Avid Bioservices, Inc. (NASDAQ: CDMO) Q3 2021 earnings call dated Mar. 08, 2021
Corporate Participants:
Tim Brons — Investor Relations
Nicholas Green — President and Chief Executive Officer
Daniel Hart — Chief Financial Officer
Timothy Compton — Chief Commercial Officer
Analysts:
Matthew Hewitt — Craig-Hallum Capital — Analyst
Jacob Johnson — Stephens — Analyst
Paul Knight — KeyBanc Capital Markets — Analyst
Presentation:
Operator
Good day, ladies and gentlemen. And welcome to the Avid Bioservices’ Third Quarter Fiscal 2021 Financial Results Conference Call. [Operator Instructions] As a reminder, this conference may be recorded.
I would now turn the call over to Mr. Tim Brons of Avid’s Investor Relations Group. Please go ahead, sir.
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 January 31, 2021. 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 March 8, 2021, will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the current beliefs of the company, which involve 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 via webcast. During the third quarter, we continue to build on the momentum of the first and second quarters of fiscal 2021. During the period, Avid recorded strong revenues and significantly improved margins. Our business development team signed orders with two new customers and we expanded work with multiple existing customers. These events resulted in significant increase in orders recorded during the quarter and a consequential increase in backlog. In addition, we continue to make progress with the first phase of the Myford expansion, initiated the second phase and successfully raised funds required to support these major projects.
Tim and I will provide additional details on business development and operations following an overview of our third quarter financial results. And for that, I’ll 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 third 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 overview of our financial results from the operations for the third quarter ended January 31, 2021.
Revenues for the third quarter of fiscal ’21 were $21.8 million, a 61% increase compared to revenues of $13.6 million recorded during the third quarter of fiscal ’20. The increase in the third quarter revenue was primarily due to the growth in the number and scope of in-process and completed manufacturing runs as well as an increase in the number of process development projects during the period.
Gross margin for the quarter was 28%, up significantly compared to a gross margin of 6% in the prior-year period, primarily from leverage of higher manufacturing and process development revenues. While previously disclosed non-operations factors strengthened the margins recorded in Q1 and Q2 of fiscal ’21, it is important to note that our current quarter margin of 28% was achieved with no such adjustments. For this reason, we believe that the strength of our third quarter margin demonstrates the growing efficiencies in our business model.
Total SG&A expenses for the third quarter of fiscal ’21 were $4 million, an increase compared to $3 million recorded in the third quarter of fiscal ’20. The increase in SG&A was primarily due to increases in payroll-related costs, including stock-based compensation. For the third quarter of fiscal ’21, we 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 $3.5 million or $0.06 per basic and diluted share for the third quarter of fiscal ’20. This marks our third consecutive quarter of profitability.
We are also pleased to report that the company generated cash flow from operating activities of $5.2 million during the quarter and $13.3 million year-to-date. Our cash and cash equivalents as of January 31, 2021 were $70.9 million. This balance includes approximately $32.1 million in net proceeds, which were raised during the quarter and a follow-on underwritten equity financing. This balance is up $35.2 million from the end of the second quarter and up $34.6 million at the end of the prior fiscal year.
Based on the consistent growth that we have achieved during the first three quarters of fiscal ’21, our forecast of our customers and a significant level of our current backlog, which Tim will detail shortly, we are pleased to report that we are increasing our annual revenue guidance for fiscal ’21 from between $84 million and $88 million to between $88 million and $91 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. Our business development team had an exceptional third quarter. Despite the challenges presented by the pandemic, our team remained highly engaged with both existing and prospective customers. As a result, we signed new orders for $74 million during the period. These orders include two new customers as well as existing customers that are advancing program from one clinical phase to another.
Projects signed during the period quarter include process development, technology transfer and CGMP clinical and commercial manufacturing, employing the full scope of Avid capability. These signings, along with the on-boarding of a new program for an existing customer in the second quarter, demonstrates our ability to support the new and existing customers with their growth demands.
As a result of these new orders, our backlog at the end of the third quarter of fiscal 2021 grew to $120 million, an increase of 78% compared to $67 million at the end of the second quarter of fiscal 2021. We expect to recognize most of this backlog by the end of next fiscal year. As you may recall from our last earnings webcast, we stated that the second quarter backlog of $67 million was the highest achieved since becoming a pure-play CDMO.
Clearly, we have significantly exceeded this benchmark during the third quarter, which we believe is a testament to Avid’s growing reputation for excellence, our state-of-the-art capabilities and our exceptional team dedicated to quality in all we do. We continue efforts to increase visibility and to capitalize on the strong and growing momentum.
This concludes my business development overview and I’ll now hand the call back over to Nick.
Nicholas Green — President and Chief Executive Officer
Thank you, Tim. As with our financial and business development performance, we have also been very pleased with Avid’s operational execution during the third quarter.
As discussed during our second quarter call in late calendar 2020, Avid initiated a two-phased expansion of the Myford facility. The first phase, which is proceeding according to plan, will expand the production capacity of our Myford North facility. On the back of what can only be described as a very solid business development effort, we have also initiated the second phase of the expansion. The additional capacity created by our Phase II expansion is expected to add a further $100 million in annual revenue, which, on top of Phase I, will create a total revenue capacity of up to $270 million annually.
As we consider our current backlog and projected customer growth, this expansion will enable us to continue to provide capacity to onboard new customers as well as capacity to accommodate the successful clinical development and commercial growth of our existing customers. Furthermore, we look forward to incorporating a high level of automation and digitization into Phase II as we further focus on commercial manufacture.
As anticipated, the onboarding of new customers is starting to translate into increased activity in the process development group, with quarter three showing a significant increase in revenues. The combination of growing revenues increased utilization allied with solid operational execution and now demonstrating that our business model can deliver both improved margins and drive profitability.
As 2020 came to a close, we were delighted to successfully complete the raise of $34.5 million in gross proceeds to fund the expansion of our state-of-the-art manufacturing facility and to support the continued growth of the business. We were also very pleased with the enthusiasm and support we received from the financial community during this offering and are already putting these funds to good use.
In closing, the third quarter was exceptional on all fronts, top line revenues were strong, operational execution was solid and significant growth in process development activity, all contributed to significant improvement in margins and other key financial metrics during the quarter. As much as it is difficult to pick any one aspect of the quarter, I think the efforts that have resulted in our booking of $74 million in new business during the quarter and resulting in a backlog of $120 million deserve a special mention. As a result, we are raising our revenue guidance for the second time in 2021 to between $88 million and $91 million.
Finally, as we enter the final fiscal quarter of financial year 2021, I am also delighted to see the Avid team is executing to plan, which is not only driving growth today but also establishing the foundation necessary for continued growth in the future.
This concludes my prepared remarks for today and we can now open the call up for questions. Operator?
Questions and Answers:
Operator
Thank you. [Operator Instructions] Our first question comes from Matt Hewitt of Craig-Hallum Capital. Your line is open.
Matthew Hewitt — Craig-Hallum Capital — Analyst
Good afternoon. Thank you for taking the questions. And congratulations on the strong quarter.
Nicholas Green — President and Chief Executive Officer
Thanks, Matt.
Daniel Hart — Chief Financial Officer
Thanks, Matt.
Matthew Hewitt — Craig-Hallum Capital — Analyst
Couple of questions. First off, given the very strong bookings number and obviously your backlog, how should we be thinking about, I guess, two different items, number one, the cadence of those revenues coming on, and number two, the impact that that will have on gross margins over the next few quarters?
Daniel Hart — Chief Financial Officer
Sure. Great question, Matt. So, as far as the bookings that we have as we stated in the prepared remarks most of those bookings will wind out through the end of next fiscal year. And as far as gross margins, as we’ve kicked off our Phase I and Phase II expansions of Myford, I think the margin that we saw of 28% is going to be where we’re at until we incrementally add that new capacity. Once we add the Phase I capacity of the Myford North facility, we’ll be able to have some incremental margins of 50% to 70%, especially at these revenue levels and the leverage of the overall revenue mix.
And then once the ultimate Phase II comes online, we’ll be able to get to industry standard margins of upwards of 40%.
Matthew Hewitt — Craig-Hallum Capital — Analyst
That’s great. And I guess, sticking with the gross margin theme, you mentioned the automation and digitization, how will that impact gross margins? Is that something that we could see even as you’re adding this incremental capacity or is that part of the Phase I and Phase II so that the benefit really won’t be seen until you’re done with that Phase II?
Nicholas Green — President and Chief Executive Officer
Yeah. I mean, if the automation is really focused on the Myford South expansions of Phase II and looking more at commercial manufacture, so obviously the more you automate the more rigid it becomes. So you want to be automating processes that have got repeatability rather than discreet one-off or two or three batches. So we’ll probably see the benefit of that as it comes into Phase II.
Matthew Hewitt — Craig-Hallum Capital — Analyst
Okay. And then, maybe one…
Daniel Hart — Chief Financial Officer
And Matt…
Matthew Hewitt — Craig-Hallum Capital — Analyst
Yeah.
Daniel Hart — Chief Financial Officer
Real quick to add to that, as we’re incrementally adding revenue capacity through our expansion, there’ll be a little bit of a step-up of cost next fiscal year.
Matthew Hewitt — Craig-Hallum Capital — Analyst
Okay. Good to know. And then, one last one from me and then I’ll hop back in the queue. Thank you for the breakdown of some of the new customers as far as two new customers and you’ve got customers adding new opportunities. But regarding the new customers, are those COVID-related or are those other market opportunities? And how should we be thinking about the broader market? I mean, are you still seeing incremental demand because you have excess capacity and that’s driving customers to your door or things may be stabilizing a little bit on the capacity front? Thank you.
Timothy Compton — Chief Commercial Officer
Yeah. Thanks, Matt. This is Tim. We are still seeing increased demand for capacity in this space as we continue to on-board new customers. Of the two new customers we did on-board last quarter, we publicly announced that one of those customer, Humanigen [Phonetic], which is obviously COVID-related and — but also has some non-COVID-related indications for the program that we’re working on there as well. But we will continue to work to on-board new customers quarter-over-quarter and year-over-year.
Matthew Hewitt — Craig-Hallum Capital — Analyst
That’s great. Thanks a lot.
Operator
Thank you. Our next question comes from Jacob Johnson of Stephens. Your line is open.
Jacob Johnson — Stephens — Analyst
Hey. Thanks and congrats on the record backlog. Maybe, following up on that last question, just on the Humanigen announcement from last month, if you can, you size up what this opportunity could mean for you in terms of near-term revenues? And then, maybe from a longer-term perspective, are you sort of [Phonetic] providing services for high-profile COVID-19 therapeutic, has this helped or could this help with business development efforts? I’d probably think that this is as good as any kind of advertisement as you could ask.
Nicholas Green — President and Chief Executive Officer
Yeah. So, in terms of, Jacob, the backlog and COVID generally, that’s around 30%, I would say, of our backlog at the moment. In terms of how much — what that ends up growing to us in the long-term, I think that’s a bit difficult at this moment in time to judge. Clearly, Humanigen going for emergency use authorization and I think we can all see that COVID is a bit of a flexible base to sort of working out exactly what the future holds in that area. It’s difficult to quantify, but nevertheless it’s an interesting project. As Tim mentioned, I think one of the good things about it is, it has both COVID and non-COVID applications as well. And certainly we were very, very pleased to sign the Humanigen piece of business in this quarter.
Jacob Johnson — Stephens — Analyst
Got it. That makes sense. Maybe for Dan, could you just talk about how we should think about the pace or timing of capex for the Phase I and II capacity expansions? Is this something that’s going to occur kind of ratably over the next, I guess, 12 to 24 months or any kind of commentary you can give us around the pace of capex?
Daniel Hart — Chief Financial Officer
Sure, Jacob. So, for Phase I, as we announced, it’s going to be roughly $15 million, Phase II is between $45 million and $55 million. I would lean towards — a majority of that will occur in fiscal ’22 for us. We’ve already started to incur costs for the first phase and bringing on some cost now for the second phase, but a majority of those costs, in addition to just general maintenance capex, will occur over fiscal ’22.
Jacob Johnson — Stephens — Analyst
Got it. That’s helpful. And then, maybe last question for Nick, you had announced that you kicked off Phase I capacity expansion a couple of months ago. And then quickly followed it with the Phase II capacity expansion. Was that the timeline you originally envisioned to do these so quickly together? Or just given what you saw in the backlog, did that kind of change your thinking on when to kick off the Phase II capacity expansion?
Nicholas Green — President and Chief Executive Officer
Yeah. No, I think if we’d have felt that we were going to do them both so quickly, we’d have probably announced them both together. So, it’s the increase in business. I think, we were — as Tim sort of alluded to and I think I also alluded to, is that, we did bookings of $21 million in quarter one, $27 million in quarter two if my memory serves me correctly and then $74 million in quarter three, which is a pretty significant uplift.
And so, you look at our backlog today, it’s, I think, around $122 million, which is double last year’s total revenue. So, very pleased with the BD efforts with how Avid has been received in the market, the result of that on our backlog. And that really is what spurred the need to go with Phase II. And just to be clear, the Phase I and Phase II are going on in parallel as opposed to sequential. So they are both officially kicked off as it were and the timeline is ticking.
Jacob Johnson — Stephens — Analyst
Got it. Thanks for taking the questions.
Nicholas Green — President and Chief Executive Officer
Thanks very much, Jacob.
Operator
Thank you. Our next question comes from Paul Knight of KeyBanc Capital Markets. Your line is open.
Paul Knight — KeyBanc Capital Markets — Analyst
Hi, Nick. Based on the backlog that you won in the quarter, how should that cadence be for the next few quarters? Is there any large deliverable in a given quarter upcoming that we should think about on the burn or the revenue recognition of that backlog?
Nicholas Green — President and Chief Executive Officer
I don’t think it’s particularly — first of all, Paul, nice day from you, but I don’t think it’s particularly phased in sort of any lumpy facing at the moment that we can see. We certainly obviously starting to push upon quite significantly on the capacity of the facility as we start to bring that production into the plant. But we are not seeing a particular spike at any point in time, just relatively sort of a smooth growth is what the way I would describe it as we stand at this moment in time.
Paul Knight — KeyBanc Capital Markets — Analyst
And then, regarding your contract wins, I mean, time-to-market is imperative. Is that one reason you’re winning projects and growing this backlog? And I know you’re definitely single use savvy, but what are the reasons behind the backlog build beside obviously a great market?
Nicholas Green — President and Chief Executive Officer
I think it goes down to a number of factors. I mean, obviously I think we said this earlier on, we’ve brought the team together. Timothy’s BD team we brought on a month or so this time last year, so just over 12 months ago now. And they’re really starting to get some cadence in the marketplace. I think, the reputation of the business is also growing stronger and stronger. So there are a number of factors. I mean, at the end of the day, execution is everything. And as a contract manufacturer, it’s on-time, in full, inspect delivery, and the more and more you do that, the more interest you get in your offering.
And one thing has been really nice this year, I think quarter three kind of saw all elements I think there — we sort of categorize them as five different elements of the business, which is a new clients coming on-board, clinic clients moving from one clinical phase to the next, clients moving into commercial, increased amounts of commercial manufacture and then additional assets from existing clients as they broaden their interaction with us. And so, this year, we’ve seen examples of each one of those five different elements. And when they all come together, it starts to result in sort of growth in both revenue and also backlog that you’ve seen in the business.
Paul Knight — KeyBanc Capital Markets — Analyst
When do you expect Phase I capex to translate into increased revenue from that program?
Nicholas Green — President and Chief Executive Officer
So the original timeline was quarter one next year, so from — we’ve said 12 to 15 months to bring it online, which is really around January 2022. So we obviously, with the fact that we’ve actually accelerated Phase II, we are — we would like to speed that up, if it’s possible, and we’ll be looking at every opportunity we can to bring these expansions on faster if the opportunity exists.
And just for clarity, I said quarter one that we always have a bit of confusion sometimes between our fiscal and calendar year. I meant calendar year quarter one, so January 2022, is kind of our early part of when we look like bring it online unless we can speed that up.
Paul Knight — KeyBanc Capital Markets — Analyst
Okay. Thank you.
Operator
Thank you. At this time, I’d like to hand the call back over to Nick Green for any closing remarks.
Nicholas Green — President and Chief Executive Officer
Thank you, operator. And thank you to everybody participating on today’s call. In closing, it only remains for me to thank the Avid team as a whole for their continued diligence and determination in overcoming the adversity presented by what is one of the most challenging periods of the COVID pandemic.
We are confident in our team, our facilities and our strategy. And we look forward to reporting future successes as we go forward. Thank you again for participating in the call and your continued support of Avid Bioservices.
Operator
[Operator Closing Remarks]