Avid Bioservices, Inc.  (NASDAQ: CDMO) Q1 2021 earnings call dated Sep. 01, 2020

Corporate Participants:

Tim Brons — Investor Relations

Nicholas Green — President & Chief Executive Officer

Daniel Hart — Chief Financial Officer

Timothy Compton — Chief Commercial Officer

Analysts:

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Jacob Johnson — Stephens Inc. — Analyst

Presentation:

Operator

Good day, ladies and gentlemen, and welcome to the Avid Bioservices First 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 July 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, September 1, 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 & Chief Executive Officer

Thank you, Tim. And thank you to everybody who has dialed in and also to those who are participating today via webcast. I officially joined Avid in late July and have truly enjoyed my first month on the job. Despite the challenges presented by the pandemic, my family and I have successfully relocated to Orange County and are settling into our new community well. My first few weeks, I’ve done nothing but confirm my view that I believe Avid to be a strong and state-of-the-art company with significant opportunity for growth. This is especially true given our focus on biologics, which is growing faster than many other sectors in the industry. As I return to the USA from my time abroad, I can’t help but feel that Avid is well positioned to benefit from some of the industry trends we have seen developing recently. Given the broad and deep talent of our employees, our quality facilities, systems, expertise and commitment to excellence that fuels our work here at Avid, I am confident that the company will continue to thrive.

As I begin what I believe will be an exciting and successful time at Avid, I would like to thank my predecessor Rick Hancock for his contributions over the last year. Under Rick’s leadership Avid has evolved into the growth organization it is today and I thank him and the Board for interesting me with the future of the company.

I’ll now address our financial business development and operational achievements for the period. From a financial perspective, the first quarter was particularly strong as we significantly exceeded revenue expectations as well as other key metrics. In business development, we expanded our customer base with the addition of three new customers, each of which brings an exciting new project to the manufacturing portfolio. Lastly Avid’s operational activities include the completion of multiple production runs that validated the remediation activities we undertook in late fiscal ’20, as well as the continued development of our plans to provide additional capacity.

Tim and I will provide additional details on the business development and operations following an overview of our first quarter financial results. And for that, I turn the call over to Dan.

Daniel Hart — Chief Financial Officer

Thank you, Nick. Before I begin, I’d like to recommend that everyone participating on today’s call, refer to our 10-Q filing with the Securities and Exchange Commission, which we filed today for additional details. I’ll now provide an overview of our financial results from continuing operations for the first quarter ended July 31, 2020. Revenues for the first quarter of fiscal 2021 were $25.4 million, a 66% increase compared to revenues of $15.3 million recorded during the first quarter of fiscal ’20. The increase in revenue was primarily due to two factors: One being the growth in the number and scale of in-process and/or completed manufacturing runs during the quarter, including $4.3 million from the completed manufacturer of all batches that had been deferred from prior periods due to a previously disclosed equipment issue. The other being $3.1 million in fees received from a customer that had reset inventory requirements with fewer than expected runs, therefore, not utilizing all of their reserve capacity that had been scheduled for the third quarter of fiscal ’21.

Gross margin for the first quarter of fiscal ’21 was 34%, up significantly compared to a gross margin of 7% for the first quarter of fiscal ’20. The increase in gross margin for the ’21 quarter was primarily due to increased manufacturing revenue from the growth in the number and scale of manufacturing runs and the previously mentioned fees associated with the customers’ unused capacity.

I’ll now address operating expenses. Total SG&A expenses for the first quarter of fiscal ’21 were $3.8 million, a decrease compared to $4.5 million recorded in the first quarter of fiscal ’20. The decrease in SG&A was primarily due to a decrease in separation related expenses, partially offset by a net increase in payroll and related costs. For the first quarter of fiscal ’21, the company recorded a consolidated net income attributable to common stockholders of $3.3 million, a $0.06 per basic and diluted share. As compared to a consolidated net loss attributable to common stockholders of $4.6 million or $0.08 per basic and diluted share for the first quarter of fiscal ’20.

Our backlog at the end of the first quarter of fiscal ’21 was $60 million compared to $65 million at the end of fiscal ’20, despite the quarter-over-quarter decrease, it is important to note that when subtracting the batches deferred from the second half of fiscal ’20, the backlog during Q1 ’21 remained consistent as compared to Q4 of ’20, despite the significant increase in revenue during the period. The company expects to recognize the majority of this backlog in fiscal year ’21.

Our cash and cash equivalents as of July 31, 2020 were $28.2 million as compared to $36.3 million as of the prior fiscal year ended April 30, 2020. This decrease in cash was primarily due to the repayment of our note payable under the Paycheck Protection Program loan of $4.4 million and the timing of changes in operating assets and liabilities during the period. We are very happy to report the strong start to the year, and while we remain optimistic that we will see continued revenue growth this year, we are cautioning against using our first quarter revenues as a new benchmark, as the deferred batches from the third and fourth quarters of fiscal ’20 and the previously mentioned fees associated with the customers’ unused capacity both contributed meaningfully to the top line during the period.

This concludes my financial overview. I will 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. During the first quarter, the efforts of our business development team paid-off nicely withstanding of $20 million in new business, which includes three new customers. Each of these new customers brings an exciting project to our portfolio and we are thrilled to have earned their business. In early August, we announced that Iovance Biotherapeutics has selected Avid to provide process development, pilot-batch manufacturing and CGMP manufacturing services to support development of IOV-3001, a novel antibody cytokine engrafted protein. In related news, last quarter, we announced that Avid has entered into a co-marketing agreement with Aragen Biosciences, a leading contract research organization focused on accelerating preclinical biologics development. We are already seeing the benefit of this collaboration as cell line development attributes for IOV-3001 are currently being conducted by Aragen under a subcontracting agreement with Avid.

On August 20, we announced that Oragenics, Inc., has selected Avid to provide analytical development, process development and drug substance manufacturing services to support Oragenics’ novel, COVID-19 spike protein vaccine candidate, Terra CoV-2. The company is currently conducting cell line development analytical method feasibility and qualification activities, and once complete plans to advance the program to upstream and downstream process development, while this program is early, we are very pleased to be working with Oragenics. And on August 26, we announced that Mapp Biopharmaceutical, Inc., has selected Avid for the clinical development of a novel monoclonal antiviral antibody. Avid is currently working to transfer the existing process into its process development laboratory and plan to conduct scale-up and ultimately provide GMP manufacturing from our Myford facility.

During the first quarter our team also entered into a co-marketing agreement with Argonaut Manufacturing Services to support drug product manufacturing. This partnership is designed to offer customers Avid’s upstream and downstream process development and drug subsctance manufacturing services along with Argonaut’s parentral drug product fill-finish services to support the efficient delivery of CGMP parental drug product for use in clinical trials. Through the collaborations with both Aragen and Argonaut, Avid has strategically established an end-to-end option for customers seeking support from early cell line development through drug product manufacturing. We are already seeing value from these relationships and we believe they will contribute significantly to Avid’s growth going forward.

Despite the impact of COVID-19 globally, our business development team is adapted well to the new normal and continue to deliver growth opportunity. We continue to engage at a high level with perspective and existing customers. We have virtual formats and we have observed no slowdown in our activities. Thankfully, we have experienced no 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 back over to Nick. Nick?

Nicholas Green — President & Chief Executive Officer

Thank you, Tim. I’d like to expand on Tim’s final comments to address Avid’s broader operations within the context of COVID-19. Despite the disruption caused globally by the pandemic, we are fortunate that we have not experienced any interruption to our operations. To date, we have observed no material impact to our production programs or our supply chain and our employees remain healthy and productive. Management continues to take every precaution and follow 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 unimpacted.

During and subsequent to the quarter, we made progress with a number of important operational projects. I’d first like to address the equipment issue that interrupted several production runs during the third and fourth quarters of fiscal ’20. As we reported last quarter, the specific piece of equipment in question is now operational. Following efforts to investigate and remediate the problem during the fourth quarter, we have now validated these efforts by completing multiple successful revenue generating production campaigns using this equipment. Importantly, as Dan reported earlier on, all of the delayed 20 batches — 2020 batches rather, have now been completed. At the very end of July, Avid also initiated its annual preventative maintenance shutdown. As in prior years, this process temporarily reduces available capacity, which as usual we expect to have some impact on our fiscal quarter two 2021 financial results.

Lastly, we continue to make progress with our expansion plans as we continue to see growth in customer demand, the ability to access additional capacity grows increasingly important. As I am new to the team and considering the importance of this in the future of the business, I’m in the process of reviewing the design funds and other ancillary requirements ahead of making our final decision with respect to the best path forward for the business. An expansion of this nature typically takes up to 24 months to complete and as such we are keen to not only move swiftly, but also thoughtfully.

In closing, I can say that I believe the accomplishments of the first quarter have established a good momentum for the rest of the year to come. During the quarter, our business development team signed $20 million in project orders with new customers as well as with existing customers. Looking ahead, we see growth in manufacturing demand and expect to continue to expand our production pipeline. Financially, we believe this demand will continue to drive our top line growth with margins improving in line. While we are not currently in a position to project sustainable quarter-to-quarter profitability, we are focused on extending this performance across our fiscal year.

This concludes my prepared remarks for today. And we can now go — we’ll open the line — the call for questions. Operator?

Questions and Answers:

Operator

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

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Good afternoon. Thank you for taking the questions. And welcome, Nick.

Nicholas Green — President & Chief Executive Officer

Thanks very much Matt.

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Regarding the three new customer wins. Obviously a nice cadence there as we lead up to the report today. Do you — it sounds like, one of them came via the new partners, but maybe talk about the pipeline of opportunities there? How the other two came about? And were you — what you’re seeing from a development standpoint I guess over the remainder of the year?

Timothy Compton — Chief Commercial Officer

Yes. Thanks, Matt. This is Tim. I’ll be happy to address that. So the other opportunities came from just our typical BD activities here at the organization. We have a strong pipeline. Our pipeline continues to grow for new opportunities on a monthly basis. As you know, some sales cycles are short and some sales cycles are long, just really depending on the absolute need of the customer and how fast they need to move when selecting a partner like Avid. And so, like I said, we have a number of opportunities in our pipeline and we look to continue to add new customers throughout the year.

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Great. And then, there was obviously a benefit, I think largely due to the fees, but even if you back off that $3.1 million, your gross margin would have come in at 24.5% roughly. That’s still a big step-up from the last couple of quarters and quite frankly, last couple of years. How should we be thinking about gross margin for the remainder of the year?

Daniel Hart — Chief Financial Officer

Hi, Matt. Gross margin for the year, gross margin will continue to track in line with revenue growth. As we noted in our prepared remarks, there are couple of items that went into this first quarter that helped absorb some of our largely fixed costs. So going forward, as I’ve mentioned in the past, we’ll continue to move our margins forward. 34% is a significant margin for us for the first quarter and as we see the ups and downs in the quarters going forward that will be a little bit more in line with that net number 20%, 24% as you mentioned.

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Okay, great. And then maybe one last question, then I’ll hop back into the queue. With the — with these new — two new partnerships, as you’re having discussions with customers, are you getting the response essentially, we’re glad that you’ve got this now or what are you hearing from customers regarding those two relationships and how does that really kind of build the pipeline for you in addition to the internal work that you’ve been doing? Thank you.

Timothy Compton — Chief Commercial Officer

Hi Matt. This is Tim again. I assume by partnerships, you’re talking about the co-marketing agreements with Argonaut and Aragen.

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Correct.

Timothy Compton — Chief Commercial Officer

Yes. So we’re seeing typically with request were pulled from our customers, they are looking for an end-to-end service offering starting out — especially some of the earlier development programs are starting out on cell line development. And so simply by providing them an option to work with one of the — one of our partners on the cell line development is beneficial and keeps us at the table with that perspective customer early on in the development of the program. Otherwise we would likely come to the table after cell line development is completed. And then going at the other end of the spectrum, looking at the drug product, we’re also getting request for drug product and so there we would connect them with our co-marketing partner there at Argonaut Manufacturing Services. But again, each of these co-marketing agreements are non-exclusive and really it’s a satisfying the customer needs and working with them to provide a flexible solution for them.

Matt Hewitt — Craig-Hallum Capital Group — Analyst

Understood. Thank you.

Operator

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

Jacob Johnson — Stephens Inc. — Analyst

Hey, thanks. Congrats on a really strong quarter. And welcome to Avid, Nick. I guess first question is just on capacity. In the release and in your comments, you talked about the need to expand capacity to meet customer demand. Maybe, could you remind us where you are in revenue capacity roughly today? And then if you break ground shortly, do you think you’ll have enough time to bring this capacity online in time to meet the projected demand you’re seeing? It sounds like you’re moving pretty swiftly?

Daniel Hart — Chief Financial Officer

Hey, Jacob. I’ll start that. So the current installed capacity we have in our two plants can get us roughly to $100 million plus in revenue. If we were to expand our current facilities, that footprint, if we were — as we talked in the past, looking at the overall Myford footprint, we have the ability to expand into the second half of Myford. And expanding into the second half, because we don’t have a lot of redundant utilities that we’ll have to put in, we could add up to capacity revenue generating capacity of up to another $100 million plus in revenues. So current installed base today is $100 million if we were to fully build out our Myford, we could get to $200 million, $250 million.

Nicholas Green — President & Chief Executive Officer

Yes. Jacob, this is Nick speaking. Just to add a little bit of color to that, I mean one of the things that I — we are looking at the moment is sort of a critical path analysis of all the various activities within the operations to try and determine whether there are opportunities to free capacity in the shorter term as well as the overall expansion which effectively adds very significant amount of expansion and take somewhat longer to do. So, to give you an exact percentage depends on which portion of the — part of the critical path you measure it against. But I think we’ll have that, that concluded in the not too distant future and probably be reporting how we’re going to move forward on that in the next few months.

Jacob Johnson — Stephens Inc. — Analyst

Great. Thanks for that Nick. And then maybe a question, high level question for you Nick. I realize that day maybe 32 on the job here at Avid, but would be interested in your high level thoughts on Avid’s strategy going forward. Are there any therapeutic areas or capabilities that maybe — had not been historical focus for Avid that there would be interested to you or just sort of any other high level thoughts on the strategy going forward?

Nicholas Green — President & Chief Executive Officer

A little early to give you a strategy for going forward, we’re actually embarking on that process as we speak and/or as soon as we finish the call with investors following this call. So certainly in terms of what I’ve seen, I think there’s plenty of opportunity. I think, I’ve been delighted with the — with open mindedness of the management team to be frank. People open to different ideas and suggestions and thoughts, which I think is always very healthy in terms of developing the strategy going forward. I think it would be fully for me to suggest that I had a magic wand and I was also going to walk in 32 days and present them with a new strategy that was going to reveal a bright new future. But I think there is lots and lots of opportunity for us, both internally and in improving the way we operate as well as externally in looking at the services and the way that we service our clients. So I think sort of next quarter call. I’d be more than happy to give you my views on how we’re going to move the organization forward, but don’t envisage that being something that’s driven by a lack of opportunity rather quite a contrary.

Jacob Johnson — Stephens Inc. — Analyst

Understood. I’ll try again next quarter. And then Dan just one last question for you. You reiterated guidance for the year. Understand there are some one-time benefits in the quarter. 2Q, I think is the seasonal maintenance period and also the fact it’s one quarter end. But just anything else you would call out as to why you guys didn’t raise guidance following, obviously a really strong start to the year.

Daniel Hart — Chief Financial Officer

I think there’s a couple of things in there, Jacob. The first one is, it’s our first quarter and as we discussed in the prepared remarks, there were a couple of things that hit the first quarter that helped elevate that top line. We do have our shut down that we do in the second quarter every year. As we look at where we’re at today, in addition, the uncertainty with the pandemic, we’re comfortable with where we’re at looking at our forecast moving forward. So that’s why we reiterated our guidance of $76 million to $81 million.

Jacob Johnson — Stephens Inc. — Analyst

Got it. Thanks for taking the questions guys.

Operator

Thank you. And I’m showing no further questions in the queue at this time. I would like to turn the call back to Nick Green for any closing remarks.

Nicholas Green — President & Chief Executive Officer

Thank you, operator. And thank you to everyone participating on today’s call. I am pleased to be at Avid at this exciting time in the company’s evolution and have a great deal of optimism for the future of the business, and I’m very happy to be working alongside our exceptional employees.

In closing, I’d like to thank our dedicated employees, many of whom are at Avid daily, working through the challenges presented by COVID-19, both at home and at work. They work to ensure that we are able to deliver commercial and clinical products we need to supply to patients in need. None of this success would be possible without the hard work, commitment to our employees and I am grateful for their dedication. I thank you again for participating in today’s call and thank you for your continued support of Avid Bioservices.

Operator

[Operator Closing Remarks]