our process development capabilities and laboratory space, which includes expanding our total available process development laboratory space, to more than 6,000 square feet, upgrading the infrastructure and equipment within our existing process development laboratories, and implementing new state-of-the-art technologies and equipment designed to facilitate efficient, high-throughput development of innovative upstream and downstream manufacturing processes.  We are strategically conducting this work in phases to avoid disruption to current customer programs. As part of this expansion, we recently completed our first refurbished laboratory, which is for purification development and is now fully operational.

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. 

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We intend for this discussion to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes.

Results of Operations(in thousands)Revenues

On May 1, 2018, we adopted ASU 2014-09, RevenueRevenues are derived from Contracts (Topic 606):Revenue from Contracts with Customers (“ASC 606”), using the modified retrospective method applied to allcontract manufacturing services provided under our customer contracts not completed as of May 1, 2018. Under the modified retrospective method, results for reporting periods beginning after May 1, 2018and are presented under ASC 606, while prior period amounts are not adjusteddisaggregated into manufacturing and continue to be reported in accordance with our historic accounting under the accounting standards in effect for the prior period. Refer to Note 2, “Summary of Significant Accounting Policies” for details regarding the adoption of ASC 606.

process development revenue streams. The following table compares the unaudited condensed consolidated statements of operations from our continuing operations for the three months ended July 31, 2018 and 2017, which are further discussed below.

Contract Manufacturing Revenue

Contract manufacturing revenue for the three months ended July 31, 2018 was $12,589 compared to $27,077 for the same period in the prior year, a decrease of $14,488 (54%). Included in the $27,077 was $9,924 ofstream represents revenue associated with several manufacturing runs that were completed in fiscal year 2017, but recognized in the first quarter of fiscal year 2018 due to a client requested delay in shipment. The remaining decline in revenue was primarily due to fewer manufacturing runs completed in the current period compared to the prior period as a result of a decrease in the current manufacturing demand from our two largest customers. This decline was offset by a favorable impact from the adoptionmanufacturing of ASC 606, which due to changescustomer product(s) derived from mammalian cell culture covering clinical through commercial manufacturing runs. The process development revenue stream represents revenue from non-manufacturing related services associated with the timingcustom development of revenue recognitiona manufacturing process and analytical methods for customer contracts, resulted in the recognition of $10,616 in revenue during the current period. Refer to Note 2 “Summary of Significant Accounting Policies” in the accompanying notes to the unaudited condensed consolidated financial statements for details regarding the adoption of ASC 606.a customer’s product.

Gross Profit

Gross profit foris equal to revenues less cost of revenues. Cost of revenues reflects the three months ended July 31, 2018 was $1,192 compared to $6,629 fordirect cost of labor, overhead and material costs. Direct labor costs include personnel costs within the same period inmanufacturing, process development, quality assurance, quality control, validation, supply chain and facilities functions. Overhead costs include the prior year, a decreaserent, common area maintenance, utilities, property taxes, security, materials and supplies, software, small equipment and deprecation costs of $5,437 (82%)all manufacturing and gross margins were 9% and 24%, respectively. Included inlaboratory locations. 

We regularly analyze the prior periodcomponents of gross profit was $2,534 associated withas well as gross profit as a percentage of revenues. Specifically we look at the above-referenced client requested shipping delay. Excludinggross profit margins of our manufacturing revenue and process development revenue, and the adoptioneffects of ASC 606, gross margins declined to a negative 73%. The decline in gross margin was primarily driven by an increase in idle capacity, costs included within the cost of contract manufacturing combined with the variability of manufacturing costs from product of product. For the three months ended July 31, 2018, idle capacity costs were $1,729, which negatively impacted gross margin by 14 percentage points, compared to idle capacity costs of $900 for the three months ended July 31, 2017, which negatively impacted gross margin by four percentage points.if any, on these revenue streams.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses consist primarilyare composed of payrollcorporate-level expenses including personnel and related expenses and stock-based compensation expense (non-cash), for personnel insupport costs of corporate functions such as executive finance,management, accounting, business development, legal, human resources, information technology, and other internal support functions. In addition,centralized services. SG&A expenses include corporate legal fees, audit and accounting fees, investor relation expenses, non-employee director fees, facility related expenses, and other expenses relating to our general management, administration, and business development activities. SG&A expenses are generally not directly proportional to revenues, but we expect such expenses to increase over time to support the needs of our growing company.

Results of Operations

The following table compares the unaudited condensed consolidated statements of operations from our operations for the three months ended July 31, 2019 and 2018 (in thousands):

Three Months Ended July 31, 2019 Compared to Three Months Ended July 31, 2018

Revenues

Revenues for the three months ended July 31, 2019 were $15.3 million compared to $12.6 million for the same period in the prior year, an increase of $2.7 million or 21%. The increase in revenues can primarily be attributed to growing manufacturing demand from a more diversified customer base. The increase in revenues was attributed to the following components of our revenue streams:

Gross Profit

Gross profit for the three months ended July 31, 2019 was $1.1 million compared to $1.2 million for the same period in the prior year, a decrease of $0.1 million, where gross margins were 7% and 9%, respectively. Despite increased revenue during the first quarter of 2020, gross profit was impacted by hiring personnel to accommodate growth in production demand, a realignment of the company's compensation structure to secure our existing workforce, and equipment repairs, which in aggregate negatively impacted gross profit by eight percentage points. This decrease was partially offset by increased revenue on customer contracts, which positively impacted gross profit by seven percentage points.

Selling, General and Administrative Expenses

SG&A expenses were $4.5 million for the three months ended July 31, 2019 compared to $3.2 million for the same period in the prior year, an increase of approximately $1.2 million or 39%. As a percentage of revenue, SG&A expenses for the three months ended July 31, 2019 and 2018 were 29% and 26%, respectively. The increase in SG&A expenses was attributed to the following components:

Operating Loss

Operating loss was $3.4 million, or a negative 22% of revenue, for the three months ended July 31, 2019 compared to an operating loss of $2.0 million, or a negative 16% of revenue, for the same period in the prior year. Of this $1.4 million change in year-over-year operating loss, approximately $0.1 million was attributable to a gross profit decrease and a SG&A increase of approximately $1.2 million.

Liquidity and Capital Resources

At July 31, 2019, we had $28.9 million in cash and cash equivalents. 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. If we are unable to generate sufficient revenue to generate positive cash flow from operations we will experience negative cash flows from operations. We plan to fund our operations using our existing cash and cash equivalents and cash generated from services provided under our customer contracts. As of July 31, 2019, we performed an analysis and concluded that our cash and cash equivalents as of July 31, 2019 together with cash expected to be generated from services provided under our customer contracts will be sufficient to support our operations for at least one year from the issuance date of this Quarterly Report.

In the event we are unable to secure sufficient additional manufacturing services projects to support our current operations, we may need to raise additional capital in the equity markets in order to fund our future operations. There can be no assurance that equity financing will be available on acceptable terms or at all. Our ability to raise additional capital in the equity 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 and economic and market conditions. If we are unable to fund our continuing operations through these sources, 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. Any of these actions could materially harm our business, results of operations, and future prospects.

Cash Flow Analysis

Significant components of the changes in cash flows from operating, investing and financing activities for the three months ended July 31, 2019 and 2018 are as follows (in thousands):

Cash Used In Operating Activities

Net cash used in operating activities represents our net loss, as reported, adjustments to reconcile net loss to net cash used in operating activities and net changes in the timing of cash flows as reflected by the changes in operating assets and liabilities.

Net cash used in operating activities for the three months ended July 31, 2019 was primarily attributable to a net loss of $3.2 million, offset by noncash charges for depreciation and amortization and stock-based compensation for an aggregate adjustment of $1.3 million, and net cash flows from the net change in operating assets and liabilities of $0.6 million. The net change in operating assets and liabilities was primarily due to the timing of cash receipts and expenditures associated with working capital.

The decreaseNet cash used in SG&A expenses of $638 (17%) duringoperating activities for the three months ended July 31, 2018 comparedwas primarily attributable to a net loss of $2.0 million, offset by noncash charges for depreciation and amortization and stock-based compensation for an aggregate adjustment of $0.9 million, cash outflow of $2.6 million related to the samechange in assets and liabilities of discontinued operations, and net cash outflows from the net change in operating assets and liabilities of $3.8 million. The net change in operating assets and liabilities was primarily due to the timing of cash receipts and expenditures associated with working capital.

Cash (Used In) Provided By Investing Activities

Investing activities consist of capital expenditures for our manufacturing and development operations and with respect to the prior year period, was driven primarily byproceeds from the sale of certain research and development assets associated with our efforts in the prior fiscal year to align our cost structure to match the needs of our current CDMO operations, which efforts can be attributed to the current year period decreases in payrolldiscontinued research and related costs of $743, facility related expenses of $589, and legal, accounting and other professional fees of $711. These current year period decreases were offset by the July 2017 settlement of a derivative and class action lawsuit, pursuant to which our former non-employee directors agreed to pay or cause to be paid $1,500 to usdevelopment segment (as described in Note 310 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018), which non-recurring amount was applied against non-employee director fees2019).

Net cash used in investing activities during the fiscal quarterthree months ended July 31, 2017.2019 consisted of property and equipment acquisitions of less than $0.1 million.

Discontinued Operations

As a resultNet cash provided by investing activities for the three months ended July 31, 2018 consisted of (i)proceeds of $3.0 million related to the sale of our PS-targeting program (as described in Note 11 to the accompanying unaudited condensed consolidated financial statements), (ii) the held for sale classification of our R84 technology, (iii) the abandonment of our remainingcertain research and development assets (includingassociated with 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 of our formerdiscontinued research and development segment, have been excludedoffset by property and equipment acquisitions of $0.2 million.

Cash Used In Financing Activities

Financing activities primarily consist of cash dividends paid on preferred stock and proceeds from continuing operationsthe exercise of stock options.

Net cash used in financing activities for the three months ended July 31, 2019 was $0.9 million. This included $1.1 million in dividends paid on preferred stock and reported as loss$0.1 million of principal finance lease payments, offset by $0.3 million of proceeds from discontinued operationsthe exercise of stock options.

Net cash used in financing activities for the accompanying unaudited condensed consolidated financial statements for all periods presented (as describedthree months ended July 31, 2018 was $0.1 million. This included $1.1 million in Note 1 todividends paid on preferred stock and $0.1 million of principal lease payments, offset by $1.0 million of proceeds from the accompanying unaudited condensed consolidated financial statements).exercise of stock options.

Critical Accounting Policies and Estimates

Our discussion and analysis of our consolidated financial position and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We review our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. During the three months ended July 31, 2018,2019, there were no significant changes in our critical accounting policies as previously disclosed by us in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended April 30, 2018, except for our critical accounting policies and estimates on revenue recognition as a result of our adoption of ASC 606, as described in2019.

Recent Accounting Pronouncements

Refer to Note 2, “SummarySummary of Significant Accounting Policies”Policies, in the accompanying notes to the unaudited condensed consolidated financial statements.

Liquidity and Capital Resources

We have expended substantial funds on our contract manufacturing business and, historically, onstatements for a discussion of recent accounting pronouncements, including ASC 842, 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.

During fiscal year 2018, we refocused our corporate strategy, whereby we transitioned our businessnew standard related to operate solely as a dedicated CDMO and discontinued our research and development segment (as described in Note 1 to the accompanying consolidated financial statements). Now that we have commenced our first full fiscal year as a dedicated CDMO, our ability to continue as a going concern depends on the amount of cash on hand and our ability to generate positive cash flows from operations, primarily through securing new customers and diversifying our customer base, and thereby reducing our reliance on a small customer base, increasing revenues, improving gross margins and managing our operating expenses.

At July 31, 2018 we had $37,484 in cash and cash equivalents. In addition, as of July 31, 2018, our current backlog was approximately $39 million (as further discussed in the “Backlog” section below). While we anticipate the majority of our backlog will be recognized as revenue during fiscal year 2019, our backlog is subject to a number of risks and uncertainties, including the risk that a customer timely cancels its commitments prior to our initiation of manufacturing services, in which case we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments; the risk that a customer may experience delays in its program(s) or otherwise, which could result in the postponement of anticipated manufacturing services; and the risk that we may not successfully execute on all customer projects, any of which could have a negative impact on our liquidity, reported backlog and future revenue. As a result of these risks and uncertainties, our cash on hand as of July 31, 2018, together with our projected cash receipts under our current backlog, may not be sufficient to fund our operations beyond one year after the date our financial statements are issued.

In the event we are unable to secure sufficient business to support our operations, we may need to raise additional capital in the future. Additional funding may include the financing or leasing of capital equipment or raising capital in the equity markets. Our ability to raise additional capital in the equity markets to fund our obligations in future periods depends on a number of factors, including, but not limited to, the market demandaccounting 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.

Significant components of the changes in cash flows from operating, investing, and financing activities for the three months ended July 31, 2018 compared to the same prior year period are as follows (in thousands):

Cash Used In Operating Activities. Net cash used in operating activities represents our (i) net loss, as reported, (ii) less non-cash operating expenses, and (iii) net changes in the timing of cash flows as reflected by the changes in operating assets and liabilities, as described in the below table:

Net cash used in operating activities decreased $4,762 to $7,448 for the three months ended July 31, 2018 compared to net cash used in operating activities of $12,210 for the three months ended July 31, 2017. This decrease in net cash used in operating activities was due to a net change in operating assets and liabilities of $5,706 primarily due to decreases in inventories and contract liabilities (customer deposits and deferred revenue) associated with the application of ASC 606, which weleases adopted on May 1, 2018, offset by an increase of $944 in net loss reported for the current three-month period after deducting non-cash expenses as described in the above table.

Net Cash Provided By (Used In) Investing Activities. Net cash provided by (used in) investing activities for the three months ended July 31, 2018 and 2017, was $2,808 and ($403), respectively.

Net cash provided by investing activities for the three months ended July 31, 2018 consisted of proceeds of $3,000 related to the sale of certain research and development assets associated with our discontinued research and development segment (as described in Note 11 to the accompanying condensed consolidated financial statements), offset by property and equipment acquisitions of $192.

Net cash used in investing activities for the three months ended July 31, 2017 was directly related to property and equipment acquisitions of $403.

Net Cash (Used In) Provided By Financing Activities. Net cash (used in) provided by financing activities for the three months ended July 31, 2018 and 2017, was ($141) and $3,070, respectively.

Net cash used in financing activities during the three months ended July 31, 2018 consisted of $1,081 in dividends paid on our issued and outstanding Series E Preferred Stock combined with $74 in principal payments on a capital lease, which amounts were offset by net proceeds from stock option exercises of $1,014.

Net cash provided by financing activities during the three months ended July 31, 2017 consisted of $4,193 in net proceeds from the sale of shares of our common stock under an At Market Issuance Sales Agreement (as of July 31, 2017 we had raised the full amount of gross proceeds available to us under this At Market Issuance Sales Agreement) combined with $34 in net proceeds from stock option exercises, which amounts were offset by dividends paid on our issued and outstanding Series E Preferred Stock of $1,081 and principal payments on a capital lease of $76.2019.

Backlog

Our backlog represents, as of a point in time, future contract manufacturing revenue from work not yet completed under signed contracts. As of July 31, 2018,2019, our backlog was approximately $39$61 million (ASC 606) as compared to approximately $33$46 million (ASC 605) as of July 31, 2017.our fiscal year ended April 30, 2019. While we anticipate the majority of our backlog will be recognized as revenue during fiscal year 2019,2020, our backlog is subject to a number of risks and uncertainties, including the risk that a customer timely cancels its commitments prior to our initiation of manufacturing services, in which case we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments; the risk that a customer may experience delays in its program(s) or otherwise, which could result in the postponement of anticipated manufacturing services; and, the risk that we may not successfully execute on all customer projects, any of which could have a negative impact on our liquidity, reported backlog and future revenue.

Our cash and cash equivalents are primarily invested in money market funds with one major commercial bank withDuring the primary objective to preserve our principal balance. Our deposits held with this bank exceed the amount of government insurance limits provided on our deposits and, therefore, we are exposed to credit riskthree months ended July 31, 2019, there were no material changes in the eventmarket risks described in the “Quantitative and Qualitative Disclosures About Market Risk” section of default byour Annual Report on Form 10-K for the major commercial bank holding our cash balances. However, these deposits may be redeemed upon demand and, therefore, bear minimal risk. In addition, while changes in U.S. interest rates would affect the interest earned on our cash balances at July 31, 2018, such changes would not have a material adverse effect on our financial position or results of operations based on historical movements in interest rates.fiscal year ended April 30, 2019.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)) under the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Interim Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

We carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officerprinciple executive officer and Chief Financial Officer,principle financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of July 31, 2018,2019, the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officerprinciple executive officer and Chief Financial Officerprinciple financial officer concluded that our disclosure controls and procedures were effective as of July 31, 2018.2019.

Except as described below, thereChanges in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting, during the quarter ended July 31, 2018,2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During the quarter ended July 31, 2018, we adopted ASC 606. We implemented new controls to mitigate the risk associated with our efforts to implement ASC 606, including changes to our contract review controls, new processes to measure satisfaction of performance obligations and revenue and cost recognition, and processes for calculating the cumulative effect adjustment upon adoption.

PART II - II—OTHER INFORMATION

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, if any, 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.  We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations or financial position

There have been no material changesWe operate in a rapidly changing environment that involves a number of risks that could materially and adversely affect our business, results of operations, financial condition or cash flows. For a detailed discussion of the risks that affect our business, please refer to the risk factors included in Part I, Item 1A,IA, “Risk Factors,” ofFactors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018.2019. There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K.

None

None

Not applicable

Following the appointment of Daniel Hart as our Chief Financial Officer effective August 1, 2018, on September 6, 2018, Stephen Hedberg resigned as our Principal Financial Officer and Principal Accounting Officer. Mr. Hedberg will continue as our Senior Director of Finance and SEC Reporting. Mr. Hedberg’s resignation was not related to any disagreement with our Board of Directors, our audit committee or our independent registered public accounting firm.