Avid Bioservices, Inc.  (NASDAQ: CDMO) Q4 2020 Earnings Call Transcript

Avid Bioservices, Inc.  (CDMO) Q4 2020 earnings call dated June 30, 2020

Corporate Participants:

Tim Brons — Executive Vice President

Rick Hancock — Interim President and Chief Executive Officer

Daniel Hart — Chief Financial Officer

Timothy Compton — Chief Commercial Officer

Analysts:

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Joe Pantginis — H.C. Wainwright — Analyst

Jacob Johnson — Stephens — Analyst

Presentation:

Operator

Good day, ladies and gentlemen and welcome to the Avid Bioservices’ Fourth Quarter and Year-end 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call may be recorded. I would now like to hand the conference over to Tim Brons of Avid’s Investor Relations Group. Please go ahead.

Tim Brons — Executive Vice President

Thank you. Good afternoon and thank you for joining us. On today’s call, we will have Rick Hancock, Interim 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 April 30th, 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 June 30th, 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 Rick Hancock, Interim President and CEO. Rick?

Rick Hancock — Interim 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. Before addressing the company’s financial and operational performance, I’d first like to welcome Nicholas Green to the Avid team. Nick has recently been appointed Avid’s new CEO and we are thrilled to have him onboard. Nick has more than 30 years of experience in the global pharmaceutical and healthcare services industry with significant expertise in the contract manufacturing of novel pharmaceutical products. His global pharmaceutical experience spans four continents having run 31 facilities in nine countries in North America, South America, Europe, and Asia. Throughout his career, Nick has held a number of senior management roles for several contract manufacturing organizations and life science companies where he is credited with successfully building and expanding those businesses and delivering significant value for customers, patients, employees, and other stakeholders.

We are very pleased to have Nick join Avid and we believe his experience will be highly valuable as the company grows both commercially and operationally. Nick’s start date is July 30th, 2020. With his arrival, I will no longer be part of the company’s day-to-day operations, but I will continue to support Avid as the Director on the company’s Board and I look forward to working with Nick and this team going forward.

I’ll now address the quarter. Avid’s performance during the fourth quarter partially offset the lower than expected revenues recorded during the third quarter. As discussed on our last earnings call, during the third quarter, the company experienced a problem with a specific piece of equipment. This resulted in a production interruption during the third quarter and a deferral of some revenue for that period. While the interruption extended into the fourth quarter, additional unplanned revenue generating projects were initiated during the period, allowing the company to exceed its restated annual revenue guidance and end the year with a strong backlog.

We are pleased to report that during the fourth quarter, we identified and mitigated the cause of the equipment problem responsible for this production interruption and we are currently in the process of confirming the successful remediation. During the quarter, we also expanded our business development team and entered into a co-marketing partnership that we believe will provide another channel from which to fill capacity. Based on our customers’ growing demand and our expanding business development activity, we believe that we will significantly increase capacity utilization in 2021 and beyond. Accordingly, we have entered into a new phase of planning for the expansion that will support our growing business in the years to come.

Tim and I will provide additional details on business development and operations following an overview of our fourth quarter and year-end financial results. For that, I’ll turn the call over to Dan Hart. Dan?

Daniel Hart — Chief Financial Officer

Thank you, Rick. Before I begin, I’d like to recommend that everyone participating on today’s call refer to our 10-K filing with the Securities and Exchange Commission, which we filed today for additional details. I’ll now discuss our financial results from continuing operations for the fourth quarter and full-year ended April 30th, 2020. I’ll first address the quarter. Revenues for the fourth quarter of fiscal 2020 were $12.6 million, a 26% decrease compared to revenues of $17.1 million recorded during the fourth quarter of fiscal 2019. The year-over-year decline in revenue was primarily attributable to the interruption of production, which began during the third quarter and continued into the fourth quarter of fiscal 2020 as a result of a problem with a specific piece of equipment. Despite the decline, fourth quarter 2020 revenues were stronger than expected primarily due to an increase in customer projects.

Gross margin for the fourth quarter of fiscal 2020 was a negative 10% compared to a gross margin of 21% for the fourth quarter of fiscal 2019. The decrease in gross margin for 2020 quarter was primarily attributable to the costs associated with the production interruption described earlier, an increase in depreciation expense from the acquisition of new equipment, and a net decrease in revenue.

I’ll now address operating expenses. Total SG&A expenses for the fourth quarter of fiscal 2020 were $3.5 million, a slight decline compared to $3.6 million recorded for the fourth quarter of fiscal 2019. For the fourth quarter of fiscal 2020, the company recorded a consolidated net loss attributable to common stockholders of $6.2 million or $0.11 per share as compared to a consolidated net loss attributable to common stockholders of $1.1 million or $0.02 per share for the fourth quarter of fiscal 2019.

Our backlog at the end of the fourth quarter 2020 was $65 million, an increase of 12% compared to $58 million at the end of the third quarter of fiscal 2020 and an increase of 41% compared to $46 million at the end of last fiscal year. This backlog represents a record high for Avid. Even when excluding the $8 million of revenue deferred due to the delay of scheduled in-process manufacturing runs during the second half of fiscal 2020, backlog increased 24% over prior year-end.

I’ll now provide an overview of our results for the full fiscal 2020. For the full fiscal year ended April 30th, 2020 revenues were $59.7 million, an 11% increase as compared to revenues of $53.6 million during the prior year period. This increase was primarily the result of continued growth in the number and scope of customer projects. These results will be our restated revenue guidance for the year.

Gross margin for the year ended April 30th, 2020 was 7%, a decrease compared to 13% in the prior year period. This decrease was primarily due to the planned growth related costs associated with payroll and related costs, an increase in depreciation expense from the acquisition of new equipment, and higher facility and equipment related costs primarily associated with the production interruption during the second half of the fiscal year.

For the full fiscal year 2020, SG&A expenses were $14.5 million, a 13% increase compared to $12.8 million for the prior year. The increase in SG&A was due to employee separation related costs, recruiting fees, and increased stock-based compensation. When excluding the separation related expenses, SG&A increased 3% during 2020 as compared to the prior year. For the full-year 2020, the company recorded a consolidated net loss attributable to common stockholders of $15.2 million or $0.27 per share compared to a consolidated net loss attributable to common stockholders of $8.9 million or $0.16 per share for fiscal 2019.

Our cash and cash equivalents as of April 30th, 2020 were $36.3 million, a 12% increase as compared to $32.4 million as of the prior fiscal year ended April 30th, 2019. The company also achieved positive free cash flow measured as the change in cash from operations, net of capital expenditures. of $2 million for fiscal year ended April 30th, 2020. This concludes my financial overview. I will now turn the call over to Tim for an update on business development activities and achievements during the quarter.

Timothy Compton — Chief Commercial Officer

Thanks, Dan. From a commercial perspective, the fourth quarter of 2020 was one of the company’s most successful with the team signing $23 million in project expansion orders with existing customers. While this was a wonderful way to end the year, we have great expectations for 2021 and beyond and are taking the important steps needed to continue this growth momentum. As I stated during last quarter’s conference call, my first order of business as Avid’s Chief Commercial Officer was to build an industry-leading BD team.

I’m pleased to report that during the fourth quarter, we added tremendous depth and strength to our team with the addition of two senior directors with proven track records in growing CDMOs. They are responsible for driving business growth in North America, Europe, and Asia. Jason Brady serves as a Senior Director of Business Development for the eastern region of North America as well as Europe and Sylvia Hinds has been named our Senior Director of Business Development for the western region of North America and Asia-Pacific region.

Sylvia comes to Avid with 17 years of experience in key business development roles in the CDMO and contract research industries. During her career, she has held positions in increasing responsibility with Nitto Denko Avecia, Brammer Bio, Novasep, Cook Pharmica and Baxter. Sylvia has specialized expertise in biologics, cell and gene therapy, and sterile fill/finish services. In her new role, she is charged with expanding the company’s CDMO business with both new and existing clients in western North America and the Asia-Pacific regions.

Jason is an accomplished sales professional with an extensive track record of establishing long-term business relationships and successfully securing new manufacturing contracts with biopharmaceutical clients. During his career, he has held senior sales and commercial positions with Aji Bio-Pharma and Lonza. In his new role, Jason is responsible for driving continued growth and expansion of the company’s CDMO business in eastern North America and Europe. I’m very pleased to welcome both Sylvia and Jason to the Avid team. Since coming onboard in April, they have quickly elevated our level of engagement with both existing and prospective customers and we expect great contributions from both in the future.

Another important commercial development was Avid’s recent announcement of a co-marketing partnership with Aragen Bioscience, a leading CRO focused on accelerating pre-clinical product development. It is the intent of the co-marketing agreement to provide an integrated sequence-to-manufacturing service offering to customers. Aragen’s cell line development expertise integrated with Avid’s upstream and downstream process development and analytical services will drive efficiencies and reduce overall timelines for delivery of CGMP bulk drug substances. It is our belief that this partnership will provide customers with a seamless solution to streamline early-stage development and manufacturing and enable rapid delivery of important therapeutics for patients in need. We are excited to be a part of this co-marketing collaboration and we are already seeing tangible benefits to both companies.

I will now discuss our marketing efforts during the quarter. In the era of COVID-19, the way in which we all do business has changed. Industry conferences have been important networking and business development events for us in the past have all been canceled, postponed or converted to virtual formats. In-person discussions and sales pitches have now been converted to online platforms and while nothing is as valuable as a face-to-face meeting with customers and new business prospects, we have been pleasantly surprised at how effective the virtual formats have been. No previously scheduled customer prospect meetings have been postponed or discontinued due to the pandemic.

In fact, without the burden of travel, we were able to have more participants on calls than we would typically have at a meeting during an industry event. It is important to note that new prospect customer quality audits are proceeding using both virtual formats and/or leveraging local third-party auditors. And so despite the challenges of doing business during COVID-19, our team is extremely busy engaged with both current and prospective customers and working diligently to close new business. This concludes my business overview and I would now hand the call back over to Rick. Rick?

Rick Hancock — Interim President and Chief Executive Officer

Thank you, Tim. As a continuation of Tim’s comments, I’d first like to address Avid’s operations in context of the COVID-19 pandemic. Since the beginning of the pandemic, Avid management has closely monitored our production pipeline and the health of our workforce. We are pleased that to date, we have observed no material impact to our production programs for our supply chain and our employees remain healthy and highly productive. Management is taking every precaution and following state and local guidelines to ensure the continued safety and well-being of our team members and we are hopeful that our operations will remain uninterrupted. I’d like to reiterate that no work has been canceled or delayed due to the pandemic and we currently have no expectations that, that will change.

I will now comment further regarding last quarter’s equipment issue and production interruption. Let me first confirm that the specific piece of equipment in question is now operational. However, this project is being executed in three phases: investigation, remediation, and confirmation. To date, we believe that we have successfully completed the first two stages by identifying and remediating the source of the problem. The company is currently progressing through the confirmation stage during which it is running multiple revenue generating production campaigns. While we are optimistic, the company will not be able to confirm the full resolution until it completes the confirmation stage, which we expect will be completed in the coming months.

As we look ahead, we believe that growing customer demand and our expanding business development activity will result in a need for additional capacity. In recent quarters, we have done much of the ancillary work that is required to support a more comprehensive expansion in the future. As we’ve addressed in prior calls, this work has included the enhancement of key systems and upgrades to general infrastructure. However, we are now taking additional steps to prepare for the growth opportunities we see ahead. While specific kick-off date has not been set for this expansion, we recognize that construction may take between 18 months and 24 months to complete. For that reason, we are undertaking the pre-engineering, design, and permitting work required to allow us to break ground on this project at the appropriate time.

Given this backdrop, I’m very pleased to announce that for fiscal 2021, we expect to record revenue of between $76 million and $81 million, representing growth of approximately 27% to 36% over fiscal 2020 and as we continue to achieve revenue growth, we expect the improvement in margins to track accordingly.

In closing, I’d like to communicate our strong optimism for fiscal 2021 and beyond. Despite the challenges of the third and fourth quarters of fiscal 2020, we finished strong with higher revenues than expected and a record-breaking backlog of business. We are preparing to welcome our new CEO, Nick Green, and we are confident that he will provide the vision and execution strategy to elevate Avid to the next level.

Our customer relationships are strong and forecasted demand is growing. Combined with our expanded business development activity, which we expect to generate an increasing number of projects from both existing and new customers, we believe that we are on a path to significantly increased capacity utilization. Accordingly, we are readying to kick-off an expansion that will allow us to meet the increasing demand of our ever-growing customer list. This concludes my prepared remarks for today. We can now open the call up to questions. Operator?

Questions and Answers:

Operator

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

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Good afternoon. Thank you for taking the questions. First one, if you could help me understand a little bit the guidance for next year. So exiting Q3, you had essentially pushed, I think it was around $8 million from the fourth quarter into roughly the first half of fiscal ’21 with the outperformance in Q4. Is some of that getting pulled into the fourth quarter and therefore that $8 million in the first half of ’21 is less or just kind of walk me through the puts and takes there.

Daniel Hart — Chief Financial Officer

Hi, Matt. Thanks for the question. So to answer your question, yes, there is a small sliver of the $8 million that was pushed when we reiterated our or when we re-forecasted our guidance at the end of the third quarter. However, a majority of the revenues that we saw for the increase, have you — in the fourth quarter was from new business from existing customers that we are able to start earlier and/or commence with new agreements. So there is a small sliver of that $8 million that was in the fourth quarter. However, a good 70% of that will still be in the first half of this next fiscal year.

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Okay, all right, that’s helpful. And then I guess given the pipeline and I appreciate that it’s building, but given these COVID opportunities, how quickly would you anticipate hearing back whether or not you won any of that business given where we’re at with the pandemic and the sense of urgency I think everyone’s feeling?

Rick Hancock — Interim President and Chief Executive Officer

[Speech Overlap] Go ahead, Tim. No, please go ahead.

Timothy Compton — Chief Commercial Officer

I was going to say, I mean, every opportunity is different, every timeline is different, but we certainly anticipate hearing back from some of the opportunities that we have in the queue for COVID probably in the next — probably next 90 days, but there are several opportunities in various stages of the sales cycle.

Rick Hancock — Interim President and Chief Executive Officer

But, Matt, you’re absolutely right. There is a tremendous sense of urgency. So whereas typically we might engage for six months or nine months with potential new clients. These opportunities, they do need to get responses very quickly. So, Tim and his team are — when we get one of these incoming inquiries, they get on them right away, get the group, all the information that they need, budgeting, timelines and they are all interested in very aggressive timelines once production begins.

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Got it. Great and then I guess one last follow-up for me and then I’ll hop back into the queue. Regarding the expansion, your capacity expansion, how should we be thinking about the cadence of investment there. As from a capex perspective, what are you expecting in fiscal ’21 and maybe when do you start the discussions with potential partners in that investment. I know it’s something you’ve talked about in the past is that you might be able to get some of your customers to help with the cost of that expansion, but when do you start those discussions?

Daniel Hart — Chief Financial Officer

Sure, Matt, this is Dan. As far as the capital requirement, currently, we’re doing a full up design effort so that we’re prepared to start at any moment. So with the design efforts, typically, it’s a low outlay of capital expenditures. Once we find the right time and move forward towards building out, at that time, we’ll look at any financing options that we feel are appropriate when the time presents itself. In addition, we will continue our conversations with customers and/or vendors to help with the funding and to participate in that funding of the overall build out.

Rick Hancock — Interim President and Chief Executive Officer

And I would just add, there is a couple of parts of those conversations with our customers. One is the opportunity for them to participate in order to reserve slots for the future. The other is just making sure that everything we put in is completely aligned with their current requirements and what they’re looking at needing over the next 10 years.

Timothy Compton — Chief Commercial Officer

And Matt, so to kind of finalize, I would anticipate that the overall build out would be somewhere around $30 million to $40 million all-in with the build in capital equipment, which would be over the, call it 18 months to 24 months.

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Okay, that’s very helpful. Congratulations on the record bookings. Thank you.

Timothy Compton — Chief Commercial Officer

Thank you.

Rick Hancock — Interim President and Chief Executive Officer

Thank you, Matt.

Operator

Thank you. Our next question comes from Joe Pantginis with H.C. Wainwright. Your line is now open.

Joe Pantginis — H.C. Wainwright — Analyst

Hey, everyone. Good afternoon. Thanks for taking the question. Hope you and your families are all doing well and the business is certainly doing well. So glad to hear this. Just curious, going back to the potential COVID contracts, is there the opportunity for exclusive contracts or something similar also to what they are doing in the United Kingdom for example for the Oxford vaccine as well, where they have multiple suppliers.

Rick Hancock — Interim President and Chief Executive Officer

So the contracts we’re looking at currently, exclusivity is not really a part of it. The main drivers to get something through proof of concept as quickly as possible and I think one of the things that makes Avid an attractive partner for these kinds of things is, while we don’t have the largest scale, some of them are requiring very small doses or very small amounts of material per dose, but the fact that we could take something very rapidly from proof of concept to commercial production with our many years of commercial capability. Just my opinion, I think the strategy of most of the people that we’re talking to, based on where they are getting their funding from, the goal is to identify something that works either as a vaccine or therapeutic and then make it as widely available as possible. Tim Compton, do you have anything you want to add?

Timothy Compton — Chief Commercial Officer

No, I agree with that, Rick. Right now, it’s very much timeline driven and certainly the exclusivity in those types of legal agreements have not been engaged or discussed on. It’s really about delivering and timeline to deliver.

Joe Pantginis — H.C. Wainwright — Analyst

Got it. That’s helpful. And then my next question is, I know Nick is not on the phone to answer this directly. So, I guess I’ll ask the question this way. Can you describe sort of the CEO selection process that you went through and why you decided on Nick. Obviously, you shared some of his background earlier, which certainly fits for the future, but I guess would you be able to share any aspects of the vision he might have for the company?

Rick Hancock — Interim President and Chief Executive Officer

You bet, Joe. Great question. So, obviously, this wasn’t a lightening fast process, but I really think at the end of the day, we wound up with just the exact right person to lead Avid for the future based on Nick’s tremendous experience both in the commercial realm, operational excellence, strategic growth. So we’re very lucky to get Nick and very happy that he’s joining us and I spoke with him just today and he expressed again how excited he is to get here. I think his vision is really a continuation of what the senior management team here has been doing, making sure that we capitalize on the very unusually exciting asset that we have here. Not many independent CDMOs in our space that can do what we can do. Again, going from proof of concept, all the way through to commercialization and post-commercial support.

So I think he’s delighted to get here to a fast-moving nimble company and as we pointed out, he’s built up and expanded many companies over his career. So I think his first focus is going to be on operational excellence throughout the organization, making sure that we’re running lean, looking to build and strengthen with Tim Compton, our relationships with existing customers and bringing on some more marquee clients and then focusing on the build out and just making sure we capitalize on all the growth potential that we have.

Joe Pantginis — H.C. Wainwright — Analyst

Got it. Really helpful. Thank you and then my last question is maybe best for Dan. With regard to gross margins. I mean, could we expect basically over the next year as you’re looking at these expansion plans that gross margins can continue to be choppy before we could start having conversations about normalizing them?

Daniel Hart — Chief Financial Officer

Appreciate the question, Joe, and I think the question is spot on. Our gross margins were depressed in the second half and the overall fiscal year 2020 primarily due to the effects that happened in the second half of the year for the equipment failure. Going forward, this is a profitable business and we will continue to be trending towards that profitability as we continue to expand not only our current customer base, but new customers and backlog.

That being said, as we start to grow, we start to reach the capacity that is currently installed prior to any expansion of additional capacity. We should be able to approach the industry standard margins for both gross margin and EBITDA margins and as we expand, we can continue to expand upon that. As I said before, once we hit the critical mass, which we should be doing here in the near future and into fiscal ’21, we should start to see a 50% to 70% incremental gross margins drop straight to the bottom line as we reach that capacity limit.

Joe Pantginis — H.C. Wainwright — Analyst

Got it. Very, very helpful. Thanks a lot guys. Appreciate it.

Daniel Hart — Chief Financial Officer

Thanks, Joe.

Operator

Thank you. And our next question comes of Jacob Johnson with Stephens. Your line is now open.

Jacob Johnson — Stephens — Analyst

Hey, thanks. First off, Rick, it’s been great working with you. Congrats on the hire of Nick and hope you enjoy going back to your role on the Board.

Rick Hancock — Interim President and Chief Executive Officer

Thank you so much.

Jacob Johnson — Stephens — Analyst

Yeah, on the equipment issue, when did you enter the confirmation stage? Was this process faster than you expected or in line with expectations? And then, how do volumes in the confirmation stage compare to when you are up and running normally?

Rick Hancock — Interim President and Chief Executive Officer

So, the remediation took about the amount of time that we expected. The investigation took quite a while, but once we identified the source of the problem, it was pretty clear what we needed to do. We’ve been going through the confirmation stage for the last few months and I hope to have it wrapped up in another couple of months here.

Daniel Hart — Chief Financial Officer

And, Jacob, as far as volumes. It’s not at full capacity because there is some additional documentation that we do during the process, but it’s above, call it 50% capacity utilization during the confirmation stage.

Jacob Johnson — Stephens — Analyst

Got it. Thanks for that, Dan and thanks for that, Rick. And then, on just COVID, Dan, as we think about guidance and the number of COVID opportunities you’re being presented with, how much of these COVID opportunities are contemplated in guidance or should we think of — if they come to fruition, that would be additive?

Daniel Hart — Chief Financial Officer

Any COVID related items would be an upside to the guide that we have for next year. There is some — the discussions that we’ve had that may lead into a COVID type product that would be baked into the overall number, but for the most part, anything that’s strictly coming in as COVID-19 related would be upside.

Jacob Johnson — Stephens — Analyst

Got you. Thanks for that. And then maybe just one last one. Tim, congrats on the business, both [Phonetic] senior business development hires. How many sales people do you currently have on your team and how many more do you need to have?

Timothy Compton — Chief Commercial Officer

Externally, we have two and we don’t foresee making any additional adds this fiscal year.

Jacob Johnson — Stephens — Analyst

Got it. Thanks for taking the questions.

Rick Hancock — Interim President and Chief Executive Officer

You bet. I would just add to that, that our project management team has a number of people who manage existing clients and as you know, a lot of our work comes in from our existing client base. So they work very closely with Tim and his team and are kind of another very valuable resource for our business development activities.

Operator

Thank you. At this time, I’d like to hand the call back over to Rick Hancock for any closing remarks.

Rick Hancock — Interim President and Chief Executive Officer

Thank you, operator and thank you to everyone participating on today’s call. In closing, I wish to reiterate how pleased we are to welcome Nick Green to the Avid team. With Nick’s executive experience and Tim Compton’s commercial expertise, we believe we are in an unprecedented position from which to grow the business. In addition, our client discussions and forecasts give us great optimism for fiscal 2021 and beyond. We look forward to updating you on these efforts and our future advancements. Thank you again for participating today and for your continued support of Avid Bioservices’.

Operator

[Operator Closing Remarks]