Avid Bioservices, Inc. (CDMO) Q2 2021 Earnings Call Transcript

Avid Bioservices, Inc.  (NASDAQ: CDMO) Q2 2021 earnings call dated Dec. 02, 2020

Corporate Participants:

Tim Brons — Investor Relations

Nicholas Green — President and Chief Executive Officer

Daniel Hart — Chief Financial Officer

Timothy Compton — Chief Commercial Officer

Analysts:

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Paul Knight — KeyBanc Capital Markets — Analyst

Jacob Johnson — Stephens — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Avid Bioservices’ Second Quarter Fiscal 2021 Financial Results Conference Call. [Operator Instructions]

I would now like to hand the conference over to Tim Brons of Avid’s Investor Relations Group. Please go ahead.

Tim Brons — Investor Relations

Thank you. Good afternoon and thank you for joining us. On today’s call we have Nick Green, President and CEO; Dan Hart, Chief Financial Officer; and Timothy Compton, Chief Commercial Officer.

Today we will be providing an overview of Avid Bioservices’ contract development and manufacturing business including updates on corporate activities and financial results for the quarter ended October 31, 2020. After our prepared remarks, we will welcome your questions. Before we begin, I’d like to caution that comments made during this conference call today, December 2, 2020 will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, concerning the current belief of the Company, which involves a number of assumptions, risks and uncertainties. Actual results could differ from these statements and the Company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the Company’s filings with the Securities and Exchange Commission concerning these and other matters.

With that, I will turn the call over to Nick Green, Avid’s President and CEO.

Nicholas Green — President and Chief Executive Officer

Thank you, Tim and thank you to everyone who has dialed in and to those who are participating today via webcast. I am pleased to report that the second quarter was highly productive for Avid. From a financial perspective, we again beat revenue expectations and had a strong showing in other key financial metrics. In business development, we added a new process development customer as well as another new manufacturing project from an existing customer. The Company had a strong operational performance during the quarter during which we successfully completed our annual maintenance program. More importantly, we finalized our review of expansion options and we look forward to proceeding with this important effort. Tim and I will provide additional details on business development and operations following an overview of our second quarter financial results.

And for that, I will turn the call over to Dan.

Daniel Hart — Chief Financial Officer

Thank you, Nick. Before I begin, in addition to the brief financial overview, I’ll provide on the call today, additional details on our second quarter financial results are included in our press release issued prior to this call and in our Form 10-Q which was filed today with the SEC. I’ll now provide an update of our financial results from continuing operations for the second quarter ended October 31, 2020. Revenues for the second quarter of fiscal ’21 were $21.1 million, a 15% increase compared to revenues of $18.3 million recorded during the second quarter of fiscal ’20.

The growth in the number and scope of in-process and or completed manufacturing runs continue to drive our revenue growth, increased utilization and improve our gross margin. In addition, the increase in manufacturing revenues included recognition of $1.7 million during the quarter from changes in estimated variable revenue consideration as a result of completing performance obligations for certain manufacturing projects, therefore, increasing revenue recognized during the period. With an increase in the number of batches manufactured combined with increased utilization of our personnel, facilities and equipment.

Gross margin for the second quarter of fiscal ’21 was 30%, up significantly compared to a gross margin of 18% for the second quarter of fiscal ’20. Our gross margin was further strengthened due to the increase in manufacturing revenues discussed previously and increased capacity utilization. Excluding the $1.7 million in additional manufacturing revenue from a change in estimated variable revenue consideration during the quarter, gross margin was approximately 24%, still a significant improvement compared to the 18% in the prior year period.

Total SG&A expenses for the second quarter of fiscal ’21 were $4.2 million, an increase compared to $3.5 million recorded for the second quarter of fiscal ’20. The increase in SG&A was primarily due to increases in payroll related costs, including stock-based compensation. For the second quarter of fiscal ’21, the company recorded a consolidated net income attributable to common stockholders of approximately 800,000 or $0.01 per basic and diluted share. As compared to a consolidated net loss attributable to common stockholders of $1.9 million or $0.03 per basic diluted share for the second quarter of fiscal ’20. We are also pleased to report the Company generated cash flow from operating activities of $10 million during the quarter and $8 million year-to-date.

Our cash and cash equivalents as of October 31, 2020 were $35.7 million, up $7.5 million from the end of the first quarter and consistent as compared to the $36.3 million as of the end of the prior fiscal year. Cash for the period remains steady primarily due to revenue growth and expansion in gross margin, partially offset by an increase in capital expenditures. While we are highly optimistic regarding the balance of the year, we must remain mindful of currently unknown challenges that may present as a result of the COVID-19 pandemic or other industry factors.

Having said that, based on the strength of the first half of fiscal ’21, the current backlog and together with our visibility into customer demand, we are pleased to report that we are increasing our annual revenue guidance for fiscal ’21 from between $76 million and $81 million to between $84 million and $88 million.

This concludes my financial overview. I’ll now turn the call over to Tim for an update on business development activities and achievements for the quarter.

Timothy Compton — Chief Commercial Officer

Thanks, Dan. On the heels of a strong first quarter, we continue to expand at a tougher base and project pipeline. During the second quarter, our business development team signed new orders for $28 million with new and existing customers, including a new process development customer and a new manufacturing project within an existing customer. While we are always pleased to add new companies to our customer list, we are equally happy to expand our relationships with existing customers as their needs grow. With our $21 million in revenue and the signing of new orders, totaling $28 million during the period.

Our backlog at the end of the second quarter of fiscal 2021 grew to $67 million, an increase of 12% compared to $60 million at the end of the first quarter of fiscal 2021. This represents the highest level of backlog Avid has achieved since becoming a pure-play CDMO and we expect to recognize the majority of this over the next 12 months. Finally, I’m happy to report that the development team continues to operate and engage with both prospective and current customers with no slowdown in our activities. In fact, the number of request for proposals continues to ramp and the value of our sales pipeline is at an all time high. Thankfully, we have not experienced any negative business development related interruptions as a result of the pandemic and we are hopeful that this will continue.

This concludes my business development overview. And I’ll now hand the call over to Nick.

Nicholas Green — President and Chief Executive Officer

Thank you, Tim. During the second quarter, Avid’s operations continue to manufacture to plan. As we reported last quarter, we initiated our scheduled annual preventative maintenance shutdown at the end of July. And this was brought to a successful conclusion during the period. As I indicated last quarter, one of my first hand [Phonetic] target was to review the Company’s expansion plans as well as other ancillary requirements ahead of making our final decision with respect to the best path forward.

We have now completed this review, and I am happy to report that the Company is already moving forward with our expansion using a phased approach. We recently developed plans for the two phase 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 expect 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 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 million 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 determined is the most appropriate, considering the markets available to us and their respective cost of capital. In closing, we are happy to report a very positive quarter during which we achieved strong revenues and margins beating estimates for both revenue and earnings per share as well as generating operating cash flow and income from our operations. Further increasing our backlog from $60 million to $67 million, while delivering the above is testament to the excellent work of our business development team and the many people behind the scenes to support them.

As a result, we have been able to increase guidance and also initiate our expansion plans with the phased approach, which we believe provides capacity, well aligned with demand, while being cognizant of both time and cost.

This concludes my prepared remarks for today, and we can now open up the call for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig-Hallum Capital Group. Your line is now open.

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Thank you for taking the questions. And congratulations on a really strong quarter. Maybe first up, the vaccines have been hitting the news. I mean that is one of the top items that you see these days, but I’m wondering if you could talk a little bit about the market beyond that, beyond vaccines, what are you seeing? What are you hearing from customers as far as maybe capacity constraints within the market, is that helping drive some business your way? Anything that you could help there?

Nicholas Green — President and Chief Executive Officer

Tim, you want to take that.

Timothy Compton — Chief Commercial Officer

Yeah, sure. Thanks, Matt. Thanks for the question. Yeah. As you can imagine, the vaccine market is taking up a significant amount of capacity right now in the marketplace. And so certainly, we look to take advantage of that having our available capacity as well as continuing to build and expand our capacity to meet future demand as Nick just described. So there likely is a shortfall of capacity out there with the amount of capacity is being consumed by COVID today. And it’s not looking like that that capacity is going away, I mean there is still a number of vaccines in development as well as therapeutics for the COVID-19 as well.

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Okay, that’s helpful. Thank you. And then obviously with the phased approach for the build out, on the expansion from Myford, I guess what was it as you kind of looked at things, Nick, what was it that drove you to the decision to kind of split things out that way? Is there any way that you can get customers to kind of lock-in or maybe even help pay for some of that expansion? And then as you look out to the phase 2 of the piece, same thing there, is that — is there a situation where you could actually have customers prepaying essentially to have access to that capacity?

Nicholas Green — President and Chief Executive Officer

Yeah. So in terms of both of those questions, Matt, in terms of the phased approach, I guess what we particularly liked about that approach was, it has a shorter timeline than the — than doing it all at one go. So that would take us somewhere between 18 to 24 months to do the full Myford South expansion. So, this brings the available capacity forward, which is a big benefit. And secondly also allows us to reduce the amount of immediate capital requirement. So it’s only a $50 million expenditure rather than the sort of $45 million to $55 million may be somewhere around that — that we would do for the whole, the whole expansion, Myford South. And then on top of that in coming forward, bringing it forward and at a lower cost. It also enables us to have sort of an interstitial step in terms of our revenue growth capability, adding that $50 million, which in turn, obviously allows us to generate some additional profits in the meantime and contribute towards being able to pay for that to some degree, depending on the timing of those revenues.

The idea and the concept of getting somebody else to pay, all of the people to pay. We’re very fortunate that we’ve managed to maintain capacity ahead of demand. I think that’s been some foresight within the business to do that. We certainly anticipate continuing to do that, so that our clients know that, as they are successful, we can continue to meet their requirements, but also I think that there is opportunity out there. We do see a lot of demand for this capacity, otherwise we wouldn’t be building it and certainly see opportunities potentially to, how will this [Phonetic] pay for it, but nothing I could announce right now for sure.

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Understood. Thank you very much.

Nicholas Green — President and Chief Executive Officer

Thanks, Matt.

Operator

Thank you. Our next question comes from the line of Paul Knight with KeyBanc. Your line is now open.

Paul Knight — KeyBanc Capital Markets — Analyst

Hi, Nick, could you talk to the number of customers that you now have, and number of products in place as well?

Nicholas Green — President and Chief Executive Officer

Good question. I’ll probably best hand that one over to Tim who has got full detail of that one. But I’m — Tim, do you want to just pick up on the total number of customers.

Timothy Compton — Chief Commercial Officer

You know, I actually don’t have a roll-up of the total number of customers, but that does continue to expand every quarter as we announce them and when we’re able to announce them quarter-by-quarter and program by program as well with existing customers.

Paul Knight — KeyBanc Capital Markets — Analyst

Our — and how many are in commercialization, Tim?

Timothy Compton — Chief Commercial Officer

Well, as we, I think previously disclosed, we have one commercial customer at this point in time.

Paul Knight — KeyBanc Capital Markets — Analyst

Okay. And then, Nick, based on your long experience in the industry, what gross margin do you believe you should ultimately run at?

Nicholas Green — President and Chief Executive Officer

So in terms of — in terms of adding the new business to the — to our existing capacity, we expect somewhere between 30% and 40% gross margin.

Paul Knight — KeyBanc Capital Markets — Analyst

Okay. And then…

Nicholas Green — President and Chief Executive Officer

Revenue additions.

Paul Knight — KeyBanc Capital Markets — Analyst

And then as you look at these additions at Myford North, Myford South, what do you think you need to do in terms of commercialization talent that you would need to add or do you have the talent now?

Nicholas Green — President and Chief Executive Officer

So in terms of — if you’re talking about business development to bring in those new opportunities in the line.

Paul Knight — KeyBanc Capital Markets — Analyst

Yeah.

Nicholas Green — President and Chief Executive Officer

I think I expressly said, a little bit at the beginning the last quarter’s call, but I think, Tim and the team and as I did also today, Tim and the team are doing an excellent job. Obviously, we have more insight into leading indicators on the business and the like. But I think as we see it, the team is working extraordinarily well, we brought three new clients in as many months in quarter 1, another new client this quarter plus an expansion of an existing clients. So, and as I say, we can see the pipeline going forward, hence the expansion. So I think we’ve got a team that’s more than capable of dealing the — dealing with the foreseeable future. And we may add to that, but at this moment in time, there is no immediate plan to do so.

Paul Knight — KeyBanc Capital Markets — Analyst

Okay. And then what’s your — what’s your outlook in terms of, do you want to go beyond monoclonal –monoclonal antibody manufacturing? Do you envision some of this capacity expansion in other areas like mRNA or cell and gene therapy?

Nicholas Green — President and Chief Executive Officer

I think those are always interesting areas again kind of from a strategic perspective on my side. First and foremost was to sort of make sure that we — we sort of looked after our existing client base and make sure that was strong good relationships. Secondly was to ensure that we have the right infrastructure and people in place to ensure that we execute in a — on time in full inspect manner for our clients. And then also to have a business development team that we believe can drive the growth. So that’s kind of been the first the cornerstones of the strategy for the first period. I think we’re moving nicely ahead on that one with you. And then adding to that, the expansion. And then from that point forward, I think the areas that you highlighted are always of interest maybe consider further expansion of our offering. But again, little early for us to say anything further than that.

Paul Knight — KeyBanc Capital Markets — Analyst

And then lastly, based on your global experience, how do you feel about a company with the Southern California presence? Do you have, is it — what are the positives and negatives regarding your presence?

Nicholas Green — President and Chief Executive Officer

Yeah, so I mean I run facilities not all over the world, but I think it’s about 14 countries, the last time I checked. I think, as I mentioned, again, I think in the last quarter’s call is, California is a nice place to be right now. I think we’re seeing quite a lot of — sort of domestic location of our — of supply chains of late, COVID, adding to the — the need to do that. So we’ve seen sort of localization rather than globalization is an outsourcing strategy along amongst many of the pharmaceutical companies, in fact, in some cases even we’ve seen regional purchasing by some people or literally want to stay on the West Coast and not move to the East or vice versa. So if I look at the US market is probably the strongest market in the world in terms of Pharma development. The California corridor is the very strong component of that overall market. So I think being in Southern California is not a bad place to be right now. So, very happy with this as a location.

Paul Knight — KeyBanc Capital Markets — Analyst

Thank you.

Nicholas Green — President and Chief Executive Officer

Thanks, Paul.

Operator

Thank you. Our next question comes from the line of Jacob Johnson with Stephens. Your line is now open.

Jacob Johnson — Stephens — Analyst

Hey, thanks. And I’ll add my congrats on really nice quarter. Maybe first Nick following up on Paul’s last question and on high level strategy. If we think as you’re thinking about Avid longer term, at some point could Avid have a presence beyond Southern California or how should we think about that?

Nicholas Green — President and Chief Executive Officer

Yeah, I think it’s more than possible. I think we do have a global market. Europe and Asia are both very active markets and if we’ve got a successful formula, then there is no reason why we shouldn’t want to market that capability on a — to a broader base of clients that ultimately at the end of the day, custom manufacturer does benefit from some degree of localization and being close to your client in terms of project execution and transfer. So a broader geographic spread would not be out of the question from my thinking. As equally a broader offering fulfilling some of the areas that maybe we don’t fulfill today. So again, first and foremost was to make sure that we got, what we’re doing well honed, get the expansion moving and then we can start to look at other things that where we feel we can bring value.

Jacob Johnson — Stephens — Analyst

Got it. That makes sense. And maybe kind of a follow-up on it, tied to COVID. I think COVID has highlighted the value of US pharma manufacturing. And I think maybe in coming years, we could see some somewhat of an in-sourcing of manufacturing back into the US. Is this something that Avid could benefit from at some point?

Nicholas Green — President and Chief Executive Officer

I’d like to think so. Yeah, I mean, I think we’ve seen this happening before COVID. So even in small molecules, to be frank with you, I’d say — we’ve seen a lot of molecules coming back from Asia back to Western manufacturers, sort of a variety of reasons. And so, obviously, in terms of large molecule or biologics. I don’t think anywhere near as much of the manufacturing has gone abroad as it did in small molecules. But we had already seen that trend coming back. I think politically. We’ve seen a strong push towards more localized supply. And then COVID on top of that, I think has made everybody very much aware of the risks and the frailty sometimes global supply chains can have. And so I do think that we will likely benefit from that in the foreseeable future.

Jacob Johnson — Stephens — Analyst

Great and then — I hope so too, maybe just a last one for Dan, looking at guidance, I think it implies, kind of a weaker back half versus, that was a really strong first half, and certainly as you called out we’re living in an uncertain environment. But in terms of puts and takes, just one thing I wanted to ask about, I think last quarter you got a fee for some unused reserve capacity, I think that might have been for the third quarter. Is that something that could be a bit of a headwind next quarter and maybe if Tim wants to chime in, just any comments on the effort to maybe backfill and to fill that capacity?

Timothy Compton — Chief Commercial Officer

Yeah, Jacob, thanks for the question. I think what I’d start with is we initially thought, it’d be a little bit of a headwind when we exited the first quarter. Looking at the pipeline and our visibility into our customers, essentially the demand that we’re seeing and the backlog that we have on the books, we did have some puts and takes. We had the $3 million that was for the one-time fee. And additionally, we had $1.7 million this quarter that helped out the first half of the year. But looking at what we can see as far as the visibility into the backlog in our customer demand and where the first-half ended up, that’s how we got to the $48 million to $88 million for the full year guide.

Jacob Johnson — Stephens — Analyst

Great, thanks for taking the questions.

Operator

Thank you. This concludes today’s question-and-answer session. I would now hand the call back to Nick Green for closing remarks.

Nicholas Green — President and Chief Executive Officer

Thank you, operator and thank you to everyone participating on today’s call. In closing, I’d like to thank all our employees at Avid. Not only have they been effective and efficient in improving the business performance, but they continue to do this in the challenging environment as a result of COVID-19. Avid’s success is dependent upon our incredible employees and I wish to thank them for their continued efforts and adapting to the challenges, which are impacting both their professional, but also their personal lives. Thank you again for participating on today’s call and for your continued support of Avid Bioservices.

Operator

[Operator Closing Remarks]