UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

~~FORM 10-Q~~

FORM 10-Q

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

For the quarterly period ended ~~January~~October 31, 2020

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

AVID BIOSERVICES, INC.

(Exact name of Registrant as specified in its charter)

~~______________________________~~

Delaware

(State or other jurisdiction of incorporation or organization)

95-3698422

(I.R.S. Employer Identification No.)

2642 Michelle Drive, Suite 200, Tustin, California 92780

(Address of principal executive offices and zip code)

(714) 508-6100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

~~(714) 508-6100~~

~~(Registrant’s telephone number, including area code)~~

~~______________________________~~

~~Securities registered pursuant to Section 12(b) of the Act:~~

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value per share	CDMO	The NASDAQ Stock Market LLC
10.50% Series E Convertible Preferred Stock, $0.001 par value per share	CDMOP	The NASDAQ Stock Market LLC

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 every Interactive Data File required to be submitted 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 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,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer ýo	Non-accelerated filer oý	Smaller reporting company ý
			Emerging growth company o

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 ~~March 2,~~November 23, 2020, the number of shares of registrant’s common stock outstanding was ~~56,482,154.~~56,726,334.

AVID BIOSERVICES, INC.

Form 10-Q

For ~~The~~the Quarter Ended ~~January~~October 31, 2020

TABLE OF CONTENTS

Page
No.

	~~Page~~ ~~No.~~
PART I - FINANCIAL INFORMATION	13
Item 1. Condensed Consolidated Financial Statements (Unaudited)	13
Item 2. Management’s Discussion and Analysis of Financial Condition And Results of Operations	1920
Item 3. Quantitative and Qualitative Disclosures About Market Risk	2729
Item 4. Controls And Procedures	2829
PART II - OTHER INFORMATION	2930
Item 1. Legal Proceedings	2930
Item 1A. Risk Factors	2930
Item 6. Exhibits	2940
SIGNATURES	3041

As 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

Item 1.

Condensed Consolidated Financial Statements (Unaudited)

avid bioservices, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited) (In thousands, except par value)

	January 31, 2020			April 30, 2019			October 31, 2020			April 30, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	30,687		$	32,351		$	35,664		$	36,262
Accounts receivable		10,151			7,374			11,568			8,606
Contract assets		6,111			4,327			5,343			3,300
Inventory		9,565			6,557			9,723			10,883
Prepaid expenses and other current assets		763			709
Prepaid expenses								828			712
Total current assets		57,277			51,318			63,126			59,763
Property and equipment, net		26,850			25,625			30,232			27,105
Operating lease right-of-use assets		20,437			–			19,408			20,100
Restricted cash		350			1,150			350			350
Other assets		302			302			479			302
Total assets	$	105,216		$	78,395		$	113,595		$	107,620

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	5,332		$	4,352		$	5,654		$	5,926
Accrued payroll and related costs		2,985			3,540			4,850			3,019
Contract liabilities		26,355			14,651			31,450			29,120
Operating lease liabilities		1,172			–
Current portion of operating lease liabilities								1,326			1,228
Note payable								–			4,379
Other current liabilities		710			619			379			808
Total current liabilities		36,554			23,162			43,659			44,480

Operating lease liabilities, less current portion		21,584			–			20,550			21,244
Deferred rent, less current portion		–			2,072
Other long-term liabilities		–			93
Total liabilities		58,138			25,327			64,209			65,724

Commitments and contingencies
Commitments and contingencies (Note 8)

Stockholders’ equity:
Preferred stock, $0.001 par value; 5,000 shares authorized; 1,648 shares issued and outstanding at January 31, 2020 and April 30, 2019, respectively		2			2
Common stock, $0.001 par value; 150,000 shares authorized; 56,479 and 56,136 shares issued and outstanding at January 31, 2020 and April 30, 2019, respectively		56			56
Preferred stock, $0.001 par value; 5,000 shares authorized; 1,648 shares issued and outstanding at October 31, 2020 and April 30, 2020, respectively								2			2
Common stock, $0.001 par value; 150,000 shares authorized; 56,722 and 56,483 shares issued and outstanding at October 31, 2020 and April 30, 2020, respectively								57			56
Additional paid-in capital		613,323			613,615			613,384			612,909
Accumulated deficit		(566,303	)		(560,605	)		(564,057	)		(571,071	)
Total stockholders’ equity		47,078			53,068			49,386			41,896
Total liabilities and stockholders’ equity	$	105,216		$	78,395		$	113,595		$	107,620

See accompanying notes to condensed consolidated financial statements.

~~avid bioservices, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and comprehensive loss~~

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

Three Months Ended
January 31,

Nine Months Ended
January 31,

2020 2019 2020 2019

Revenues $ 13,585 $ 13,781 $ 47,152 $ 36,548
Cost of revenues 12,800 11,731 41,921 32,972
Gross profit
785 2,050 5,231 3,576

Operating expenses:
Selling, general and administrative 2,996 3,242 10,989 9,273
Loss on lease termination – – 355 –
Total operating expenses 2,996 3,242 11,344 9,273

Operating loss (2,211 ) (1,192 ) (6,113 ) (5,697 )
Interest and other income, net 107 9 415 190
Loss from continuing operations before income taxes (2,104 ) (1,183 ) (5,698 ) (5,507 )
Income tax benefit – 44 – 217
Loss from continuing operations, net of tax (2,104 ) (1,139 ) (5,698 ) (5,290 )
Income from discontinued operations, net of tax – – – 739
Net loss $ (2,104 ) $ (1,139 ) $ (5,698 ) $ (4,551 )

Comprehensive loss $ (2,104 ) $ (1,139 ) $ (5,698 ) $ (4,551 )

Series E preferred stock accumulated dividends (1,442 ) (1,442 ) (3,604 ) (3,604 )

Net loss attributable to common stockholders $ (3,546 ) $ (2,581 ) $ (9,302 ) $ (8,155 )

Basic and diluted net (loss) income per common share attributable to common stockholders:
Continuing operations $ (0.06 ) $ (0.05 ) $ (0.17 ) $ (0.16 )
Discontinued operations – – – 0.01
Net loss per share attributable to common stockholders $ (0.06 ) (0.05 ) $ (0.17 ) $ (0.15 )

Weighted average basic and diluted shares outstanding
56,404 56,069 56,275 55,949
~~See accompanying notes to condensed consolidated financial statements.~~
2
~~avid bioservices, INC.~~
~~CONDENSED CONSOLIDATED STATEMENTS of STOCKHOLDERs’ EQUITY~~
~~(Unaudited) (In thousands, except per share information)~~
Three Months Ended January 31, 2020
Preferred Stock Common Stock
Additional
Paid-In
Accumulated
Total
Stockholders’

Shares Amount Shares Amount Capital
Deficit
Equity
Balance at October 31, 2019 1,648 $ 2 56,338 $ 56 $ 613,325 $ (564,199 ) $ 49,184
Series E preferred stock dividends paid
($0.65625 per share) – – – – (1,081 ) – (1,081 )
Exercise of stock options – – 120 – 484 – 484
Vesting of restricted stock units – – 21 – – – –
Stock-based compensation expense – – – – 595 – 595
Net loss – – – – – (2,104 ) (2,104 )
Balance at January 31, 2020 1,648 $ 2 56,479 $ 56 $ 613,323 $ (566,303 ) $ 47,078
Three Months Ended January 31, 2019
Preferred Stock Common Stock Additional Paid-In Accumulated
Total
Stockholders’

Shares Amount Shares Amount Capital
Deficit
Equity
Balance at October 31, 2018 1,648 $ 2 56,063 $ 56 $ 614,541 $ (559,802 ) $ 54,797
Series E preferred stock dividends paid
($0.65625 per share) – – – – (1,081 ) – (1,081 )
Exercise of stock options – – 9 – 29 – 29
Stock-based compensation expense – – – – 458 – 458
Net loss – – – – – (1,139 ) (1,139 )
Balance at January 31, 2019 1,648 $ 2 56,072 $ 56 $ 613,947 $ (560,941 ) $ 53,064

3

avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS ~~of STOCKHOLDERs’ EQUITY (Continued)~~OF OPERATIONS and comprehensive INCOME (loss)
(Unaudited) (In thousands, except per share information)

Nine Months Ended January 31, 2020
Preferred Stock Common Stock Additional
Paid-In Accumulated Total
Stockholders’
Shares Amount Shares Amount Capital
Deficit
Equity
Balance at April 30, 2019 1,648 $ 2 56,136 $ 56 $ 613,615 $ (560,605 ) $ 53,068
Series E preferred stock dividends paid
($1.96875 per share) – – – – (3,244 ) – (3,244 )
Common stock issued under employee stock purchase plan – – 47 – 187 – 187
Exercise of stock options – – 247 – 916 – 916
Vesting of restricted stock units – – 49 – – – –
Stock-based compensation expense – – – – 1,849 – 1,849
Net loss – – – – – (5,698 ) (5,698 )
Balance at January 31, 2020 1,648 $ 2 56,479 $ 56 $ 613,323 $ (566,303 ) $ 47,078

Three Months Ended
October 31,

Six Months Ended
October 31,

2020 2019 2020
2019

Revenues $ 21,064 $ 18,313 $ 46,456 $ 33,567
Cost of revenues 14,646 14,953 31,494 29,121
Gross profit
6,418 3,360 14,962 4,446

Operating expenses:
Selling, general and administrative 4,166 3,534 7,991 7,993
Loss on lease termination – 355 – 355
Total operating expenses 4,166 3,889 7,991 8,348

Operating income (loss) 2,252 (529 ) 6,971 (3,902 )
Interest and other income, net 32 99 43 308
Net income (loss) $ 2,284 $ (430 ) $ 7,014 $ (3,594 )

Comprehensive income (loss) $ 2,284 $ (430 ) $ 7,014 $ (3,594 )

Series E preferred stock accumulated dividends (1,442 ) (1,442 ) (2,523 ) (2,523 )

Net income (loss) attributable to common stockholders $ 842 $ (1,872 ) $ 4,491 $ (6,117 )

Net income (loss) per share attributable to common stockholders:
Basic $ 0.01 $ (0.03 ) $ 0.08 $ (0.11 )
Diluted $ 0.01 $ (0.03 ) $ 0.08 $ (0.11 )

Weighted average common shares outstanding:

Basic 56,660 56,253 56,592 56,210
Diluted 57,248 56,253 57,073 56,210

Nine Months Ended January 31, 2019
Preferred Stock Common Stock
Additional
Paid-In
Accumulated
Total
Stockholders’

Shares Amount Shares Amount Capital
Deficit
Equity
Balance at April 30, 2018 1,648 $ 2 55,689 $ 55 $ 614,810 $ (559,129 ) $ 55,738
Series E preferred stock dividends paid
($1.96875 per share) – – – – (3,244 ) – (3,244 )
Cumulative-effect adjustment pursuant to adoption of ASC 606 – – – – – 2,739 2,739
Common stock issued under employee stock purchase plan – – 40 – 114 – 114
Exercise of stock options – – 343 1 1,187 – 1,188
Stock-based compensation expense – – – – 1,080 – 1,080
Net loss – – – – – (4,551 ) (4,551 )
Balance at January 31, 2019 1,648 $ 2 56,072 $ 56 $ 613,947 $ (560,941 ) $ 53,064
See accompanying notes to condensed consolidated financial statements.

4
avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS of STOCKHOLDERs’ EQUITY
(Unaudited) (In thousands, except per share information)
Three Months Ended October 31, 2020
Preferred Stock Common Stock Additional Total
Shares Amount Shares Amount Paid-In Capital
Accumulated
Deficit
Stockholders’ Equity
Balance at July 31, 2020 1,648 $ 2 56,601 $ 56 $ 612,822 $ (566,341 ) $ 46,539
Series E preferred stock dividends paid ($0.65625 per share) – – – – (1,081 ) – (1,081 )
Exercise of stock options – – 121 1 618 – 619
Stock-based compensation expense – – – – 1,025 – 1,025
Net income – – – – – 2,284 2,284
Balance at October 31, 2020 1,648 $ 2 56,722 $ 57 $ 613,384 $ (564,057 ) $ 49,386
Three Months Ended October 31, 2019
Preferred Stock Common Stock Additional Total
Shares Amount Shares Amount
Paid-In
Capital

Accumulated
Deficit
Stockholders’ Equity
Balance at July 31, 2019 1,648 $ 2 56,238 $ 56 $ 613,395 $ (563,769 ) $ 49,684
Series E preferred stock dividends paid ($0.65625 per share) – – – – (1,081 ) – (1,081 )
Common stock issued under Employee Stock Purchase Plan – – 47 – 187 – 187
Exercise of stock options – – 53 – 173 – 173
Stock-based compensation expense – – – – 651 – 651
Net loss – – – – – (430 ) (430 )
Balance at October 31, 2019 1,648 $ 2 56,338 $ 56 $ 613,325 $ (564,199 ) $ 49,184
See accompanying notes to condensed consolidated financial statements.
5
avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS of STOCKHOLDERs’ EQUITY (CONTINUED)
(Unaudited) (In thousands, except per share information)
Six Months Ended October 31, 2020
Preferred Stock Common Stock Additional Total
Shares Amount Shares Amount
Paid-In
Capital

Accumulated
Deficit
Stockholders’ Equity
Balance at April 30, 2020 1,648 $ 2 56,483 $ 56 $ 612,909 $ (571,071 ) $ 41,896
Series E preferred stock dividends paid ($1.3125 per share) – – – – (2,162 ) – (2,162 )
Common stock issued under Employee Stock Purchase Plan – – 32 – 179 – 179
Exercise of stock options – – 141 1 703 – 704
Common stock issued upon vesting of restricted stock units – – 66 – – – –
Stock-based compensation expense – – – – 1,755 – 1,755
Net income – – – – – 7,014 7,014
Balance at October 31, 2020 1,648 $ 2 56,722 $ 57 $ 613,384 $ (564,057 ) $ 49,386

Six Months Ended October 31, 2019
Preferred Stock Common Stock Additional Total
Shares Amount Shares Amount Paid-In Capital
Accumulated
Deficit
Stockholders’ Equity
Balance at April 30, 2019 1,648 $ 2 56,136 $ 56 $ 613,615 $ (560,605 ) $ 53,068
Series E preferred stock dividends paid ($1.3125 per share) – – – – (2,162 ) – (2,162 )
Common stock issued under Employee Stock Purchase Plan – – 47 – 187 – 187
Exercise of stock options – – 127 – 431 – 431
Common stock issued upon vesting of restricted stock units – – 28 – – – –
Stock-based compensation expense – – – – 1,254 – 1,254
Net loss – – – – – (3,594 ) (3,594 )
Balance at October 31, 2019 1,648 $ 2 56,338 $ 56 $ 613,325 $ (564,199 ) $ 49,184
See accompanying notes to condensed consolidated financial statements.
6

avid bioservices, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (In thousands)

Six Months Ended
October 31,

2020 2019

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 7,014 $ (3,594 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization 1,684 1,467
Stock-based compensation 1,755 1,254
Loss on lease termination – 355
Loss on disposal of assets – 13
Changes in operating assets and liabilities:
Accounts receivable (2,962 ) (48 )
Contract assets (2,043 ) (1,783 )
Inventory 1,160 (1,252 )
Prepaid expenses and other assets (293 ) (217 )
Accounts payable (2,103 ) (86 )
Accrued payroll and related costs 1,831 (180 )
Contract liabilities 2,330 7,548
Other accrued expenses and liabilities (240 ) (61 )
Net cash provided by operating activities 8,133 3,416

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (2,980 ) (985 )
Net cash used in investing activities (2,980 ) (985 )

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 704 431
Proceeds from issuance of common stock under employee stock purchase plan 179 187
Repayment of note payable (4,379 ) –
Dividends paid on preferred stock (2,162 ) (2,162 )
Principal payments on finance lease (93 ) (78 )
Net cash used in financing activities (5,751 ) (1,622 )
Net (decrease) increase in cash, cash equivalents and restricted cash (598 ) 809
Cash, cash equivalents and restricted cash, beginning of period 36,612 33,501
Cash, cash equivalents and restricted cash, end of period $ 36,014 $ 34,310

Supplemental disclosures of non-cash activities:
Unpaid purchases of property and equipment $ 1,831 $ 1,860

Nine Months Ended
January 31,

2020 2019

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,698 ) $ (4,551 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 2,276 2,006
Stock-based compensation 1,849 1,080
Loss on lease termination 355 –
Loss on disposal of assets 13 104
Gain on sale of research and development assets – (1,000 )
Changes in operating assets and liabilities:
Accounts receivable (2,777 ) (4,131 )
Contract assets (1,784 ) (1,024 )
Inventory (3,008 ) (402 )
Prepaid expenses and other assets (54 ) 114
Accounts payable 491 993
Accrued payroll and related expenses (555 ) (15 )
Contract liabilities 11,704 (5,402 )
Other accrued expenses and current liabilities (32 ) (590 )
Assets and liabilities of discontinued operations – (4,425 )
Net cash provided by (used in) operating activities 2,780 (17,243 )

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (3,025 ) (1,248 )
Proceeds from sale of research and development assets – 6,000
Net cash (used in) provided by investing activities (3,025 ) 4,752

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 916 1,188
Proceeds from issuance of common stock under employee stock purchase plan 187 114
Dividends paid on preferred stock (3,244 ) (3,244 )
Principal payments on finance lease (78 ) (74 )
Net cash used in financing activities (2,219 ) (2,016 )

Net decrease in cash, cash equivalents and restricted cash (2,464 ) (14,507 )
Cash, cash equivalents and restricted cash, beginning of period 33,501 43,415
Cash, cash equivalents and restricted cash, end of period $ 31,037 $ 28,908

Supplemental disclosures of non-cash activities:
Decapitalization of right-of-use assets upon lease termination and/or modification $ 1,469 $ –
Unpaid purchases of property and equipment $ 489 $ 14
Property and equipment acquired under finance lease $ – $ 245
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:

October 31,
2020

April 30,
2020

October 31,
2019

April 30,
2019

Cash and cash equivalents $ 35,664 $ 36,262 $ 33,960 $ 32,351
Restricted cash 350 350 350 1,150
Total cash, cash equivalents and restricted cash $ 36,014 $ 36,612 $ 34,310 $ 33,501

See accompanying notes to condensed consolidated financial statements.

57

avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1 – Description of Company and Basis of Presentation

~~Avid Bioservices, Inc. is~~We are a dedicated contract development and manufacturing organization (“CDMO”) that provides a comprehensive range of services from process development to Current Good Manufacturing Practices (“CGMP”) clinical and commercial manufacturing, focused on biopharmaceutical ~~products~~drug substances 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, and accordingly, they do not include all of the information and disclosures required by U.S. GAAP for annual 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, ~~2019,~~2020, as filed with the SEC on June ~~27, 2019.~~30, 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.

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.
Certain prior period amounts within the accompanying unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications did not affect our financial position, net loss, cash flows as of and for the periods presented.
~~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 income from discontinued operations, net of tax, in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss (Note 7).

Note 2 – Summary of Significant Accounting Policies

Information regarding our significant accounting policies is contained in Note 2, “Summary of Significant Accounting Policies”, of the consolidated financial statements in our Annual Report on Form 10-K for the fiscal year ended April 30, ~~2019.~~2020.
Revenue Recognition
Revenue recognized from services provided under our customer contracts are disaggregated into manufacturing and process development revenue streams.

68

avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~Revenue Recognition~~
~~Revenue is recognized from services provided under our customer contracts, which we have disaggregated into manufacturing and process development revenue streams.~~
Manufacturing revenue

Manufacturing revenue generally represents revenue from the manufacturing of customer 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 entire cost of the performance obligation. 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 products are manufactured exclusively for a specific customer and have no 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.

Process development revenue

Process 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 date to the most 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 projects are customized to each customer to meet its 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 its product as the product is being created or enhanced by our services and can 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 profit margin.

The following table summarizes our manufacturing and process development revenue streams ~~for the three and nine months ended January 31, 2020 and 2019~~ (in thousands):

Three Months Ended
January 31,

Nine Months Ended
January 31,

2020 2019 2020 2019
Manufacturing revenue $ 11,525 $ 10,770 $ 40,422 $ 28,313
Process development revenue 2,060 3,011 6,730 8,235
  Total revenues $ 13,585 $ 13,781 $ 47,152 $ 36,548

Three Months Ended
October 31,

Six Months Ended
October 31,

2020 2019 2020 2019
Manufacturing revenues $ 18,449 $ 15,989 $ 42,512 $ 28,897
Process development revenues 2,615 2,324 3,944 4,670
    Total revenues $ 21,064 $ 18,313 $ 46,456 $ 33,567

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.

79

avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

During the three and ~~nine~~six months ended ~~January~~October 31, 2020, we recognized revenue of ~~$0.6~~$6.3 million and ~~$13.2~~$22.7 million, respectively, for which the contract liability was recorded in a prior period.

During the three and ~~nine~~six months ended ~~January~~October 31, 2019, we recognized revenue of ~~$2.2~~$6.4 million and ~~$12.2~~$12.6 million, respectively, for which the contract liability was recorded in a prior period.
The 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 services 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.
During the three and six months ended October 31, 2020, changes in estimates for variable consideration related to the completion of certain performance obligations during the current year periods resulted in an increase in revenues of $1.7 million and $1.1 million, respectively.
There were no material adjustments in estimates for variable consideration for the three and six months ended October 31, 2019.

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,~~As of October 31, 2020, we do not have any unsatisfied performance obligations for contracts greater than one ~~year~~year.
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 ~~January~~credit, during the term of such lease. At October 31, ~~2020.~~2020 and April 30, 2020, restricted cash of $0.4 million was pledged as collateral under the letter of credit.

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 be reported in accordance with our historical accounting under the previous lease standard. In addition, we elected the package of practical expedients available for existing contracts, which allowed us to carry forward our historical assessments of lease identification, lease classification, and initial direct costs. As a 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 primarily related to our facility operating leases (Note 3). The difference between the right-of-use assets and lease liabilities is primarily attributed to the elimination of deferred rent. There was no adjustment to the opening balance of accumulated deficit as a result of the adoption of ASC 842.

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 ~~sheet at January 31, 2020.~~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(s).~~option. Operating lease expense is recognized on a straight-line basis over the expected lease term.
10
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.
~~Restricted Cash~~
Under the terms of three separate operating leases related to our facilities (Note 3), we are required to maintain, as collateral, letters of credit. During the quarter ended October 31, 2019, $0.8 million of restricted cash that was pledged as collateral under two such letters of credit was released back to us. Accordingly, as of January 31, 2020 and April 30, 2019, restricted cash of $0.4 million and $1.2 million, respectively, was pledged as collateral under these letter(s) of credit.
8
~~avid bioservices, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows (in thousands):

January 31,
2020

April 30,
2019

January 31,
2019

April 30,
2018

Cash and cash equivalents $ 30,687 $ 32,351 $ 27,758 $ 42,265
Restricted cash 350 1,150 1,150 1,150
Total cash, cash equivalents and restricted cash $ 31,037 $ 33,501 $ 28,908 $ 43,415

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 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. as follows:
Description Estimated Useful Life
Leasehold improvements Shorter of estimated useful life or lease term
Laboratory and manufacturing equipment 5 – 10 years
Furniture, fixtures and office equipment 5 – 10 years
Computer equipment and software 3 – 5 years
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 ~~January~~October 31, 2020 and April 30, ~~2019.~~
2020. All of our property and equipment are located in the U.S. Property and equipment consist of the following (in thousands):

January 31, 2020 April 30, 2019
October 31,
2020

April 30,

2020

Leasehold improvements $ 21,130 $ 20,574 $ 21,175 $ 21,130
Laboratory and manufacturing equipment 14,968 12,858 15,980 15,033
Computer equipment and software 4,931 4,644 5,541 5,334
Furniture, fixtures and office equipment 685 528 715 685
Construction-in-progress 1,963 1,590 6,147 2,564
Total property and equipment, gross $ 43,677 $ 40,194 $ 49,558 $ 44,746
Less: accumulated depreciation and amortization (16,827 ) (14,569 ) (19,326 ) (17,641 )
Total property and equipment, net $ 26,850 $ 25,625 $ 30,232 $ 27,105

Depreciation and amortization expense for the three and ~~nine~~six months ended ~~January~~October 31, 2020 was ~~$0.8~~$0.9 million and ~~$2.3~~$1.7 million, respectively.

Depreciation and amortization expense for the three and ~~nine~~six months ended ~~January~~October 31, 2019 was $0.7 million and ~~$2.0~~$1.3 million, respectively.

911

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 that 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 if impairment indicators exist. For the ~~nine~~six months ended ~~January~~October 31, 2020 and 2019, there were no indicators of impairment of the value of our long-lived assets and no cumulative impairment losses were recognized as of ~~January~~October 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 ~~January~~October 31, 2020 and April 30, 2020, there were no outstanding stock-based awards with market or performance conditions.

Comprehensive ~~Loss~~Income (Loss)

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

· Level 1 – Observable inputs, such as unadjusted quoted prices in active markets for identical assets or liabilities.
· Level 2 – Observable inputs other than quoted prices included in Level 1, such as assets or liabilities whose values are based on quoted market prices in markets where trading occurs infrequently or whose values are based on quoted prices of instruments with similar attributes in active markets.
· Level 3 – Unobservable inputs that are supported by little or no market activity and significant to the overall fair value measurement of the assets or liabilities; therefore, requiring the company to develop its own valuation techniques and assumptions.

As of ~~January~~October 31, 2020 and April 30, ~~2019,~~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 nine months ended January 31, 2020 and 2019.~~
10
~~avid bioservices, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
~~Income Taxes~~
The income tax benefit recognized in the accompanying unaudited condensed consolidated statements of operations and comprehensive loss during the three and nine months ended January 31, 2019 resulted from the “Intraperiod Tax Allocation” rules under ASC 740:~~Income Taxes~~, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in our case, discontinued operations. Accordingly, a tax benefit was recorded in continuing operations with an offsetting tax expense recorded in discontinued operations for the nine months ended January 31, 2019 (Note 7).

Recent Accounting ~~Standards Not Yet Adopted~~Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-13, Financial ~~Instruments—~~Instruments – Credit Losses (Topic 326): , Measurement of Credit Losses onof Financial ~~Instruments.~~Instruments ~~This~~(“ASU 2016-13”). The standard ~~update requires that certain financial assets be measured at amortized cost net of an allowance~~changes the methodology for ~~estimated~~measuring credit losses on financial instruments and the timing of when such ~~that~~losses are recorded. As a smaller reporting company as defined by 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 occur over the life of the assets. 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 amounts.SEC, ASU 2016-13 isand its subsequent updates are effective for ~~fiscal years, and interim periods within those years, beginning after December 15, 2019. In November 2019, the FASB issued ASU 2019-10, Financial Instruments—Credit Losses (Topic 326)~~,~~Derivatives and Hedging (Topic 815) and Leases (Topic 842):~~~~Effective Dates~~~~, which defers the effective date of ASU 2016-13 to~~ fiscal years beginning after December 15, 2022, ~~for all entities except SEC reporting companies that are not smaller reporting companies. As a smaller reporting company, ASU 2016-13~~which will ~~now~~ be ~~effective for~~ our fiscal year 2024 beginning May 1, 2023; however, early adoption is permitted. We are currently evaluating the ~~timing and~~ impact ~~of adopting ASU 2016-13~~this standard will have on our condensed consolidated financial statements.
12
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 ~~the disclosure requirements in Topic 820 by removing~~ certain disclosure requirements ~~related to the~~of fair value ~~hierarchy, modifying existing disclosure requirements related~~measurements. Entities will no longer be required to ~~measurement uncertainty~~disclose the amount of and ~~adding new disclosure requirements, primarily surrounding Level 3 fair value measurements and~~reasons for transfers between Level 1 and Level 2.2 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, which will be our fiscal year 2021 beginning~~2019. We adopted ASU 2018-13 on May 1, 2020. ~~Early adoption is permitted for any removed or modified disclosures. We are currently evaluating the new guidance and do not expect the~~The adoption of ~~ASU 2018-13 to~~this standard did not have a material impact on our condensed consolidated financial ~~statements~~statements.
In June 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and ~~related disclosures.~~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 15, 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 ~~is intended to simplify various aspects related to~~simplifies the accounting for income ~~taxes. ASU 2019-12 removes~~taxes by removing certain exceptions ~~to the general principles~~and improving consistent application in certain areas of Topic ~~740 and also clarifies and amends existing guidance to improve consistent application.~~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.
In August 2020, the FASB issued ASU No. 2020-06, Debt with Conversion and other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). The amendments in this ASU will eliminate the beneficial conversion and cash conversion accounting models for convertible instruments, as well as, amend the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. The ASU will also modify how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted earnings per share calculation. As a smaller reporting company as defined by the SEC, ASU 2020-06 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2023, which will be our fiscal year 2025 beginning May 1, 2024. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. We are currently evaluating the timing and impact of adopting ASU 2020-06 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.

1113

avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 34 – 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. ~~With respect to multi-year renewal options, a~~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 onincluded in our ~~January 31, 2020~~accompanying condensed consolidated balance ~~sheet~~sheets primarily relate to these facility leases.

In September 2019, we ~~entered into a lease amendment to terminate~~terminated an operating lease for one of our non-manufacturing facilities that was primarily utilized for warehouse space. The lease termination was primarily driven by our efforts to reduce costs by leveraging available warehouse space in our other facilities, which in aggregate will save us approximately $1.3 million over a period of four years. In connection with the termination of this lease, we removed the corresponding operating lease right-of-use asset and liability balances from our balance sheet and recognized a loss of $0.4 million, which amount is included in loss on lease termination in the accompanying unaudited condensed consolidated statements of operations and comprehensive ~~loss~~income (loss) for the ~~nine~~three and six months ended ~~January~~October 31, ~~2020. Additionally, the lease termination released $0.3 million of restricted cash that was pledged as collateral under a letter of credit required by the terminated lease.~~2019.

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.

The components of lease cost ~~which are~~ included in our accompanying unaudited condensed consolidated statements of operations and comprehensive ~~loss as either cost of revenues or selling, general and administrative expense, depending on the leased asset,~~income (loss) were as follows (in thousands):

Three Months Ended
October 31,

Six Months Ended
October 31,

Three Months Ended
January 31, 2020

Nine Months Ended
January 31, 2020
2020 2019 2020 2019
Operating lease cost $ 798 $ 2,570 $ 788 $ 880 $ 1,576 $ 1,772
Variable lease cost 199 170 320 326
Short-term lease cost 83 83 98 – 190 –
Variable lease cost 155 488
Total lease cost $ 1,036 $ 3,141 $ 1,085 $ 1,050 $ 2,086 $ 2,098

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

October 31,
2020

April 30,
2020

Assets
Operating lease right-of-use assets $ 19,408 $ 20,100
Liabilities
Current portion of operating lease liabilities $ 1,326 $ 1,228
Operating lease liabilities, less current portion 20,550 21,244
Total operating lease liabilities $ 21,876 $ 22,472
Weighted average remaining lease term 10.0 years 10.5 years
Weighted average discount rate 8.0% 8.0%
14
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Cash paid for amounts included in the measurement of lease liabilities for the ~~nine~~six months ended ~~January~~October 31, 2020 and 2019 was ~~$2.3~~$1.5 million and $1.6 million, respectively, and is included in net cash used in operating activities in our accompanying unaudited condensed consolidated statements of cash flows.

12
~~avid bioservices, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
As of ~~January~~October 31, 2020, the maturities of our operating lease liabilities, which includes those derived from lease renewal options that we considered reasonably certain that we would exercise, were as follows (in thousands):

Fiscal Year Ending April 30, Total
2020 (remaining period) $ 735
2021 2,972
2022 2,995
2023 3,010
2024 3,086
Thereafter 21,938
Total lease payments $ 34,736
Less: imputed interest (11,980 )
Total operating lease liabilities $ 22,756
~~The balance sheet classification of our operating lease liabilities was as follows (in thousands):~~
January 31, 2020
Operating lease liabilities $ 1,172
Operating lease liabilities, less current portion 21,584
Total operating lease liabilities $ 22,756
~~As of January 31, 2020, the weighted average remaining lease term and weighted average discount rate of our operating leases was 10.7 years and 8.0%, respectively.~~
Fiscal Year Ending April 30, Total
2021 (remaining period) $ 1,491
2022 2,995
2023 3,010
2024 3,086
2025 3,171
Thereafter 18,767
Total lease payments $ 32,520
Less: imputed interest (10,644 )
Total operating lease liabilities $ 21,876

Note 45 –Stockholders’ Equity
~~Termination of Rights Agreement (Series D Preferred Stock)~~
On March 16, 2006, we entered into a Rights Agreement with Rights Agent named therein, which agreement was subsequently amended and restated on March 16, 2016 (as amended, the “Rights Agreement”). The Rights Agreement was designed to strengthen the ability of our Board of Directors to protect the interests of our stockholders against potential abusive or coercive takeover tactics and to enable all stockholders to receive the full and fair value of their investment in the event that an unsolicited attempt is made to acquire us. Under the Rights Agreement, our Board of Directors declared a dividend of one preferred share purchase right (the “Right”) for each share of our common stock held by our stockholders of record as of the close of business on March 27, 2006, each of which Right entitled the holder thereof to purchase a fraction of a share of our Series D Participating Preferred Stock, par value $0.001 per share, at the price specified in the Rights Agreement. The Rights were only exercisable if a person or group acquired 15% or more of our outstanding common stock or announced a tender offer or exchange offer which, if consummated, would have resulted in ownership by a person or group of 15% or more of our outstanding stock.
13
~~avid bioservices, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
On September 23, 2019, the Rights Agreement was further amended to accelerate the scheduled expiration date of the Rights Agreement from the close of business on March 16, 2021 to the close of business on September 23, 2019, and effectively terminate the Rights Agreement and the Rights granted thereunder as of such expiration date. Our Board of Directors elected to terminate the Rights Agreement and the Rights granted thereunder based on their recent evaluation of the effectiveness of, and the need for, a stockholder rights plan and consideration of current corporate governance practices and proxy advisory guidelines. In connection with the termination of the Rights Agreement, we filed a Notification of Removal from Listing and/or Registration under Section 12(b) of the Securities Exchange Act on Form 25 with the SEC on September 23, 2019, in order to withdraw the Rights from registration under Section 12(b) of the Securities Exchange Act of 1934, as amended, which deregistration was effective 90 days after the filing date.

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 ~~January~~October 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 ~~1,961,619~~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.

~~Dividends~~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, ~~which dividends~~and are payable quarterly in cash, on or about the 1^stfirst day of each January, April, July and October. For each of the three and ~~nine~~six months ended ~~January~~October 31, 2020 and 2019, we paid aggregate cash dividends of $1.1 million and ~~$3.2~~$2.2 million, respectively, for issued and outstanding shares of our Series E Preferred Stock.
15
avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 56 –Equity Compensation Plans

Stock Incentive Plans

As of ~~January~~October 31, 2020, we had an aggregate of ~~6,944,895~~6,728,623 shares of our common stock reserved for issuance under our stock incentive plans, of which ~~3,686,129~~4,016,873 shares were subject to outstanding stock options and restricted stock units (“RSUs”) and ~~3,258,766~~2,711,750 shares were available for future grants of stock-based awards.

Stock Options
The following summarizes our stock option transaction activity for the six months ended October 31, 2020:
Stock Options Grant Date Weighted Average Exercise Price
(in thousands)
Outstanding at May 1, 2020 2,896 $6.20
Granted 789 $6.99
Exercised (141 ) $5.02
Canceled or expired (93 ) $6.97
Outstanding at October 31, 2020 3,451 $6.41
Restricted Stock Units
The following summarizes our RSUs transaction activity for the six months ended October 31, 2020:
Shares Weighted Average Grant Date Fair Value
(in thousands)
Outstanding at May 1, 2020 307 $5.23
Granted 337 $7.09
Vested (68 ) $5.10
Forfeited (10 ) $5.71
Outstanding at October 31, 2020 566 $6.34

1416

avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~Stock Options~~
~~The following summarizes our stock option transaction activity for the nine months ended January 31, 2020:~~
Stock Options Grant Date Weighted Average Exercise Price
(in thousands)
Outstanding at May 1, 2019 3,274 $ 7.51
Granted 845 $ 5.95
Exercised (247 ) $ 3.72
Canceled or expired (931 ) $ 10.45
Outstanding at January 31, 2020 2,941 $ 6.45
~~Restricted Stock Units~~
~~The following summarizes our RSUs transaction activity for the nine months ended January 31, 2020:~~
Shares Weighted Average Grant Date Fair Value
(in thousands)
Outstanding at May 1, 2019 200 $ 4.32
Granted 194 $ 5.91
Vested (49 ) $ 4.30
Forfeited (27 ) $ 5.15
Outstanding at January 31, 2020 318 $ 5.22

Employee Stock Purchase Plan

The Avid Bioservices, Inc. 2010 Employee Stock Purchase Plan (the “ESPP”) is a stockholder-approved plan under which eligible employees ~~are allowed to~~can purchase shares of our common stock, ~~through payroll deductions at~~based on a percentage of their compensation, subject to certain limits. The purchase price per share is equal to ~~85%~~the lower of ~~the lower~~85% of the fair market value of our common stock ~~as of~~on the first trading day of the offering period or on the last trading day of the six-month offering period. Employee participants are limited to purchase no more than $25,000 of stock in any one calendar year. On October 9, 2019, our stockholders approved an amendment to the ESPP to extend its term for an additional five years to October 21, 2025 and to change the commencement dates of the offering periods from May 1 and November 1 of each year, to January 1 and July 1 of each year.

During the ~~nine~~six months ended ~~January~~October 31, 2020, ~~47,526~~a total of 32,197 shares of our common stock were purchased under the ESPP at a purchase price of ~~$3.94~~$5.58 per share. As of ~~January~~October 31, 2020, we had ~~1,148,735~~1,116,538 shares of our common stock reserved for issuance under the ESPP.

15
~~avid bioservices, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
Stock-Based Compensation

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

Three Months Ended
January 31,

Nine Months Ended
January 31,

Three Months Ended
October 31,

Six Months Ended
October 31,

2020 2019 2020 2019 2020 2019 2020 2019
Cost of revenues $ 248 $ 147 $ 679 $ 317 $ 372 $ 245 $ 649 $ 431
Selling, general and administrative 347 311 1,170 763 653 406 1,106 823
Total stock-based compensation $ 595 $ 458 $ 1,849 $ 1,080 $ 1,025 $ 651 $ 1,755 $ 1,254

As of ~~January~~October 31, 2020, the total estimated unrecognized compensation cost related to non-vested ~~employee~~ stock options and non-vested RSUs was ~~$4.6~~$6.0 million and ~~$1.4~~$3.2 million, respectively. These costs are expected to be recognized over weighted average vesting periods of ~~2.82~~2.86 years and ~~3.06~~3.14 years, respectively.

Note 67 – Net ~~Loss~~Income (Loss) Per Common Share

Basic net ~~loss~~income (loss) per common share is computed by dividing our net ~~loss~~income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net ~~loss~~income (loss) per common share is computed by dividing our net ~~loss~~income (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 income attributable to common stockholders represents our net income less Series E Preferred Stock accumulated dividends. Net loss attributable to common stockholders represents our net 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).

17
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 is 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. ~~Since~~A reconciliation of the ~~impact~~numerators and the denominators of ~~potentially dilutive securities is anti-dilutive during periods of net loss, there was no difference between~~the basic and ~~diluted loss~~dilutive net income (loss) per common share ~~amounts~~computations for the three and ~~nine~~six months ended ~~January~~October 31, 2020 and ~~2019.~~2019, are as follows (in thousands, expect per share amounts):

Three Months Ended
October 31,

Six Months Ended
October 31,

2020 2019 2020 2019
Numerator
Net income (loss) $ 2,284 $ (430 ) $ 7,014 $ (3,594 )
Series E preferred stock accumulated dividends (1,442 ) (1,442 ) (2,523 ) (2,523 )
Net income (loss) attributable to common stockholders $ 842 $ (1,872 ) $ 4,491 $ (6,117 )

Denominator
Weighted average common shares outstanding, basic 56,660 56,253 56,592 56,210
Effect of dilutive securities:
Stock options 444 – 349 –
RSUs 140 – 125 –
ESPP 4 – 7 –

Weighted average common shares outstanding, dilutive 57,248 56,253 57,073 56,210

Net income (loss) per share, basic $ 0.01 $ (0.03 ) $ 0.08 $ (0.11 )

Net income (loss) per share, diluted $ 0.01 $ (0.03 ) $ 0.08 $ (0.11 )
The following table presents the securities excluded from the calculation of diluted net income (loss) per share for the three and six months ended October 31, 2020 and 2019, as the effect of their inclusion would have been anti-dilutive (in thousands):

Three Months Ended
October 31,

Six Months Ended
October 31,

2020 2019 2020 2019
Stock options 2,048 3,063 2,216 2,988
RSUs – 66 – 171
ESPP – 12 – 6
Series E Preferred Stock 1,979 1,979 1,979 1,979
    Total 4,027 5,120 4,195 5,144

1618

avid bioservices, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~The calculation of weighted average diluted shares outstanding excludes~~
Note 8 – Commitments and Contingencies
In March 2020, the ~~dilutive effect~~World Health Organization declared the novel coronavirus disease (“COVID-19”) outbreak a global 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 ~~following weighted average outstanding stock options, unvested RSUs~~outbreak and ~~shares of common stock expected to be issued under~~its impact on the economic environment and our ~~ESPP as their~~business is highly uncertain. Accordingly, we cannot provide any assurance that the COVID-19 pandemic will not have a material adverse impact ~~is anti-dilutive during periods of net loss (in thousands):~~

Three Months Ended
January 31,

Nine Months Ended
January 31,

2020 2019 2020 2019
Stock options 245 117 152 161
RSUs 102 38 73 33
ESPP – 1 7 10
    Total 347 156 232 204
The calculation of weighted average diluted shares outstanding also 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 (in thousands):

Three Months Ended
January 31,

Nine Months Ended
January 31,

2020 2019 2020 2019
Stock options 2,106 2,779 2,721 2,659
RSUs – 47 8 16
Warrants – – – 17
Series E Preferred Stock 1,979 1,979 1,979 1,979
    Total 4,085 4,805 4,708 4,671
~~Note 7 – Discontinued Operations~~
As a result of the sale of our PS-targeting and r84 technologies in February 2018 and September 2018, respectively (as described in Note 10 of the Notes to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019), the abandonment of our remaining research and development assets, and the strategic shift in our corporate direction to focus solely on our ~~CDMO~~operations or future results. The extent to which the COVID-19 pandemic may impact our future business, ~~the operating~~strategic initiatives, results of our former research and development segment have been excluded from continuing operations and reported as income from discontinued operations, net of tax, in the accompanying unaudited condensed consolidated financial statements for all periods presented.
17
~~avid bioservices, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
There were no operating results from discontinued operations for the three and nine months ended January 31, 2020. The following table is a reconciliation of the pre-tax income from discontinued operations to the income from discontinued operations, net of tax, as presented in the accompanying unaudited condensed consolidated statements of operations and ~~comprehensive loss for~~financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the ~~nine months ended January 31, 2019 (in thousands):~~
Gain on sale of research and development assets before income taxes⁽¹⁾ $ 1,000
Income tax expense (261 )
Income from discontinued operations, net of tax $ 739
~~_____________~~
⁽¹⁾ ~~The gain~~duration, spread, severity and resurgence of the COVID-19 pandemic, the effects of the COVID-19 pandemic on ~~sale of research~~our workforce, customers, and ~~development assets before income taxes was recorded in connection with~~vendors and the ~~$1.0 million we received from Oncologie, Inc. (“Oncologie”) under~~remedial actions and stimulus measures adopted by local and federal governments, and the ~~September 2018 Asset Assignment and Purchase Agreement pursuant~~extent to which ~~we sold to Oncologie our r84 technology, which included the assignment of certain licenses, patents~~normal economic and ~~other assets useful and/or necessary for the potential commercialization of the r84 technology.~~operating conditions can resume.

Note 89 – Subsequent Events

On ~~March 4,~~December 1, 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 ~~January~~October 1, 2020 through ~~March~~December 31, 2020. The cash dividend is payable on ~~April 1, 2020~~January 4, 2021 to holders of the Series E Preferred Stock of record on ~~March 16,~~December 14, 2020.

1819

Item 2. Management’s Discussion and Analysis of Financial Condition And Results of Operations

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.~~2020.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements, including the anticipated future impact of the ongoing COVID-19 global pandemic on our business operations, that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results of operations to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. These forward-looking statements are subject to numerous risks and uncertainties, including the risks and uncertainties described under the section titled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, ~~2019,~~2020, those identified in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q, and in other filings we may make with the Securities and Exchange Commission from time to time. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. We qualify all of our forward-looking statements by these cautionary statements and, except as required by law, assume no obligation and do not intend to update these forward-looking statements.

Overview

We are a dedicated CDMO that provides a comprehensive range of services from process development to CGMP clinical and commercial manufacturing, focused on biopharmaceutical ~~products~~drug substances derived from mammalian cell culture. With ~~over 25~~27 years of experience producing monoclonal antibodies and recombinant proteins, ~~in batch, fed-batch and perfusion modes,~~ our services include CGMP clinical and commercial product manufacturing, ~~purification,~~ bulk packaging, release and stability testing and regulatory submissions ~~and~~ support. We also provide a variety of process development services, including ~~cell line~~upstream and downstream development and ~~optimization, cell culture and feed~~ optimization, analytical methods development, testing and ~~product~~ characterization.

Strategic Objectives

We have established and are currently executing on the following strategic objectives:

· ~~Expand existing customer relationships~~Invest in additional manufacturing capacity and ~~diversify~~resources required for us to achieve our ~~customer base by securing additional customers~~long-term growth strategy and meet the growth-demand of our customers’ programs, moving from development through to ~~support~~commercial manufacturing;
· Broaden our ~~future potential revenue growth;~~market awareness through a diversified yet flexible marketing strategy;
· Continue to ~~invest in manufacturing facilities~~expand our customer base and ~~infrastructure to maximize our facility utilization and support our customers’~~programs with existing customers for both process development and ~~clinical and commercial~~ manufacturing ~~requirements;~~service offerings; and
· ~~Broaden~~Increase our ~~sales force by hiring sales representatives~~operating profit margin to ~~execute our business development initiatives in key markets.~~best-in-class industry standards.

1920

~~Third~~Second Quarter Highlights

The following summarizes select highlights from our ~~third~~second quarter ended ~~January~~October 31, 2020:

· ~~Appointed Timothy Compton as our Chief Commercial Officer. Mr. Compton is~~Reported revenues of $21.1 million, an ~~accomplished professional with more than 20 years~~increase of ~~commercial operations and sales team management experience. In this role, Mr. Compton will focus on driving~~15%, or $2.8 million, compared to the ~~continued growth of our CDMO business, including the ongoing expansion of our commercial and clinical client base;~~same prior year period;
· ~~Added one~~Reported net income attributable to common stockholders of $0.8 million, or $0.01 per basic and diluted share;
· Signed customer orders during the quarter, including a new process development customer and ~~expanded~~a new manufacturing project with an existing customer, and ended the ~~scope~~quarter with a backlog of ~~work with multiple existing customers to increase the number of manufacturing batches;~~$67 million, our highest level since becoming a pure-play CDMO; and
· ~~Advanced the planning and design stages to both enhance~~Developed plans for a two-phased expansion of our Myford facility ~~and support its future expansion. These near-term facility improvements include, installing a pharmaceutical grade water system, and upgrading key IT systems and general infrastructure. We expect~~as further discussed in the installation and validation of the pharmaceutical grade water system to take place in late calendar year 2020 and certain IT system enhancements and general infrastructure upgrades to complete by the end of fiscal 2021.“Facility Expansion” section below.
Facility Expansion
We recently developed plans for a two-phased expansion of our Myford facility. The first phase expands the production capacity of our existing Myford North facility by the addition of a second downstream processing suite. The second phase further expands the capacity through the build out of a second manufacturing train, including both upstream and downstream processing suites within Myford South.
Due to an anticipated increase in customer demand, we have commenced the first phase of expansion, which we estimate will take approximately 12 to 15 months to complete at an estimated cost of approximately $15 million. We estimate that the first phase of expansion could increase our annual revenue generating capacity by up to $50 million, bringing the combined annual revenue generating capacity of our Franklin and Myford North facilities to up to $170 million.
The decision to commence the second phase of expansion will be dictated by revenue growth and projected customer demand. Based on preliminary conceptual plans, we estimate that the Myford South expansion will take 18 to 24 months to complete at a cost of approximately $45 to $55 million. We estimate that the addition of the future Myford South facility will increase our annual revenue generating capacity by up to $100 million.
To complete these anticipated expansions, we expect to raise external capital at the appropriate time, accessing the form of capital that we determine is most appropriate considering the markets available to us and their respective costs of capital.
Impact of COVID-19 Global Pandemic
In March 2020, the World Health Organization declared the novel coronavirus disease (“COVID-19”) outbreak a global pandemic. To date, the COVID-19 pandemic has not had a significant impact on our operations, as we have been able to continue to operate our manufacturing facilities and provide essential services to our customers. Additionally, in an effort to protect the health and safety of our employees and in compliance with state regulations, we have instituted a work-from-home policy for employees who can perform their job functions offsite, implemented daily temperature checking, social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our manufacturing facilities, and suspended all non-essential employee travel.
The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. We will continue to assess the potential impact of the COVID-19 pandemic on our business, financial condition, and results of operations. For a further discussion of potential risks to our business from the COVID-19 pandemic, please refer to “Part II, Item 1A—Risk Factors” in this Quarterly Report on Form 10-Q.
21

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.
20

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, 2020 and 2019 (in thousands):~~

Three Months Ended
January 31,

Nine Months Ended
January 31,

2020 2019 $ Change 2020 2019 $ Change
Revenues $ 13,585 $ 13,781 $ (196 ) $ 47,152 $ 36,548 $ 10,604
Cost of revenues 12,800 11,731 1,069 41,921 32,972 8,949
Gross profit 785 2,050 (1,265 ) 5,231 3,576 1,655

Operating expenses:
Selling, general and administrative 2,996 3,242 (246 ) 10,989 9,273 1,716
Loss on lease termination – – – 355 – 355
Total operating expenses 2,996 3,242 (246 ) 11,344 9,273 2,071
Operating loss (2,211 ) (1,192 ) (1,019 ) (6,113 ) (5,697 ) (416 )
Interest and other income, net 107 9 98 415 190 225
Loss from continuing operations before income taxes (2,104 ) (1,183 ) (921 ) (5,698 ) (5,507 ) (191 )
Income tax benefit – 44 (44 ) – 217 (217 )
Loss from continuing operations, net of tax $ (2,104 ) $ (1,139 ) $ (965 ) $ (5,698 ) $ (5,290 ) $ (408 )
21
~~Three Months Ended January 31, 2020 Compared to Three Months Ended January 31, 2019~~
~~Revenues~~
Revenues for the three months ended January 31, 2020 were $13.6 million compared to $13.8 million for the same period in the prior year, a decrease of $0.2 million, or 1%. The decrease in revenues can primarily be attributed to a decrease in process development revenue, which was largely offset by an increase in the number of in-process and completed manufacturing runs in the current-year period. The following table provides the net change in revenues by our revenue streams:
$ millions
Net increase in manufacturing revenue $ 0.8
Net decrease in process development revenue (1.0 )
Total decrease in revenues $ (0.2 )
Additionally, growth in manufacturing revenue during the current-year period was impacted by a production interruption related to a problem with a specific piece of equipment, which resulted in the termination of certain in-process manufacturing runs and the postponement of other manufacturing runs scheduled to commence during the current-year period. We are currently in the process of implementing what we believe to be the necessary corrections for the specific piece of equipment that resulted in the production interruption, however, we expect that this interruption will continue to have a negative impact on our revenues and gross profit for the remainder of fiscal 2020.
~~Gross Profit~~
Gross profit for the three months ended January 31, 2020 was $0.8 million compared to $2.1 million for the same period in the prior year, a decrease of approximately $1.3 million, where gross margins for such periods were 6% and 15%, respectively. The $1.3 million decrease in gross profit for the current-year period was primarily attributed to the costs associated with the production interruption described above, increased depreciation expense from the acquisition of new equipment, and a net decrease in revenues.
~~Selling, General and Administrative Expenses~~
SG&A expenses were $3.0 million for the three months ended January 31, 2020 compared to $3.2 million for the same period in the prior year, a decrease of approximately $0.2 million, or 8%. As a percentage of revenue, SG&A expenses for the three months ended January 31, 2020 and 2019 were 22% and 24%, respectively. The decrease in SG&A expenses was attributed to the following components:
$ millions
Decrease in accrued bonus expenses $ (0.7 )
Increase in separation related expenses 0.2
Net increase in all other SG&A expenses 0.3
Total decrease in SG&A expenses $ (0.2 )

22

~~Operating Loss~~Results of Operations

~~Operating loss was $2.2 million, or a negative 16%~~The following table compares the unaudited condensed consolidated statements of ~~revenue,~~operations for the three and six months ended ~~January~~October 31, 2020 compared to an operating loss of $1.2 million, or a negative 9% of revenue, for the same period in the prior year. Of this $1.0 million change in year-over-year operating loss, approximately $1.3 million was attributable to a gross profit decrease, which was partially offset by a decrease in SG&A expenses of approximately $0.2 million.and 2019 (in thousands):

Three Months Ended
October 31,

Six Months Ended
October 31,

2020 2019 $ Change 2020 2019 $ Change
Revenues $ 21,064 $ 18,313 $ 2,751 $ 46,456 $ 33,567 $ 12,889
Cost of revenues 14,646 14,953 (307 ) 31,494 29,121 2,373
Gross profit 6,418 3,360 3,058 14,962 4,446 10,516

Operating expenses:
Selling, general and administrative 4,166 3,534 632 7,991 7,993 (2 )
Loss on lease termination – 355 (355 ) – 355 (355 )
Total operating expenses 4,166 3,889 277 7,991 8,348 (357 )
Operating income (loss) 2,252 (529 ) 2,781 6,971 (3,902 ) 10,873
Interest and other income, net 32 99 (67 ) 43 308 (265 )
Net income (loss) $ 2,284 $ (430 ) $ 2,714 $ 7,014 $ (3,594 ) $ 10,608
~~Nine~~
Three Months Ended ~~January~~October 31, 2020 Compared to ~~Nine~~Three Months Ended ~~January~~October 31, 2019

Revenues

Revenues for the ~~nine~~three months ended ~~January~~October 31, 2020 and 2019 were ~~$47.2~~$21.1 million ~~compared to $36.5~~and $18.3 million, ~~for the same period in the prior year,~~respectively, an increase of ~~approximately $10.6~~$2.8 million or ~~29%~~15%. The increase in revenues can ~~primarily~~ be attributed to a $2.5 million increase in manufacturing revenues primarily due to an increase in the number and scope of manufacturing runs in-process and/or completed in the ~~current-year~~current year period compared to the ~~prior-year~~prior year period, combined with a $0.3 million increase in process development revenues. In addition, the current-year period increase in manufacturing revenues included the recognition of $1.7 million from changes in estimated variable revenue consideration as a result of ~~growing manufacturing demand from a more diversified customer base, which increase was offset by a decrease in process development revenue.~~completing performance obligations for certain projects during the quarter, therefore increasing revenue recognized for those projects during the period. The increase in revenues was attributed to the following components of our revenue streams:

$ millions
Net increase in manufacturing revenue $ 12.1
Net decrease in process development revenue (1.5 )
Total increase in revenues $ 10.6
Additionally, growth in manufacturing revenue during the current-year period was impacted by a production interruption related to a problem with a specific piece of equipment, which resulted in the termination of certain in-process manufacturing runs and the postponement of other manufacturing runs scheduled to commence during the current-year period. We are currently in the process of implementing what we believe to be the necessary corrections for the specific piece of equipment that resulted in the production interruption, however, we expect that this interruption will continue to have a negative impact on our revenues and gross profit for the remainder of fiscal 2020.
~~Gross Profit~~
Gross profit for the nine months ended January 31, 2020 was $5.2 million compared to $3.6 million for the same period in the prior year, an increase of approximately $1.7 million, where gross margins for such periods were 11% and 10%, respectively. The $1.7 million increase in gross profit for the current-year period was primarily attributed to increased revenues, which was partially offset by costs associated with payroll and related costs, higher facility and equipment related costs primarily associated with the production interruption described above, increased depreciation expense from the acquisition of new equipment, and general equipment repairs and maintenance costs.
$ millions
Net increase in manufacturing revenues $ 2.5
Net increase in process development revenues 0.3
Total increase in revenues $ 2.8

23

Gross Profit
Gross profit for the three months ended October 31, 2020 and 2019 was $6.4 million and $3.4 million, respectively, an increase of approximately $3.1 million, and gross margins for such periods were 30% and 18%, respectively. The increase in gross profit for the current-year period can primarily be attributed to increased revenues, which includes the aforementioned revenues of $1.7 million associated with the change in variable consideration, partially offset by an increase in payroll related costs. Excluding the $1.7 million in additional variable revenue consideration, gross margin for the three months ended October 31, 2020 was approximately 24%.
Selling, General and Administrative Expenses

SG&A expenses ~~were $11.0 million~~ for the ~~nine~~three months ended ~~January~~October 31, 2020 ~~compared to $9.3~~and 2019 were $4.2 million ~~for the same period in the prior year,~~and $3.5 million, respectively, an increase of approximately ~~$1.7~~$0.6 million or ~~19%~~18%. As a percentage of revenue, SG&A expenses for the ~~nine~~three months ended ~~January~~October 31, 2020 and 2019 were ~~23%~~20% and ~~25%~~19%, respectively. The net increase in SG&A expenses was attributed to the following components:

$ millions
Increase in separation related expenses $ 0.8
Increase in payroll and benefit costs 0.5
Increase in stock-based compensation expense 0.4
Decrease in accrued bonus expenses (0.3 )
Net increase in all other SG&A expenses 0.3
Total increase in SG&A expenses $ 1.7
$ millions
Increase in accrued bonus expenses $ 0.6
Increase in stock-based compensation expense 0.2
Decrease in payroll and benefit costs (0.1 )
Net decrease in all other SG&A expenses (0.1 )
Total increase in SG&A expenses $ 0.6

Loss on Lease Termination

In ~~September~~the prior year three-month period ended October 31, 2019, we ~~entered into a lease amendment to terminate~~terminated an operating lease for one of our non-manufacturing facilities that was primarily utilized for warehouse space. The lease termination was primarily driven by our efforts to reduce costs by leveraging available warehouse space in our other ~~facilities, which in aggregate will save us approximately $1.3 million over a period of four years.~~facilities. In connection with the termination of this lease, we removed the corresponding operating lease right-of-use asset and liability balances from our balance sheet and recognized a loss of $0.4 million. Additionally, the lease termination released $0.3 million of restricted cash that was pledged as collateral under a letter of credit required by the terminated lease.

Operating ~~Loss~~Income (Loss)

Operating ~~loss~~income was ~~$6.1~~$2.3 million ~~or a negative 13% of revenue,~~ for the ~~nine~~three months ended ~~January~~October 31, 2020 compared to an operating loss of ~~$5.7~~$0.5 million ~~or a negative 16% of revenue,~~ for the same period in the prior year. ~~Of this $0.4~~This $2.8 million ~~change~~improvement in year-over-year operating ~~loss, approximately $1.7~~income (loss) can primarily be attributed to a $3.1 million ~~was attributable to an~~ increase in ~~SG&A expenses and $0.4 million was attributable to a~~gross profit combined with the absence of the loss on lease termination recognized in ~~connection with~~ the ~~termination of an operating lease, which were~~prior year period, as discussed above, partially offset by an increase in ~~gross profit~~SG&A expense of approximately ~~$1.7~~$0.6 million.
~~Income Tax Benefit~~
In September 2018, we recognized a $1.0 million gain in discontinued operations, before taxes, for the sale of our r84 technology (as described in Note 7 to the accompanying unaudited condensed consolidated financial statements). In accordance with the “Intraperiod Tax Allocation” rules under ASC 740:~~Income Taxes~~, which requires the allocation of an entity’s total annual income tax provision among continuing operations and, in our case, discontinued operations for the nine months ended January 31, 2019, we recorded a tax benefit in continuing operations of $0.2 million with an offsetting tax expense of $0.3 million in discontinued operations. The remaining deferred tax benefit of $0.1 million was allocated proportionally to continuing operations throughout the remainder of fiscal year 2019.

24

~~Discontinued Operations~~Six Months Ended October 31, 2020 Compared to Six Months Ended October 31, 2019

AsRevenues
Revenues for the six months ended October 31, 2020 and 2019, were $46.5 million and $33.6 million, respectively, an increase of $12.9 million or 38%. The increase in revenues can be attributed to a $13.6 million increase in manufacturing revenues primarily due to an increase in the number and scope of manufacturing runs in-process and/or completed in the current-year period compared to the prior year period, partially offset by a $0.7 million decrease in process development revenues. In addition, the current-year period increase in manufacturing revenues includes: (i) $3.1 million in fees received during the first quarter of fiscal 2021 from a customer that had reached its inventory requirements with fewer manufacturing runs than expected, therefore not utilizing all their reserved capacity that had been scheduled for the third quarter of fiscal 2021, and (ii) the recognition of $1.1 million from changes in estimated variable revenue consideration as a result of completing performance obligations for certain projects during the ~~sale~~second quarter of fiscal 2021, therefore increasing revenue recognized for those projects during the period The increase in revenues was attributed to the following components of our ~~PS-targeting~~revenue streams:
$ millions
Net increase in manufacturing revenues $ 13.6
Net decrease in process development revenues (0.7 )
Total increase in revenues $ 12.9
Additionally, growth in manufacturing revenues during the six months ended October 31, 2020 was supplemented by $4.3 million from the completion of certain manufacturing runs during the first quarter of fiscal 2021 that had been postponed during the second half of fiscal 2020 as previously disclosed.
Gross Profit
Gross profit for the six months ended October 31, 2020 and ~~r84 technologies~~2019 was $15.0 million and $4.4 million, respectively, an increase of approximately $10.5 million, and gross margins for such periods were 32% and 13%, respectively. The increase in ~~February 2018~~gross profit for the current-year period can primarily be attributed to increased revenues, which includes the aforementioned fees associated with a customer’s unused capacity of $3.1 million and ~~September 2018, respectively (as described~~the $1.1 million associated with the change in ~~Note 10~~variable revenue consideration, partially offset by an increase in payroll related costs and increased facility and equipment related costs. Excluding the $3.1 million fees associated with a customer’s unused capacity and the $1.1 million in additional variable revenue consideration, gross margin for the six months ended October 31, 2020 was approximately 25%.
Selling, General and Administrative Expenses
SG&A expenses for each of the six-month periods ended October 31, 2020 and 2019 were $8.0 million, resulting in a nominal change. As a percentage of revenue, SG&A expenses for the six months ended October 31, 2020 and 2019 were 17% and 24%, respectively. The nominal change in SG&A expenses was attributed to the ~~Notes~~following components:
$ millions
Decrease in separation related expenses $ (0.8 )
Increase in accrued bonus expenses 0.5
Increase in payroll and benefit costs 0.3
Increase in stock-based compensation expense 0.3
Net decrease in all other SG&A expenses (0.3 )
Total change in SG&A expenses $ –
25
Loss on Lease Termination
In the second quarter of the six-month prior year period ended October 31, 2019, we terminated an operating lease for one of our non-manufacturing facilities that was primarily utilized for warehouse space. The lease termination was primarily driven by our efforts to ~~the Consolidated Financial Statements included~~reduce costs by leveraging available warehouse space in our Annual Report on Form 10-K for the fiscal year ended April 30, 2019), the abandonment of our remaining research and development assets, and the strategic shift in our corporate direction to focus solely on our CDMO business, the operating results of our former research and development segment have been excluded from continuing operations and reported as income from discontinued operations, net of tax, in the accompanying unaudited condensed consolidated financial statements for all periods presented. The gain of $1.0 million that was recorded inother facilities. In connection with the ~~sale~~termination of this lease, we removed the corresponding operating lease right-of-use asset and liability balances from our ~~r84 technology in September 2018 is included in~~balance sheet and recognized a loss of $0.4 million. Additionally, the lease termination released $0.3 million of restricted cash that was pledged as collateral under a letter of credit required by the terminated lease.
Operating Income (Loss)
Operating income ~~from discontinued operations, net~~was $7.0 million for the six months ended October 31, 2020 compared to an operating loss of ~~tax,~~$3.9 million for the same period in the ~~accompanying unaudited condensed consolidated statements~~prior year. This $10.9 million improvement in year-over-year operating income (loss) can primarily be attributed to a $10.5 million increase in gross profit combined with the absence of ~~operations and comprehensive~~the loss ~~for~~on lease termination recognized in the ~~nine months ended January 31, 2019. There were no operating results from discontinued operations during the three and nine months ended January 31, 2020.~~prior year period, as discussed above.

Liquidity and Capital Resources

~~At January~~Our principal sources of liquidity are cash flows from operating activities as well as our cash and cash equivalents on hand. As of October 31, 2020, we had ~~$30.7 million in~~ cash and cash ~~equivalents. Our ability~~equivalents of $35.7 million.
We currently expect to ~~fund~~finance our operations ~~is dependent on the amount of~~with our existing 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~~anticipated cash flows from operations.
We ~~plan to fund our operations using~~believe that our existing cash on hand and our anticipated cash ~~equivalents and cash generated~~flows from services provided under our customer contracts. As of January 31, 2020, we performed an analysis and concluded that our cash and cash equivalents as of January 31, 2020 together with cash expected to be generated from services provided under our customer contractsoperating activities will be sufficient to ~~support~~fund our operations for at least ~~one year~~the next 12 months from the ~~issuance~~ date of this Quarterly Report.

~~In the event we~~If cash flows from operations are ~~unable to secure~~not sufficient ~~additional manufacturing services projects~~ to support our ~~current~~ operations or capital requirements, then we ~~may~~will need to ~~raise~~obtain additional ~~capital through a combination of~~ equity ~~offerings and~~or debt ~~financings in order~~financing to fund our future operations. ~~There can be no assurance~~We recently developed plans for a two-phased expansion of our Myford facility. To complete these anticipated expansions, we expect to raise external capital at the appropriate time, accessing the form of capital that inwe determine is most appropriate considering the ~~event we require additional financing, such financing will~~markets available to us and their respective costs of capital. We may raise these funds through the issuance of debt or through the public offering of securities under our effective shelf registration statement, under which approximately $102 million remained available to us as of the date of this Quarterly Report. These financings may not be available on acceptable terms, or at all. Our ability to raise additional capital in the equity and debt markets is dependent on a number of factors including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties including, but not limited to, our financial results, ~~and~~ economic and market ~~conditions. If we raise additional capital through debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions,~~conditions, and global financial crises and economic downturns, including those caused by widespread public health crises such as ~~making~~the COVID-19 pandemic, which may cause extreme volatility and disruptions in capital ~~expenditures or incurring additional debt.~~and credit markets. If we are unable to fund our continuing operations through these sources, we may not be able to complete planned projects or 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, financial condition, results of operations, and future prospects.

~~Cash Flow Analysis~~

~~Significant components of the changes in~~
26
The following table presents our cash flows from operating, investing and financing activities for the ~~nine~~six months ended ~~January~~October 31, 2020 and 2019 ~~are as follows~~ (in thousands):

Nine Months Ended January 31,
2020 2019
Net cash provided by (used in) operating activities $ 2,780 $ (17,243 )
Net cash (used in) provided by investing activities (3,025 ) 4,752
Net cash used in financing activities (2,219 ) (2,016 )
Six Months Ended October 31,
2020 2019
Cash, cash equivalents and restricted cash ⁽¹⁾ $ 36,014 $ 34,310
Net cash provided by operating activities 8,133 3,416
Net cash used in investing activities (2,980 ) (985 )
Net cash used in financing activities (5,751 ) (1,622 )
___________
25⁽¹⁾ As of October 31, 2020 and 2019, cash, cash equivalents and restricted cash included $0.4 million that was restricted from general use, related to cash that was pledged as collateral under a letter of credit under the terms of a facility lease agreement.

Net Cash Provided ~~By (Used In)~~by Operating Activities

~~Net cash provided by (used in) operating activities represents our net loss, as adjusted to reconcile our net loss to~~During the six months ended October 31, 2020, net cash provided by ~~(used in)~~ operating activities ~~and~~increased by $4.7 million to $8.1 million from $3.4 of net ~~changes in~~cash provided by operating activities during the ~~timing of cash flows as reflected by the changes in operating assets and liabilities.~~six months ended October 31, 2019.

Net cash provided by operating activities for the ~~nine~~six months ended ~~January~~October 31, 2020 was primarily attributable to a net ~~loss~~income of ~~$5.7~~$7.0 million ~~offset by~~combined with non-cash adjustments to ~~exclude noncash charges for~~net income of $3.4 million related to depreciation and amortization and stock-based compensation, ~~and loss on lease termination in an aggregate amount of $4.5 million, and include~~offset by cash flows from the net change in operating assets and liabilities of ~~$4.0~~$2.3 million. ~~The~~
Net cash provided by operating activities for the six months ended October 31, 2019 was a result of a $3.6 million net loss, offset by non-cash adjustments to net loss of $2.7 million related to depreciation and amortization and stock-based compensation, and cash flows from the net change in operating assets and liabilities ~~was primarily due to the timing~~ of ~~cash receipts and expenditures associated with working capital.~~
Net cash used in operating activities for the nine months ended January 31, 2019 was primarily attributable to a net loss of $4.6 million, as negatively adjusted to exclude a $1.0 million gain on the sale of certain research and development assets and $4.4 million related to the change in assets and liabilities of discontinued operations, and partially offset by positive adjustments to exclude noncash charges for depreciation and amortization and stock-based compensation of $3.1 million, in aggregate, and net cash outflows from the net change in certain other operating assets and liabilities of $10.5$4.3 million. ~~The net change in operating assets and liabilities was primarily due to the timing of cash receipts and expenditures associated with working capital.~~

Net Cash ~~(Used In) Provided By~~Used in Investing Activities

~~Our~~During the six months ended October 31, 2020, net cash used in investing activities ~~consist~~increased by $2.0 million to $3.0 million from $1.0 million of ~~capital expenditures for our manufacturing and development operations and with respect to~~net cash used in investing activities during the prior year period, proceeds from the sale of certain research and development assets associated with our discontinued research and development segment (as described in Note 10 of the Notes to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal yearsix months ended ~~April 30, 2019).~~October 31, 2019.

Net cash used in investing activities ~~during~~for the ~~nine~~six months ended ~~January~~October 31, 2020 and 2019 consisted of $3.0 million and $1.0 million, respectively, used to acquire property and equipment ~~acquisitions of $3.0 million~~ primarily related to our manufacturing and development operations.

Net cash provided by investing activities for the nine months ended January 31, 2019 consisted of proceeds of $6.0 million related to the sale of certain research and development assets associated with our discontinued research and development segment, offset by property and equipment acquisitions of $1.2 million.
Net Cash Used Inin Financing Activities

~~Our~~During the six months ended October 31, 2020, net cash used in financing activities ~~primarily consist~~increased by $4.1 million to $5.8 million from $1.6 million of net cash ~~dividends paid on our preferred stock and proceeds from~~used in financing activities during the ~~exercise of stock options and the issuance of common stock under our ESPP.~~six months ended October 31, 2019.
27

Net cash used in financing activities for the ~~nine~~six months ended ~~January~~October 31, 2020 ~~was $2.2 million. This included $3.2 million in dividends paid on our preferred stock and $0.1~~consisted primarily of $4.4 million of ~~principal finance lease payments,~~cash used to repay in full a promissory note issued pursuant to the Paycheck Protection Program (as further described in Note 3 of the Notes to the Condensed Consolidated Financial Statements) and $2.2 million of cash used to pay preferred dividends to holders of our Series E Preferred Stock, partially offset by ~~$0.9~~$0.7 million of proceeds from the exercise of stock options and $0.2 million of proceeds from the issuance of common stock under our ESPP.

Net cash used in financing activities for the ~~nine~~six months ended ~~January~~October 31, 2019 ~~was $2.0 million. This included $3.2~~consisted primarily of cash used to pay preferred dividends to holders of our Series E Preferred Stock of $2.2 million, ~~in dividends paid on our preferred stock and $0.1 million of principal lease payments,~~partially offset by ~~$1.2~~$0.4 million of proceeds from the exercise of stock options and ~~$0.1~~$0.2 million of proceeds from the issuance of common stock under our ESPP.

26
Contractual Obligations

~~Except as set forth below, during~~During the ~~nine~~six months ended ~~January~~October 31, 2020, there were no material changes in our contractual obligations and commitments, as described in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended April 30, ~~2019.~~
In September 2019, we entered into an amendment of one of our facility operating lease agreements (as described in Note 3 to the accompanying unaudited condensed consolidated financial statements), pursuant to which the term of the lease was shortened from August 2023 to September 2019, which effectively terminated the lease and thereby reduced our future minimum lease payments under all non-cancelable operating leases by approximately $1.0 million.2020.

Critical Accounting Policies and Estimates

Our discussion and analysis of our consolidated financial ~~position~~condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We review our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. During the ~~nine~~six months ended ~~January~~October 31, 2020, there were no significant changes in our critical accounting policies as previously disclosed by us in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended April 30, ~~2019.~~2020.

Recent Accounting Pronouncements

~~Refer~~For a discussion of recent accounting pronouncements applicable to us, please refer to Note 2,Summary of Significant Accounting Policies, in the accompanying notes to our unaudited condensed consolidated financial ~~statements for a discussion of recent accounting pronouncements, including ASC 842, the new standard related to accounting for leases, which we adopted on May 1, 2019.~~statements.

Backlog

Our backlog represents, as of a point in time, future revenue from work not yet completed under signed contracts. As of ~~January~~October 31, 2020, our backlog was ~~approximately $58~~$67 million, as compared to ~~approximately $46~~$65 million as of April 30, ~~2019.~~2020. While we anticipate the majority of our backlog will be recognized as revenue over the next ~~twelve (12)~~12 months, our backlog is subject to a number of risks and uncertainties, including the risk that a customer timely cancels its commitments prior to our initiation of manufacturing services, in which case we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments; the risk that a customer may experience delays in its program(s) or otherwise, which could result in the postponement of anticipated manufacturing services; ~~and,~~ the risk that we may not successfully execute on all customer ~~projects,~~projects; or a potential negative impact from the COVID-19 global pandemic, any of which could have a negative impact on our liquidity, reported backlog and future revenue.

28
Item 3. Quantitative and Qualitative Disclosures About Market Risk

During the ~~nine~~six months ended ~~January~~October 31, 2020, there were no material changes in the market risks described in the “Quantitative and Qualitative Disclosures About Market Risk” section of our Annual Report on Form 10-K for the fiscal year ended April 30, ~~2019.~~2020.
27

Item 4. Controls And Procedures

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 principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~January~~October 31, 2020, the end of the period covered by this Quarterly Report. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of ~~January~~October 31, 2020.

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting, during the quarter ended ~~January~~October 31, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

2829

PART II—OTHER INFORMATION

Item 1. 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, 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 financial condition or results of ~~operations or financial position.~~operations.

Item 1A. Risk Factors

You should carefully consider the risks and uncertainties described below, together with all of the other information contained in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and the related notes thereto, before making a decision to invest in our securities. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently believe are not material, also may become important factors that affect us and impair our business operations. The occurrence of any of the events or developments discussed in the risk factors below could have a material and adverse impact on our business, financial condition, results of operations and cash flows and, in such case, our future prospects would likely be materially and adversely affected.
Risks Related to the COVID-19 Pandemic
Our business, financial condition, and results of operations may be adversely affected by global health epidemics, including the COVID-19 pandemic.
In March 2020, the World Health Organization declared the novel coronavirus disease (“COVID-19”) outbreak a global pandemic. COVID-19 has spread across the globe and is affecting worldwide economic activity. Any public health epidemic, including the COVID-19 pandemic, may affect our operations and those of third parties on which we rely, including our customers and suppliers. Our business, financial condition, and results of operations may be affected by: disruptions in our customers’ abilities to fund, develop, or bring to market products as anticipated; delays in or disruptions to the conduct of clinical trials by our customers; cancellations of contracts or confirmed orders from our customers; customers’ inability to maintain agreed upon payment terms; and the inability, difficulty, or additional cost or delays in obtaining key raw materials, components, and other supplies from our existing supply chain; among other factors caused by the COVID-19 pandemic. Our operations could be disrupted if some of our employees become ill or are otherwise absent from work as a result of the COVID-19 pandemic. Additionally, governmental restrictions, including travel restrictions, quarantines, shelter-in-place orders, curfews, business closures, new safety requirements or regulations, or restrictions on the import or export of certain materials, or other operational issues related to the COVID-19 pandemic may have an adverse effect on our business and results of operations. We ~~operate~~continue to monitor our operations and governmental recommendations and have made modifications for an indefinite period to our normal operations because of the COVID-19 pandemic, including requiring most non-production related employees to work remotely which may increase cyber security risks or create data accessibility concerns.
30
Risks Related to Our Business
We have a history of losses and may have future losses.
We have incurred net losses in most fiscal years since we began operations in 1981, including net losses of $10.5 million and $4.2 million for the fiscal years ended April 30, 2020 and 2019, respectively. As of October 31, 2020, we had an accumulated deficit of $564 million. We have only recently begun generating positive cash flows from operations. However, if we fail to continue generating sufficient revenue, we may not continue to generate positive cash flows from operations.
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. At October 31, 2020, we had $35.7 million in cash and cash equivalents. Although it is difficult to forecast all of our future liquidity requirements, we believe that our cash and cash equivalents on hand, combined with our projected cash flows from operations will be sufficient to fund our operations beyond one year after the date our unaudited condensed consolidated financial statements are issued.
In the event a ~~rapidly changing environment that involves~~customer timely cancels its commitments prior to our initiation of manufacturing services, we may be required to refund some or all of the advance payments made to us under those canceled commitments, which would have a negative impact on our liquidity, reported backlog and future revenue. Further, in the event we are unable to secure sufficient business 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 equity. These financings may not be available to us 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 and economic and market conditions. Further, global financial crises and economic downturns, including those caused by widespread public health crises such as the global novel coronavirus disease, may cause extreme volatility and disruptions in capital and credit markets, and may impact our ability to raise additional capital when needed on acceptable terms, if at all. 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.
A significant portion of our revenue comes from a limited number of customers.
Our revenue has historically been derived from a small number of customers. For example, for the fiscal years ended April 30, 2020, 2019 and 2018, we derived approximately 63%, 64% and 86% of our revenues from our top three customers, respectively. We continue to be dependent on a limited number of customers for a substantial majority of our revenue. The loss of, or a significant reduction of business from, any of our major customers could have a material adverse effect on our business, financial condition, and results of operations.
We generally do not have long-term customer contracts and our backlog cannot be relied upon as a future indicator of sales.
We generally do not have long-term contracts with our customers, and existing contracts and purchase commitments may be canceled under certain circumstances. As a result, we are exposed to market and competitive price pressures on every order, and our agreements with customers do not provide assurance of future sales. Our customers are not required to make minimum purchases and, in certain circumstances, may cease using our services at any time without penalty. Our backlog should not be relied on as a measure of anticipated demand or future revenue, because the orders constituting our backlog may be subject to changes in delivery schedules or cancellation without significant penalty to the customer. Any reductions, cancellations or deferrals in customer orders would negatively impact our business.
31
Our operating results will be adversely affected if we are unable to maximize our facility capacity utilization.
Our operating results are significantly influenced by our capacity utilization and, as such, if we are unable to utilize our facilities to capacity, our margins could be adversely affected, and our financial condition and results of operations will be adversely affected.
We rely on third parties to supply most of the necessary raw materials and supplies for the products we manufacture on behalf of our customers and our inability to obtain such raw materials or supplies may adversely impact our business, financial condition, and results of operations.
Our operations require various raw materials, including proprietary media, resins, buffers, and filters, in addition to numerous additional raw materials supplied primarily by third parties. We or our customers specify the raw materials and other items required to manufacture their product and, in some cases, specify the suppliers from whom we must purchase these raw materials. In certain instances, the raw materials and other items can only be supplied by a limited number of suppliers and, in some cases, a single source, or in limited quantities. If third-party suppliers do not supply raw materials or other items on a timely basis, it may cause a manufacturing run to be delayed or canceled which would adversely impact our financial condition and results of operations. Additionally, we do not have long-term supply contracts with any of our single source suppliers. If we experience difficulties acquiring sufficient quantities of required materials or products from our existing suppliers, or if our suppliers are found to be non-compliant with the FDA’s quality system regulation, CGMPs or other applicable laws or regulations, we would be required to find alternative suppliers. If our primary suppliers become unable or unwilling to perform, any resulting delays or interruptions in the supply of raw materials required to support our manufacturing of CGMP pharmaceutical-grade products would ultimately delay our manufacture of products for our customers, which could materially and adversely affect our financial condition and operating results. Furthermore, third-party suppliers may fail to provide us with raw materials and other items that meet the qualifications and specifications required by us or our customers. If third-party suppliers are not able to provide us with raw materials that meet our or our customers’ specifications on a timely basis, we may be unable to manufacture their product or it could prevent us from delivering products to our customers within required timeframes. Any such delay in delivering our products may create liability for us to our customers for breach of contract or cause us to experience order cancellations and loss of customers. In the event that we manufacture products with inferior quality components and raw materials, we may become subject to product liability claims caused by defective raw materials or components from a third-party supplier or from a customer, or our customer may be required to recall its products from the market.
All of our manufacturing facilities are situated in a single location in California, which increases our exposure to significant disruption to our business as a result of unforeseeable developments in a single geographic area.
We operate our manufacturing facilities in Tustin, California. It is possible that we could experience prolonged periods of reduced production due to unforeseen catastrophic events occurring in or around our facilities. It is also possible that operations could be disrupted due to other unforeseen circumstances such as power outages, explosions, fires, floods, earthquakes or accidents. As a result, we may be unable to shift manufacturing capabilities to alternate locations, accept materials from suppliers, meet customer shipment needs or address other severe consequences that may be encountered, and we may suffer damage to our reputation. Our financial condition and results of our operations could be materially adversely affected were such events to occur.
Our manufacturing services are highly complex, and if we are unable to provide quality and timely services to our customers, our business could suffer.
The manufacturing services we offer are highly complex, due in part to strict regulatory requirements. A failure of our quality control systems in our facilities could cause problems to arise in connection with facility operations for a variety of reasons, including equipment malfunction, viral contamination, failure to follow specific manufacturing instructions, protocols and standard operating procedures, problems with raw materials or environmental factors. Such problems could affect production of a single manufacturing run or a series of runs, requiring the destruction of products, or could halt manufacturing operations altogether. In addition, our failure to meet required quality standards may result in our failure to timely deliver products to our customers which, in turn, could damage our reputation for quality and service. Any such incident could, among other things, lead to increased costs, lost revenue, reimbursement to customers for lost drug substance, damage to and possibly termination of existing customer relationships, time and expense spent investigating the cause and, depending on the cause, similar losses with respect to other manufacturing runs. With respect to our commercial manufacturing, if problems are not discovered before the product is released to the market, we may be subject to regulatory actions, including product recalls, product seizures, injunctions to halt manufacture and distribution, restrictions on our operations, civil sanctions, including monetary sanctions, and criminal actions. In addition, such issues could subject us to litigation, the cost of which could be significant.
32
We may be unable to manage our future growth effectively, which could make it difficult to execute our business strategy.
We intend to continue to grow our business operations as demand for our services increases and increase the number of our employees to accommodate such potential growth, which may cause us to experience periods of rapid growth and expansion. This potential future growth could create a strain on our organizational, administrative and operational infrastructure, including manufacturing operations, quality control, technical support and other administrative functions. Our ability to manage our growth properly will require us to continue to improve our operational, financial and management controls.
As we expect our commercial operations and sales volume to grow, we will need to continue to increase our capacity for manufacturing, customer service, billing and general process improvements and expand our internal quality assurance program, among other things. We may also need to purchase additional equipment, some of which can take several months or more to procure, install and validate, and increase our manufacturing, maintenance, software and computing capacity to meet increased demand. We may not be able to successfully implement the increase in scale, expansion of personnel, purchase and validation of equipment or process enhancements, which could adversely affect our ability to increase revenues.
If we do not enhance our existing or introduce new service offerings in a timely manner, our offerings may become obsolete or noncompetitive over time, customers may not buy our offerings and our revenues and profitability may decline.
Demand for our manufacturing services may change in ways that we may not anticipate due to evolving industry standards and customer needs that are increasingly sophisticated and varied, as well as the introduction by others of new offerings and technologies that provide alternatives to our offerings. In the event we are unable to offer or enhance our service offerings or expand our manufacturing infrastructure to accommodate requests from our customers and potential customers, our offerings may become obsolete or noncompetitive over time, in which case our revenue and operating results would suffer. For example, if we are unable to respond to changes in the nature or extent of the technological or other needs of our customers through enhancing our offerings, our competition may develop offerings that are more competitive than ours and we could find it more difficult to renew or expand existing agreements or obtain new agreements. Potential innovations intended to facilitate enhanced or new offerings generally will require a substantial capital investment before we can determine their commercial viability, and we may not have financial resources sufficient to fund all desired innovations. Even if we succeed in creating enhanced or new offerings, however, they may still fail to result in commercially successful offerings or may not produce revenue in excess of our costs of development, and they may be rendered obsolete by changing customer preferences or the introduction by our competitors of offerings embodying new technologies or features. Finally, the marketplace may not accept our innovations due to, among other things, existing patterns of clinical practice, the need for regulatory clearance and/or uncertainty over market access or government or third-party reimbursement.
If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.
Our contract manufacturing operations involve the controlled use of hazardous materials and chemicals. We are subject to federal, state and local laws and regulations in the United States governing the use, manufacture, storage, handling and disposal of hazardous materials and chemicals. Although we believe that our procedures for using, handling, storing and disposing of these materials comply with legally prescribed standards, we may incur significant additional costs to comply with applicable laws in the future. Also, even if we are in compliance with applicable laws, we cannot completely eliminate the risk of contamination or injury resulting from hazardous materials or chemicals. As a result of any such contamination or injury, we may incur liability or local, city, state or federal authorities may curtail the use of these materials and interrupt our business operations. In the event of an accident, we could be held liable for damages or penalized with fines, and the liability could exceed our resources. Compliance with applicable environmental laws and regulations is expensive, and current or future environmental regulations may impair our contract manufacturing operations, which could materially harm our business, financial condition and results of operations.
33
Potential product liability claims, errors and omissions claims in connection with services we perform and potential liability under indemnification agreements between us and our officers and directors could adversely affect us.
We manufacture products intended for use in humans. These activities could expose us to risk of liability for personal injury or ~~cash flows. For~~death to persons using such products. We seek to reduce our potential liability through measures such as contractual indemnification provisions with customers (the scope of which may vary by customer, and the performances of which are not secured) and insurance maintained by us and our customers. We could be materially adversely affected if we are required to pay damages or incur defense costs in connection with a ~~detailed discussion~~claim that is outside the scope of the ~~risks~~indemnification agreements, if the indemnity, although applicable, is not performed in accordance with its terms or if our liabilities exceed the amount of applicable insurance or indemnity. In addition, we could be held liable for errors and omissions in connection with the services we perform. We currently maintain product liability and errors and omissions insurance with respect to these risks. Our insurance coverage may not be adequate or insurance coverage may not continue to be available on terms acceptable to us.
We also indemnify our officers and directors for certain events or occurrences while the officer or director is serving at our request in such capacity. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited. Although we have a director and officer insurance policy that covers a portion of any potential exposure, we could be materially and adversely affected if we are required to pay damages or incur legal costs in connection with a claim above such insurance limits.
Any claims beyond our insurance coverage limits, or that are otherwise not covered by our insurance, may result in substantial costs and a reduction in our available capital resources.
We maintain property insurance, employer’s liability insurance, product liability insurance, general liability insurance, business interruption insurance, and directors’ and officers’ liability insurance, among others. Although we maintain what we believe to be adequate insurance coverage, potential claims may exceed the amount of insurance coverage or may be excluded under the terms of the policy, which could cause an adverse effect on our business, financial condition and results from operations. Generally, we would be at risk for the loss of inventory that is not within customer specifications. These amounts could be significant. In addition, in the future we may not be able to obtain adequate insurance coverage or we may be required to pay higher premiums and accept higher deductibles in order to secure adequate insurance coverage.
Our services and our customers’ products may infringe on or misappropriate the intellectual property rights of third parties.
Any claims that our services infringe the rights of third parties, including claims arising from any of our customer engagements, regardless of their merit or resolution, could be costly and may divert the efforts and attention of our management and technical personnel. We may not prevail in such proceedings, given the complex technical issues and inherent uncertainties in intellectual property litigation. If such proceedings result in an adverse outcome, we could be required, among other things, to pay substantial damages, discontinue the use of the infringing technology, expend significant resources to develop non-infringing technology, license such technology from the third party claiming infringement (which license may not be available on commercially reasonable terms or at all) and/or cease the manufacture, use or sale of the infringing processes or offerings, any of which could have a material adverse effect on our business.
In addition, our customers’ products may be subject to claims of intellectual property infringement and such claims could materially affect our business ~~please refer~~if their products cease to ~~Part I, Item IA, “Risk Factors”~~be manufactured and they have to discontinue the use of the infringing technology which we may provide. Any of the foregoing could affect our ability to compete or could have a material adverse effect on our business, financial condition and results of operations.
34
We depend on key personnel and the loss of key personnel could harm our business and results of operations.
We depend on our ability to attract and retain qualified scientific and technical employees, as well as a number of key executives. These employees may voluntarily terminate their employment with us at any time. We may not be able to retain key personnel, or attract and retain additional qualified employees. We do not maintain key-man or similar policies covering any of our senior management or key personnel. Our inability to attract and retain key personnel would have a material adverse effect on our business.
We have federal and state net operating loss, or NOL, carry forwards which, if we were to become profitable, could be used to offset/defer federal and state income taxes. Our ability to use such carry forwards to offset future taxable income may be subject to certain limitations related to changes in ownership of our ~~Annual Report on Form 10-K for~~stock and decisions by California and other states to limit or suspend NOL carry forwards.
As of April 30, 2020, we had federal and state NOL carry forwards of approximately $427 million and $277 million, respectively. These NOL carry forwards could potentially be used to offset certain future federal and state income tax liabilities. The federal net operating loss carry forwards generated prior to January 1, 2018 expire in fiscal years 2021 through 2038. The federal net operating loss generated after January 1, 2018 of $19.8 million can be carried forward indefinitely. Net operating losses generated after 2017 through 2020 may offset future taxable income without limitation. Utilization of net operating losses generated subsequent to 2020 are limited to 80% of future taxable income. However, utilization of NOL carry forwards may be subject to a substantial annual limitation pursuant to Section 382 of the Internal Revenue Code of 1986, as amended, as well as similar state provisions due to ownership changes that have occurred previously or that could occur in the future. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. A Section 382 analysis was completed as of the fiscal year ended April 30, ~~2019. There~~2019 and we subsequently reviewed such activity through April 30, 2020 and determined that no such change in ownership has occurred. However, ownership changes occurring subsequent to April 30, 2020 may impact the utilization of our NOL carry forwards and other tax attributes. Additionally, states may impose other limitations on the use of state NOL carry forwards. We are subject to California’s recent suspension of NOL carry forwards for the taxable years beginning in 2020 and lasting through 2022. Any limitation may result in expiration of a portion of the carry forwards before utilization. If we were not able to utilize our carry forwards, we would be required to use our cash resources to pay taxes that would otherwise have been offset, thereby reducing our liquidity.
We may be subject to various litigation claims and legal proceedings.
We, as well as certain of our directors and officers, may be subject to claims or lawsuits during the ordinary course of business. Regardless of the outcome, these lawsuits may result in significant legal fees and expenses and could divert management’s time and other resources. If the claims contained in these lawsuits are successfully asserted against us, we could be liable for damages and be required to alter or cease certain of our business practices. Any of these outcomes could cause our business, financial performance and cash position to be negatively impacted.
We have become increasingly dependent on information technology and any breakdown, interruption or breach of our information technology systems could subject us to liability or interrupt the operation of our business, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We are increasingly dependent upon sophisticated information technology systems and infrastructure in connection with the conduct of our business. We must constantly update our information technology infrastructure and our various current information technology systems throughout the organization may not continue to meet our current and future business needs. Furthermore, modification, upgrade or replacement of such systems may be costly. In addition, due to the size and complexity of these systems, any breakdown, interruption, corruption or unauthorized access to or cyber-attack on these systems could create system disruptions, shutdowns or unauthorized disclosure of confidential information. While we attempt to take appropriate security and cyber-security measures to protect our data and information technology systems and to prevent such breakdowns and unauthorized breaches and cyber-attacks, these measures may not be successful and these breakdowns and breaches in, or attacks on, our systems and data may not be prevented. Such breakdowns, breaches or attacks may cause business interruption and could have a material adverse effect on our business, financial condition, results of operations and cash flows and could cause the market value of our common shares to decline, and we may suffer financial damage or other loss, including fines or criminal penalties because of lost or misappropriated information.
35
We may seek to grow our business through acquisitions of complementary businesses, and the failure to manage acquisitions, or the failure to integrate them with our existing business, could harm our financial condition and operating results.
From time to time, we may consider opportunities to acquire other companies, products or technologies that may enhance our manufacturing capabilities, expand the breadth of our markets or customer base, or advance our business strategies. Potential acquisitions involve numerous risks, including: problems assimilating the acquired service offerings, products or technologies; issues maintaining uniform standards, procedures, quality control and policies; unanticipated costs associated with acquisitions; diversion of management’s attention from our existing business; risks associated with entering new markets in which we have limited or no ~~material~~experience; increased legal and accounting costs relating to the acquisitions or compliance with regulatory matters; and unanticipated or undisclosed liabilities of any target.
We have no current commitments with respect to any acquisition. We do not know if we will be able to identify acquisitions we deem suitable, whether we will be able to successfully complete any such acquisitions on favorable terms or at all, or whether we will be able to successfully integrate any acquired service offerings, products or technologies. Our potential inability to integrate any acquired service offerings, products or technologies effectively may adversely affect our business, operating results and financial condition.
Risks Related to Our Customers
The consumers of the products we manufacture for our customers may significantly influence our business, financial condition, and results of operations.
We depend on, and have no control over, consumer demand for the products we manufacture for our customers. Consumer demand for our customers’ products could be adversely affected by, among other things, delays in health regulatory approval, the inability of our customers to demonstrate the efficacy and safety of their products, the loss of patent and other intellectual property rights protection, the emergence of competing or alternative products, including generic drugs, the degree to which private and government payment subsidies for a particular product offset the cost to consumers and changes in the marketing strategies for such products and the outbreak of a pandemic such as the COVID-19 pandemic. Additionally, if the products we manufacture for our customers do not gain market acceptance, our revenues and profitability may be adversely affected.
We believe that continued changes to the ~~risk factors as previously disclosed~~healthcare industry, including ongoing healthcare reform, adverse changes in government or private funding of healthcare products and services, legislation or regulations governing the privacy of patient information or patient access to care, or the delivery, pricing or reimbursement of pharmaceuticals and healthcare services or mandated benefits, may cause healthcare industry participants to purchase fewer services from us or influence the price that others are willing to pay for our ~~Annual Report on Form 10-K, except as follows:~~services. Changes in the healthcare industry’s pricing, selling, inventory, distribution or supply policies or practices could also significantly reduce our revenue and profitability.
If production volumes of key products that we manufacture for our customers decline, our financial condition and results of operations may be adversely affected.
Our customers’ failure to receive or maintain regulatory approval for their product candidates could negatively impact our revenues and profitability.
Our success depends upon the regulatory approval of the products we manufacture. As such, if our customers experience a delay in, or failure to receive, approval for any of their product candidates or fail to maintain regulatory approval of their products and we are not able to manufacture these products, our revenue and profitability could be adversely affected. Additionally, if the FDA or a comparable foreign regulatory authority does not approve of our facilities for the manufacture of a customer product or if it withdraws such approval in the future, our customers may choose to identify alternative manufacturing facilities and/or relationships, which could significantly impact our ability to expand our manufacturing capacity and capabilities and achieve profitability.
36

~~Outbreaks of communicable infections, such as the global coronavirus,~~We depend on spending and demand from our customers for our contract manufacturing and development services and any reduction in spending or demand could ~~cause disruptions in~~have a material adverse effect on our business.

The ~~recent global outbreak~~amount that our customers spend on the development and manufacture of their products or product candidates, particularly the ~~coronavirus~~amount our customers choose to spend on outsourcing these services to us, substantially impacts our revenue and profitability. The outcomes of our customers’ research, development and marketing also significantly influence the amount that our customers choose to spend on our services and offerings. Our customers determine the amounts that they will spend on our services based upon, among other things, the clinical and market success of their products, available resources, access to capital and their need to develop new products which, in turn, depend upon a number of other factors, including their competitors’ research, development and product initiatives and the anticipated market for any new products, as well as clinical and reimbursement scenarios for specific products and therapeutic areas. Further, increasing consolidation in the pharmaceutical industry may impact such spending, particularly in the event that any of our customers choose to develop or acquire integrated manufacturing operations. Any reduction in customer spending on biologics development and related services as a result of these and other factors could have a ~~negative impact~~material adverse effect on our ~~revenues~~business, financial condition, and results of operations.
If we are unable to protect the confidentiality of our customers’ proprietary information, we may be subject to claims.
Many of the formulations used and processes developed by us in the manufacture of our customers’ products are subject to trade secret protection, patents or other intellectual property protections owned or licensed by such customer. While we make significant efforts to protect our customers’ proprietary and confidential information, including requiring our employees to enter into agreements protecting such information, if any of our employees breaches the non-disclosure provisions in such agreements, or if our customers make claims that their proprietary information has been disclosed, our reputation may suffer damage and we may become subject to legal proceedings that could require us to incur significant expense and divert our management’s time, attention and resources.
Risks Related to the Industry in Which We Operate
Failure to comply with existing and future regulatory requirements could adversely affect our business, financial condition, and results of operations.
Our industry is highly regulated. We are required to comply with the regulatory requirements of various local, state, provincial, national and international regulatory bodies having jurisdiction in the countries or localities in which we manufacture products or in which our customers’ products are distributed. In particular, we are subject to laws and regulations concerning development, testing, manufacturing processes, equipment and facilities, including compliance with CGMPs, import and export, and product registration and listing, among other things. As a result, most of our facilities are subject to regulation by the FDA, as well as regulatory bodies of other jurisdictions where our customers have marketing approval for their products including, but not limited to, the EMA, ANVISA and/or Health Canada, depending on the countries in which our customers market and sell the products we manufacture on their behalf. As we expand our operations, we may be exposed to more complex and new regulatory and administrative requirements and legal risks, any of which may require expertise in which we have little or no experience. It is possible that compliance with new regulatory requirements could impose significant compliance costs on us. Such costs could have a material adverse effect on our business, financial condition and results of operations.
These regulatory requirements impact many aspects of our operations, including manufacturing, developing, storage, distribution, import and export and record keeping related to customers’ products. Noncompliance with any applicable regulatory requirements can result in government refusal to approve: (i) facilities for testing or manufacturing products or (ii) products for commercialization. The FDA and other regulatory agencies can delay, limit or deny approval for many reasons, including:
· changes to the regulatory approval process, including new data requirements for product candidates in those jurisdictions, including the United States, in which our customers may be seeking approval;
· that a customer’s product candidate may not be deemed to be safe or effective;
· the ability of the regulatory agency to provide timely responses as a result of its resource constraints; and
· that the manufacturing processes or facilities may not meet the applicable requirements.
37
In addition, if new legislation or regulations are enacted or existing legislation or regulations are amended or are interpreted or enforced differently, we may be required to obtain additional approvals or operate according to different manufacturing or operating ~~results.~~standards. This ~~outbreak~~may require a change in our development and manufacturing techniques or additional capital investments in our facilities. Any related costs may be significant. If we fail to comply with applicable regulatory requirements in the future, then we may be subject to warning letters and/or civil or criminal penalties and fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, restrictions on the import and export of our products, debarment, exclusion, disgorgement of profits, operating restrictions and criminal prosecution and the loss of contracts and resulting revenue losses. Inspections by regulatory authorities that identify any deficiencies could result in ~~disruptions~~remedial actions, production stoppages or facility closure, which would disrupt the manufacturing process and ~~damage~~supply of product to our ~~business,~~customers. In addition, such failure to comply could expose us to contractual and product liability claims, including claims by customers for reimbursement for lost or damaged active pharmaceutical ingredients or recall or other corrective actions, the cost of which could be significant.
In addition, certain products we manufacture must undergo pre-clinical and clinical evaluations relating to product safety and efficacy before they are approved as commercial therapeutic products. The regulatory authorities having jurisdiction in the countries in which our customers intend to market their products may delay or put on hold clinical trials or delay approval of a product or determine that the product is not approvable. The FDA or other regulatory agencies can delay approval of a drug if our manufacturing facility, including any newly commissioned facility, is not able to demonstrate compliance with CGMPs, pass other aspects of pre-approval inspections or properly scale up to produce commercial supplies. The FDA and comparable government authorities having jurisdiction in the countries in which we or our customers intend to market their products have the authority to withdraw product approval or suspend manufacture if there are significant problems with raw materials or supplies, quality control and assurance or the product we manufacture is adulterated or misbranded. If our manufacturing facilities and services are not in compliance with FDA and comparable government authorities, we may be unable to obtain or maintain the necessary approvals to continue manufacturing products for our customers, which would materially adversely affect our financial condition and results of operations.
We operate in a highly competitive market and competition may adversely affect our business.
We operate in a market that is highly competitive. Our competition in the contract manufacturing market includes full-service contract manufacturers and large pharmaceutical companies offering third-party manufacturing services to fill their excess capacity. We may also compete with the internal operations of those pharmaceutical companies that choose to source their product offerings internally. In addition, most of our competitors may have substantially greater financial, marketing, technical or other resources than we do. Moreover, additional competition may emerge, particularly in lower-cost jurisdictions such as India and China, which could, among other things, result in a decrease in the fees paid for our services, which may adversely affect our financial condition and results of operations.
Risks Related to the Ownership of Our Common Stock
A significant number of shares of our common stock are issuable pursuant to outstanding options, restricted stock units and convertible securities, and we may issue additional shares of common stock in the future. Sales or conversions of these shares will dilute the interests of other security holders and may depress the price of our common stock.
As of October 31, 2020, an aggregate of 6,728,623 shares of common stock were reserved for issuance under outstanding stock options and restricted stock units, or available for future issuance under our equity incentive plans. Additionally, as of October 31, 2020, there were 1,116,538 shares of common stock reserved for and available for issuance under our ESPP and up to 6,826,435 shares of common stock issuable upon conversion of our outstanding Series E Preferred Stock. The issuance of additional shares of common stock upon the exercise, release or conversion, as applicable, of any of the foregoing securities, or the perception that such issuances may occur, would have a dilutive impact on other stockholders and could have a material negative effect on the market price of our common stock.
38
Our highly volatile stock price may adversely affect the liquidity of our common stock.
The market price of our common stock has generally been highly volatile and is likely to continue to be highly volatile. For instance, the market price of our common stock has ranged from $2.24 to $8.44 per share over the last three fiscal years ended April 30, 2020.
The market price of our common stock may be significantly impacted by many factors including the following:
· our loss of a significant customer;
· significant changes in our financial results or that of our competitors, including our ability to continue as a going concern;
· our ability to meet our revenue guidance;
· the offering and sale of shares of our common stock, either sold at market prices or at a discount under an equity transaction;
· significant changes in our capital structure;
· published reports by securities analysts;
· announcements of partnering transactions, joint ventures, strategic alliances, and any other transaction that involves the development, sale or use of our technologies or competitive technologies;
· regulatory developments, including possible delays in the regulatory approval of our customers’ products which we manufacture;
· outcomes of significant litigation, disputes and other legal or regulatory proceedings;
· general stock trends in the biotechnology and pharmaceutical industry sectors;
· public concerns as to the safety and effectiveness of the products we manufacture;
· economic trends and other external factors including, but not limited to, interest rate fluctuations, economic recession, inflation, foreign market trends, national crisis, and disasters; and
· healthcare reimbursement reform and cost-containment measures implemented by government agencies.
These and other external factors have caused ~~by both~~and may continue to cause the ~~negative impact~~market price and demand for our common stock to fluctuate substantially, which may limit or prevent investors from readily selling their shares of common stock, and may otherwise negatively affect the liquidity of our common stock.
Anti-takeover provisions in our certificate of incorporation and amended and restated bylaws as well as provisions of Delaware law could prevent or delay a change in control of our company, even if such change in control would be beneficial to our stockholders.
Provisions of our certificate of incorporation and amended and restated bylaws could discourage, delay or prevent a merger, acquisition or other change in control of our company, even if such change in control would be beneficial to our stockholders. These include: authorizing the issuance of “blank check” preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; no provision for the use of cumulative voting for the election of directors; limiting the ability of stockholders to call special meetings; requiring all stockholder actions to be taken at a meeting of our stockholders (i.e. no provision for stockholder action by written consent); and establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.
In addition, the Delaware General Corporation Law prohibits us, except under specified circumstances, from engaging in any mergers, significant sales of stock or assets or business combinations with any stockholder or group of stockholders who owns at least 15% of our common stock.
39
Our bylaws, as amended, provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain ~~raw materials, supplies~~a favorable judicial forum for disputes with us or our directors, officers or employees.
Our bylaws, as amended, provide that, unless we consent in writing to an alternative forum, the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of a fiduciary duty owed by any of our directors, officers, or other employees to us, any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws, any action to interpret, apply, enforce, or determine the validity of our certificate of incorporation or bylaws, or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and ~~component parts necessary~~our directors, officers and other employees.
We do not intend to ~~operate~~pay dividends on our ~~CDMO~~common stock, so any returns will be limited to the value of our stock.
We have never declared or paid any cash dividend on our common stock. We currently anticipate that we will retain future earnings, if any, for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the ~~negative impact on our ability~~foreseeable future. Any return to ~~operate our manufacturing facilities should~~stockholders will therefore be limited to the coronavirus spread more broadly within Southern California thereby creating an increased risk of exposure to our manufacturing workforce which cannot operate our facilities remotely. While we continue to develop plans to help mitigate the negative impactappreciation of the ~~coronavirus to~~trading price of our common stock.
If securities or industry analysts do not publish research reports about us, or if they issue adverse opinions about our business, ~~the efforts will not completely prevent~~our stock price and trading volume could decline.
The research and reports that industry or securities analysts publish about us or our business ~~from being adversely affected, and~~will influence the ~~longer~~market for our common stock. If one or more analysts who cover us issues an adverse opinion about us, our stock price would likely decline. If one or more of these analysts ceases research coverage of us or fails to regularly publish reports on us, we could lose visibility in the ~~outbreak impacts supply and demand and~~financial markets which, in turn, could cause our stock price or trading volume to decline. Further, if we fail to meet the ~~more broadly the outbreak spreads the more negative the impact it will have on~~market expectations of analysts who follow our ~~business, revenues and operating results, and the more limited~~stock, our ~~ability will be to try and make up for delayed or lost revenues.~~stock price likely would decline.

Item 6. Exhibits

(a) Exhibits:

31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. *

31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. *

32 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *

101.INS XBRL Taxonomy Extension Instance Document. *

101.SCH XBRL Taxonomy Extension Schema Document. *

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document. *

101.DEF XBRL Taxonomy Extension Definition Linkbase Document. *

101.LAB XBRL Taxonomy Extension Label Linkbase Document. *

101.PRE XBRL Presentation Extension Linkbase Document. *
~~__________________~~_________________
* Filed herewith.
* Filed herewith.

2940

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

AVID BIOSERVICES, INC.

Date:~~March 10,~~December 2, 2020 By:~~/s/ Richard B. Hancock~~ /s/ Nicholas S. Green
~~Richard B. Hancock~~Nicholas S. Green
~~Interim~~ President and Chief Executive Officer
(Principal Executive Officer)

Date:~~March 10,~~December 2, 2020 By:~~/s/~~ /s/ Daniel R. Hart
Daniel R. Hart
Chief Financial Officer
(signed both as an officer duly authorized to sign on behalf of the Registrant and ~~principal financial officer~~Principal Financial Officer and ~~chief accounting officer)~~Principal Accounting Officer)

3041

	Three Months Ended January 31,						Nine Months Ended January 31,
	2020			2019			2020			2019

Revenues	$	13,585		$	13,781		$	47,152		$	36,548
Cost of revenues		12,800			11,731			41,921			32,972
Gross profit		785			2,050			5,231			3,576

Operating expenses:
Selling, general and administrative		2,996			3,242			10,989			9,273
Loss on lease termination		–			–			355			–
Total operating expenses		2,996			3,242			11,344			9,273

Operating loss		(2,211	)		(1,192	)		(6,113	)		(5,697	)
Interest and other income, net		107			9			415			190
Loss from continuing operations before income taxes		(2,104	)		(1,183	)		(5,698	)		(5,507	)
Income tax benefit		–			44			–			217
Loss from continuing operations, net of tax		(2,104	)		(1,139	)		(5,698	)		(5,290	)
Income from discontinued operations, net of tax		–			–			–			739
Net loss	$	(2,104	)	$	(1,139	)	$	(5,698	)	$	(4,551	)

Comprehensive loss	$	(2,104	)	$	(1,139	)	$	(5,698	)	$	(4,551	)

Series E preferred stock accumulated dividends		(1,442	)		(1,442	)		(3,604	)		(3,604	)

Net loss attributable to common stockholders	$	(3,546	)	$	(2,581	)	$	(9,302	)	$	(8,155	)

Basic and diluted net (loss) income per common share attributable to common stockholders:
Continuing operations	$	(0.06	)	$	(0.05	)	$	(0.17	)	$	(0.16	)
Discontinued operations		–			–			–			0.01
Net loss per share attributable to common stockholders	$	(0.06	)		(0.05	)	$	(0.17	)	$	(0.15	)

Weighted average basic and diluted shares outstanding		56,404			56,069			56,275			55,949

	Three Months Ended January 31, 2020
	Preferred Stock				Common Stock				Additional Paid-In			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital			Deficit			Equity
Balance at October 31, 2019		1,648	$	2		56,338	$	56	$	613,325		$	(564,199	)	$	49,184
Series E preferred stock dividends paid ($0.65625 per share)		–		–		–		–		(1,081	)		–			(1,081	)
Exercise of stock options		–		–		120		–		484			–			484
Vesting of restricted stock units		–		–		21		–		–			–			–
Stock-based compensation expense		–		–		–		–		595			–			595
Net loss		–		–		–		–		–			(2,104	)		(2,104	)
Balance at January 31, 2020		1,648	$	2		56,479	$	56	$	613,323		$	(566,303	)	$	47,078

	Three Months Ended January 31, 2019
	Preferred Stock				Common Stock				Additional Paid-In			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital			Deficit			Equity
Balance at October 31, 2018		1,648	$	2		56,063	$	56	$	614,541		$	(559,802	)	$	54,797
Series E preferred stock dividends paid ($0.65625 per share)		–		–		–		–		(1,081	)		–			(1,081	)
Exercise of stock options		–		–		9		–		29			–			29
Stock-based compensation expense		–		–		–		–		458			–			458
Net loss		–		–		–		–		–			(1,139	)		(1,139	)
Balance at January 31, 2019		1,648	$	2		56,072	$	56	$	613,947		$	(560,941	)	$	53,064

	Nine Months Ended January 31, 2020
	Preferred Stock				Common Stock				Additional Paid-In			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital			Deficit			Equity
Balance at April 30, 2019		1,648	$	2		56,136	$	56	$	613,615		$	(560,605	)	$	53,068
Series E preferred stock dividends paid ($1.96875 per share)		–		–		–		–		(3,244	)		–			(3,244	)
Common stock issued under employee stock purchase plan		–		–		47		–		187			–			187
Exercise of stock options		–		–		247		–		916			–			916
Vesting of restricted stock units		–		–		49		–		–			–			–
Stock-based compensation expense		–		–		–		–		1,849			–			1,849
Net loss		–		–		–		–		–			(5,698	)		(5,698	)
Balance at January 31, 2020		1,648	$	2		56,479	$	56	$	613,323		$	(566,303	)	$	47,078

	Three Months Ended October 31,						Six Months Ended October 31,
	2020			2019			2020			2019
Revenues	$	21,064		$	18,313		$	46,456		$	33,567
Cost of revenues		14,646			14,953			31,494			29,121
Gross profit		6,418			3,360			14,962			4,446

Operating expenses:
Selling, general and administrative		4,166			3,534			7,991			7,993
Loss on lease termination		–			355			–			355
Total operating expenses		4,166			3,889			7,991			8,348

Operating income (loss)		2,252			(529	)		6,971			(3,902	)
Interest and other income, net		32			99			43			308
Net income (loss)	$	2,284		$	(430	)	$	7,014		$	(3,594	)

Comprehensive income (loss)	$	2,284		$	(430	)	$	7,014		$	(3,594	)

Series E preferred stock accumulated dividends		(1,442	)		(1,442	)		(2,523	)		(2,523	)

Net income (loss) attributable to common stockholders	$	842		$	(1,872	)	$	4,491		$	(6,117	)

Net income (loss) per share attributable to common stockholders:
Basic	$	0.01		$	(0.03	)	$	0.08		$	(0.11	)
Diluted	$	0.01		$	(0.03	)	$	0.08		$	(0.11	)

Weighted average common shares outstanding:
Basic		56,660			56,253			56,592			56,210
Diluted		57,248			56,253			57,073			56,210

	Nine Months Ended January 31, 2019
	Preferred Stock				Common Stock				Additional Paid-In			Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Capital			Deficit			Equity
Balance at April 30, 2018		1,648	$	2		55,689	$	55	$	614,810		$	(559,129	)	$	55,738
Series E preferred stock dividends paid ($1.96875 per share)		–		–		–		–		(3,244	)		–			(3,244	)
Cumulative-effect adjustment pursuant to adoption of ASC 606		–		–		–		–		–			2,739			2,739
Common stock issued under employee stock purchase plan		–		–		40		–		114			–			114
Exercise of stock options		–		–		343		1		1,187			–			1,188
Stock-based compensation expense		–		–		–		–		1,080			–			1,080
Net loss		–		–		–		–		–			(4,551	)		(4,551	)
Balance at January 31, 2019		1,648	$	2		56,072	$	56	$	613,947		$	(560,941	)	$	53,064

	Three Months Ended October 31, 2020
	Preferred Stock				Common Stock				Additional						Total
	Shares		Amount		Shares		Amount		Paid-In Capital			Accumulated Deficit			Stockholders’ Equity
Balance at July 31, 2020		1,648	$	2		56,601	$	56	$	612,822		$	(566,341	)	$	46,539
Series E preferred stock dividends paid ($0.65625 per share)		–		–		–		–		(1,081	)		–			(1,081	)
Exercise of stock options		–		–		121		1		618			–			619
Stock-based compensation expense		–		–		–		–		1,025			–			1,025
Net income		–		–		–		–		–			2,284			2,284
Balance at October 31, 2020		1,648	$	2		56,722	$	57	$	613,384		$	(564,057	)	$	49,386

	Three Months Ended October 31, 2019
	Preferred Stock				Common Stock				Additional						Total
	Shares		Amount		Shares		Amount		Paid-In Capital			Accumulated Deficit			Stockholders’ Equity
Balance at July 31, 2019		1,648	$	2		56,238	$	56	$	613,395		$	(563,769	)	$	49,684
Series E preferred stock dividends paid ($0.65625 per share)		–		–		–		–		(1,081	)		–			(1,081	)
Common stock issued under Employee Stock Purchase Plan		–		–		47		–		187			–			187
Exercise of stock options		–		–		53		–		173			–			173
Stock-based compensation expense		–		–		–		–		651			–			651
Net loss		–		–		–		–		–			(430	)		(430	)
Balance at October 31, 2019		1,648	$	2		56,338	$	56	$	613,325		$	(564,199	)	$	49,184

	Six Months Ended October 31, 2020
	Preferred Stock				Common Stock				Additional						Total
	Shares		Amount		Shares		Amount		Paid-In Capital			Accumulated Deficit			Stockholders’ Equity
Balance at April 30, 2020		1,648	$	2		56,483	$	56	$	612,909		$	(571,071	)	$	41,896
Series E preferred stock dividends paid ($1.3125 per share)		–		–		–		–		(2,162	)		–			(2,162	)
Common stock issued under Employee Stock Purchase Plan		–		–		32		–		179			–			179
Exercise of stock options		–		–		141		1		703			–			704
Common stock issued upon vesting of restricted stock units		–		–		66		–		–			–			–
Stock-based compensation expense		–		–		–		–		1,755			–			1,755
Net income		–		–		–		–		–			7,014			7,014
Balance at October 31, 2020		1,648	$	2		56,722	$	57	$	613,384		$	(564,057	)	$	49,386

	Six Months Ended October 31, 2019
	Preferred Stock				Common Stock				Additional						Total
	Shares		Amount		Shares		Amount		Paid-In Capital			Accumulated Deficit			Stockholders’ Equity
Balance at April 30, 2019		1,648	$	2		56,136	$	56	$	613,615		$	(560,605	)	$	53,068
Series E preferred stock dividends paid ($1.3125 per share)		–		–		–		–		(2,162	)		–			(2,162	)
Common stock issued under Employee Stock Purchase Plan		–		–		47		–		187			–			187
Exercise of stock options		–		–		127		–		431			–			431
Common stock issued upon vesting of restricted stock units		–		–		28		–		–			–			–
Stock-based compensation expense		–		–		–		–		1,254			–			1,254
Net loss		–		–		–		–		–			(3,594	)		(3,594	)
Balance at October 31, 2019		1,648	$	2		56,338	$	56	$	613,325		$	(564,199	)	$	49,184

	Six Months Ended October 31,
	2020			2019

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	7,014		$	(3,594	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		1,684			1,467
Stock-based compensation		1,755			1,254
Loss on lease termination		–			355
Loss on disposal of assets		–			13
Changes in operating assets and liabilities:
Accounts receivable		(2,962	)		(48	)
Contract assets		(2,043	)		(1,783	)
Inventory		1,160			(1,252	)
Prepaid expenses and other assets		(293	)		(217	)
Accounts payable		(2,103	)		(86	)
Accrued payroll and related costs		1,831			(180	)
Contract liabilities		2,330			7,548
Other accrued expenses and liabilities		(240	)		(61	)
Net cash provided by operating activities		8,133			3,416

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(2,980	)		(985	)
Net cash used in investing activities		(2,980	)		(985	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options		704			431
Proceeds from issuance of common stock under employee stock purchase plan		179			187
Repayment of note payable		(4,379	)		–
Dividends paid on preferred stock		(2,162	)		(2,162	)
Principal payments on finance lease		(93	)		(78	)
Net cash used in financing activities		(5,751	)		(1,622	)
Net (decrease) increase in cash, cash equivalents and restricted cash		(598	)		809
Cash, cash equivalents and restricted cash, beginning of period		36,612			33,501
Cash, cash equivalents and restricted cash, end of period	$	36,014		$	34,310

Supplemental disclosures of non-cash activities:
Unpaid purchases of property and equipment	$	1,831		$	1,860

	October 31, 2020		April 30, 2020		October 31, 2019		April 30, 2019
Cash and cash equivalents	$	35,664	$	36,262	$	33,960	$	32,351
Restricted cash		350		350		350		1,150
Total cash, cash equivalents and restricted cash	$	36,014	$	36,612	$	34,310	$	33,501

	Three Months Ended October 31,				Six Months Ended October 31,
	2020		2019		2020		2019
Manufacturing revenues	$	18,449	$	15,989	$	42,512	$	28,897
Process development revenues		2,615		2,324		3,944		4,670
Total revenues	$	21,064	$	18,313	$	46,456	$	33,567

	January 31, 2020		April 30, 2019		January 31, 2019		April 30, 2018
Cash and cash equivalents	$	30,687	$	32,351	$	27,758	$	42,265
Restricted cash		350		1,150		1,150		1,150
Total cash, cash equivalents and restricted cash	$	31,037	$	33,501	$	28,908	$	43,415

Description		Estimated Useful Life
Leasehold improvements		Shorter of estimated useful life or lease term
Laboratory and manufacturing equipment		5 – 10 years
Furniture, fixtures and office equipment		5 – 10 years
Computer equipment and software		3 – 5 years

	January 31, 2020			April 30, 2019			October 31, 2020			April 30, 2020
Leasehold improvements	$	21,130		$	20,574		$	21,175		$	21,130
Laboratory and manufacturing equipment		14,968			12,858			15,980			15,033
Computer equipment and software		4,931			4,644			5,541			5,334
Furniture, fixtures and office equipment		685			528			715			685
Construction-in-progress		1,963			1,590			6,147			2,564
Total property and equipment, gross	$	43,677		$	40,194		$	49,558		$	44,746
Less: accumulated depreciation and amortization		(16,827	)		(14,569	)		(19,326	)		(17,641	)
Total property and equipment, net	$	26,850		$	25,625		$	30,232		$	27,105

					Three Months Ended October 31,				Six Months Ended October 31,
	Three Months Ended January 31, 2020		Nine Months Ended January 31, 2020		2020		2019		2020		2019
Operating lease cost	$	798	$	2,570	$	788	$	880	$	1,576	$	1,772
Variable lease cost						199		170		320		326
Short-term lease cost		83		83		98		–		190		–
Variable lease cost		155		488
Total lease cost	$	1,036	$	3,141	$	1,085	$	1,050	$	2,086	$	2,098

Fiscal Year Ending April 30,	Total
2020 (remaining period)	$	735
2021		2,972
2022		2,995
2023		3,010
2024		3,086
Thereafter		21,938
Total lease payments	$	34,736
Less: imputed interest		(11,980	)
Total operating lease liabilities	$	22,756

Fiscal Year Ending April 30,	Total
2021 (remaining period)	$	1,491
2022		2,995
2023		3,010
2024		3,086
2025		3,171
Thereafter		18,767
Total lease payments	$	32,520
Less: imputed interest		(10,644	)
Total operating lease liabilities	$	21,876

	Stock Options			Grant Date Weighted Average Exercise Price
	(in thousands)
Outstanding at May 1, 2020		2,896		$6.20
Granted		789		$6.99
Exercised		(141	)	$5.02
Canceled or expired		(93	)	$6.97
Outstanding at October 31, 2020		3,451		$6.41

	Shares			Weighted Average Grant Date Fair Value
	(in thousands)
Outstanding at May 1, 2020		307		$5.23
Granted		337		$7.09
Vested		(68	)	$5.10
Forfeited		(10	)	$5.71
Outstanding at October 31, 2020		566		$6.34

	Stock Options			Grant Date Weighted Average Exercise Price
		*(in thousands)*
Outstanding at May 1, 2019		3,274		$	7.51
Granted		845		$	5.95
Exercised		(247	)	$	3.72
Canceled or expired		(931	)	$	10.45
Outstanding at January 31, 2020		2,941		$	6.45

Gain on sale of research and development assets before income taxes⁽¹⁾	$	1,000
Income tax expense		(261	)
Income from discontinued operations, net of tax	$	739

	$ millions
Net increase in manufacturing revenue	$	0.8
Net decrease in process development revenue		(1.0	)
Total decrease in revenues	$	(0.2	)

	$ millions
Decrease in accrued bonus expenses	$	(0.7	)
Increase in separation related expenses		0.2
Net increase in all other SG&A expenses		0.3
Total decrease in SG&A expenses	$	(0.2	)

	$ millions
Net increase in manufacturing revenue	$	12.1
Net decrease in process development revenue		(1.5	)
Total increase in revenues	$	10.6

	$ millions
Net increase in manufacturing revenues	$	2.5
Net increase in process development revenues		0.3
Total increase in revenues	$	2.8

	$ millions
Increase in separation related expenses	$	0.8
Increase in payroll and benefit costs		0.5
Increase in stock-based compensation expense		0.4
Decrease in accrued bonus expenses		(0.3	)
Net increase in all other SG&A expenses		0.3
Total increase in SG&A expenses	$	1.7

	$ millions
Increase in accrued bonus expenses	$	0.6
Increase in stock-based compensation expense		0.2
Decrease in payroll and benefit costs		(0.1	)
Net decrease in all other SG&A expenses		(0.1	)
Total increase in SG&A expenses	$	0.6

	$ millions
Net increase in manufacturing revenues	$	13.6
Net decrease in process development revenues		(0.7	)
Total increase in revenues	$	12.9