U.S. markets open in 2 hours 13 minutes

Edited Transcript of PPHM earnings conference call or presentation 27-Jun-19 8:30pm GMT

Q4 2019 Avid Bioservices Inc Earnings Call

Tustin Jul 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Avid Bioservices Inc earnings conference call or presentation Thursday, June 27, 2019 at 8:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Daniel R. Hart

Avid Bioservices, Inc. - CFO

* Richard B. Hancock

Avid Bioservices, Inc. - Interim President, CEO & Director

* Tracy L. Kinjerski

Avid Bioservices, Inc. - VP of Business Operations

================================================================================

Conference Call Participants

================================================================================

* Joseph Pantginis

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* Paul Richard Knight

Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst

* Steven Schwartz

First Analysis Securities Corporation, Research Division - Analyst

* Tim Brons

Vida Strategic Partners Inc. - EVP

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, ladies and gentlemen, and welcome to the Avid Bioservices Fourth Quarter and Year-end 2019 Financial Results Conference Call. (Operator Instructions) 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, Vida Strategic Partners Inc. - EVP [2]

--------------------------------------------------------------------------------

Thank you. Good afternoon and thank you for joining us. On today's call, we have Rick Hancock, Interim President and CEO; Dan Hart, Chief Financial Officer; and Tracy Kinjerski, Vice President Business Operations. 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 and full year ended April 30, 2019. 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 27, 2019, 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?

--------------------------------------------------------------------------------

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [3]

--------------------------------------------------------------------------------

Thank you, Tim, and thank you to all of you who have dialed in and to those who are participating today via the webcast. This is my first earnings call in this role with Avid, I would like to say that I'm very pleased to be working closely with our team as we continue to transition the business and build upon the accomplishments of my predecessor, Roger Lias. I am particularly pleased to have the opportunity to discuss the achievements of Q4 fiscal 2019, Avid's strongest quarter since becoming a dedicated CDMO.

With respect to our financial performance, fourth quarter 2019 results beat industry estimates for both revenue and EPS. Most importantly, during the fourth quarter, the company achieved positive income, generating cash from development and manufacturing operations for the first time since the beginning of the transition. The growth realized during the quarter was reflected in other metrics as well, and Dan will provide more details regarding our financial performance in a moment. Multiple successes on the business development front drove the quarter's strong financial performance. In the fourth quarter, our BD team advanced new business opportunities and won multiple new projects with existing customers. Though these new projects are with existing customers, many are for the development and manufacture of additional molecules, which were not part of the initial contract. Each of these programs represents the opportunity -- represents a new opportunity for commercial production down the road. Tracy will provide more color on these developments shortly.

With that, I'll turn the call over to Dan to provide a financial overview.

--------------------------------------------------------------------------------

Daniel R. Hart, Avid Bioservices, Inc. - CFO [4]

--------------------------------------------------------------------------------

Thanks, Rick. Before I begin, I'd like to recommend that everyone participating today 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 ended April 30, 2019, starting with revenue. As Greg stated, the fourth quarter was our strongest to date since officially beginning the transition to a dedicated CDMO. Revenue for the fourth quarter of 2019 was $17.1 million, an increase of 146% as compared to $6.9 million for the same period of the prior year. This increase was primarily the result of the growing in the number and scope of customer projects. Revenue for the full fiscal year 2019 was $53.6 million, and while that was flat compared to fiscal 2018, it exceeded our guidance, which we had expected to come in within the lower half of the range between $51 million and $55 million. For both the fourth quarter and the full fiscal year 2019, margins increased significantly as compared to prior year periods. Gross margin for the fourth quarter was 21%, and gross margin for the full fiscal year 2019 was 13%. These margins are compared to a negative 28% for the fourth quarter of 2018 and a negative 5% for fiscal 2018. These increases reflect the growth in customer projects, the increased utility of our existing capacity, a judicious management of expenses and increasing operational efficiencies.

Turning now to operating expenses. Total SG&A expenses for the fourth quarter of fiscal 2019 were $3.6 million compared to $4.2 million for the fourth quarter of fiscal 2018. For the full fiscal year 2019, total SG&A expenses were $12.8 million or 24% of revenue compared to $16.5 million or 31% of revenue for the full fiscal year 2018. It's important to note that SG&A results for the prior year included nonrecurring expenses of approximately $4.4 million related to the transition of our business to a pure play CDMO. These prior year expenses included reductions in payroll and related cost, legal fees and other professional consulting fees, administrative cost and a write-off related to a deposit of capital equipment. Excluding these nonrecurring charges, SG&A increased $0.8 million primarily due to increases in bonuses related to achievement levels of corporate goals and stock-based compensation. During the fourth quarter of 2019, we generated income from continuing operations of $0.2 million compared to a loss from continuing operations of $6.1 million for the fourth quarter of fiscal 2018. This marks the first quarter of positive income from continuing operations since announcing our transition to a dedicated CDMO back in January of 2018. Fiscal year 2019 loss from continuing operations was $5.1 million compared to a prior year loss from continuing operations of $20.6 million. The decrease during the full fiscal year was partially driven by reductions in both cost of revenues and SG&A resulting in higher profitability margins. For the fourth quarter of fiscal 2019, the company recorded consolidated net loss attributable to common stockholders of $1.1 million or $0.02 per share compared to a consolidated net income attributable to common stockholders of $1.6 million or $0.03 per share for the same prior year quarter. For the full year fiscal 2019, the company recorded a consolidated net loss attributable to common stockholders of $8.9 million or $0.16 per share compared to a consolidated net loss attributable to common stockholders of $26.5 million or $0.56 per share for full year fiscal 2018. Both the prior fourth quarter and the full fiscal year 2018 net income and loss were favorably impacted by the sale of Avid's legacy R&D assets to Oncologie Inc. for $8 million and the associated discontinuing operations. Our backlog at the end of the fourth quarter 2019 was approximately $46 million, an increase compared to a backlog of $43 million at the end of Q3 2019. We are pleased to maintain a strong backlog that will continue to contribute to our growth trend, and we expect to recognize the majority of this balance in fiscal 2020.

Lastly, during the fourth quarter of fiscal 2019, we generated $5.6 million of operating cash flow plus increasing our cash and cash equivalents as of April 30, 2019, to $32.4 million. Cash and cash equivalents were $42.3 million as of the prior fiscal year ended April 30, 2018. As we stated consistently throughout the last year, achieving positive income from continuing operations has been a major milestone for the company. By aggressively pursuing and winning new business from existing clients, carefully managing cash and expenses and consistently incorporating new efficiencies into our processes, we have successfully delivered on this goal. Based on our current backlog as well as our forecast for typical expansion of ongoing projects, we believe the company has reached a very important position from which we expect to achieve sustainable growth and continued profitability.

This concludes my financial overview. I will now turn the call over to Tracy for an update on business activities and achievements for the quarter.

--------------------------------------------------------------------------------

Tracy L. Kinjerski, Avid Bioservices, Inc. - VP of Business Operations [5]

--------------------------------------------------------------------------------

Thanks, Dan. During the fourth quarter, Avid's increased visibility in the industry and our aggressive work to expand both our client base as well as our project pipeline yielded great dividends. During the quarter, we had a strong presence at several of the industry's best-attended events and conferences, including but not limited to DCAT Week and INTERPHEX. As the quarter was coming to an end, we were heavily focused on our preparation for the 2019 BIO International Convention, which commenced subsequent to quarter end. Part of this conference was to further build our brand awareness and messaging in the biotherapeutics industry while also meeting with current and potential new customers and sponsoring and supporting key industry organizations such as DCAT and Women in Bio. As a result of this continuous exposure as well as our customer outreach efforts, our log of new business discussions continues to grow. As evidenced by the high number of key meetings at conferences and subsequent influence or influx of new request for proposals, we are gaining important traction with new potential customers and industry partners. Equally important, as we believe today's financial results have demonstrated, is the new business we continue to win with existing customers. While some of this business results from the expansion of our current projects, many of these projects are completely new, requiring development and/or manufacture new of molecule. These wins are incredibly valuable for several reasons. First, the earlier phased projects represent opportunity for both early-stage as well as commercial production, as the program advances through the various regulatory stages. Other follow-on molecules from existing customers may be later phased, leading to validation in commercial stage with more certainty and providing assurance of need for long-term manufacturing. Second, as we already have a working relationship with these companies, onboarding and other aspects of the process are much more efficient and less costly, making these projects more profitable for Avid. And finally, the repeat business is a great testimonial for Avid. The fact that many of our clients have come back from multiple projects speaks to the collaborative relationships we established with our clients, the expertise of our team, the state-of-the-art nature of our facilities and processes, and most importantly, the quality of our product.

I would now like to provide an update with respect to one of our largest customers. Halozyme Therapeutics continues to increase demand for manufacture of the recombinant human hyaluronidase enzyme, supporting their enhanced technology platform. Avid currently manufactures product not only for Halozyme's collaboration products, but also for collaboration product candidates currently in development. We believe that the strengthened forecast are partially due to a key Halozyme partner for whom Avid is the exclusive supplier, depleting their inventory. More importantly, this demand is also driven by new development projects and new product launches by Halozyme's partners as well as market growth for their commercial products. We anticipate that this trend will continue into fiscal year 2020 as Halozyme's partners advance their clinical development programs and begin preparing for commercialization. As we discussed last quarter, Avid recently completed a profit validation campaign for a new scaled-up manufacturing process on behalf of Halozyme in anticipation of future commercial manufacturing. In addition, we have recently completed a second process validation campaign of fiscal 2019, with another campaign in progress. Once the profit validation is completed, the associated certifications of that process represent a key part of global regulatory filings. The manufacturing profit becomes part of the product approval and the customer is required to manufacture in the specified facility using a specified process. Of course, clinical trials and regulatory reviews take years and there's no guarantee of a drug approval at the end of the process. However, for those products approved using processes validated at Avid is likely that the commercial manufacturing will be conducted at Avid. To move the business to another CDMO at that point would require a new process validation and refiling with the regulatory agency, which are highly risky, expensive and time-consuming propositions. For these reasons, we see each process validation completed today as a great opportunity to build commercial business in the future. We remain very excited about the demand in the biopharmaceutical community in general. And with our regulatory history, we believe we are uniquely positioned to serve clients, who are developing products with accelerated approval time line. Importantly, this strategy allows us to support rare disease product development partners. As a CDMO, our aim is to support our clients to ensure availability of medicines for all, regardless of the size of the patient population. The flexibility is built into our facility configuration and design combined with the mindset of our leadership continues to foster this goal. During the year, our business development and project management team members set and met the high standards essential to our customer-centric approach. Looking forward, we are excited by the new and expanding opportunities that we expect to feel continued growth and increase in capacity utilization in fiscal 2020.

This concludes my business overview, and I'll now hand the call back to Rick. Rick?

--------------------------------------------------------------------------------

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [6]

--------------------------------------------------------------------------------

Thank you, Tracy. I'd also like to congratulate the business operations team on its accomplishments during fiscal 2019. The new business won in the past year has put Avid in a stronger position to continue its growth trajectory.

I'd now like to provide a brief update regarding operations at Avid. We continue to make progress with the expansion of the Franklin process development lab, which will primarily has upstream processing. It is currently our expectation that this work will be completed in the fall. Concurrent with this work, we are evaluating all of our facilities, equipment and processes as part of a 3-year plan in an effort to incorporate additional efficiencies where possible and new technologies where applicable. This ongoing process is essential in ensuring that Avid's processes remain at the forefront of development and manufacturing, and that our facilities represent the state-of-the-art among CDMOs. All these enhancements are taking place to improve our existing Franklin and Myford facilities. We have significant room to expand our operations and anticipate doing so as demand for our services continues to increase. Until then, we will remain focused on filling and optimizing our existing capacity.

I'll now turn to leadership at Avid. I recently stepped in to serve as Avid's Interim President and CEO, following the departure of Roger Lias last month. Given my 20 years of experience in the CDMO sector, and my tenure on Avid's board, I am thrilled that the opportunity to assume temporary leadership at this exciting time of growth and transition. The Avid Board has initiated a search for the company's new, permanent CEO. Having said that, we are being very deliberate in this crucial process. We recognize the significant progress that has been made to date at Avid, and we will take our time to sign the ideal candidate to lead the company to ongoing success. We do not have a time line for this process. We'll update you as there is news to report.

In closing, I'd like to emphasize that during fiscal 2019, the Avid team successfully achieved the most critical goals for the business. Most notably, we converted the losses and negative margins of fiscal 2018 into a sustainable position of financial strength and operational profitability. And we expect to continue revenue growth moving forward. With respect to business development, the 5 new clients signed in late fiscal 2018 contributed significantly to revenue diversification in fiscal 2019. These projects substantially increased capacity utilization, which drove a meaningful improvement in margins during the year. Avid is stronger to date than it has been at any point in its history. For that, we offer our sincere thanks to Roger Lias, who led the transition from a drug development company to a leading and profitable CDMO. Looking ahead, we will continue to execute according to plan with even higher goals for revenue and new customer projects. As in fiscal 2019, we expect to continue to achieve great successes in the coming years. With that, I'm happy to announce that for fiscal 2020, we expect to record revenue of between $64 million and $67 million, representing growth of approximately 20% to 25% over fiscal 2019. And as we continue to achieve revenue growth, we expect the improvement in margins to track accordingly. Thank you to all of our investors, industry colleagues and friends who have continued to support Avid during its transition. But most importantly, I'd like to offer a big thank you to the entire Avid team, employees worked tirelessly and diligently to make Avid the best CDMO it can be. It is because of their unwavering commitment to excellence that I am confident in Avid's growth potential and very excited about the successes that lie ahead.

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

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question will come from Joe Pantginis with H.C. Wainwright.

--------------------------------------------------------------------------------

Joseph Pantginis, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [2]

--------------------------------------------------------------------------------

First, just curious with the 5 new clients that were signed in late fiscal '19, can you talk about what the mix is? Are they all early stage for process development -- in early process development?

--------------------------------------------------------------------------------

Tracy L. Kinjerski, Avid Bioservices, Inc. - VP of Business Operations [3]

--------------------------------------------------------------------------------

Yes. So I'll take a stab at that. So we did -- as you mentioned, there are several projects that we signed and they varied. Some of those projects came in immediately from cell line development stage. So they are very early on, and we also had at least one project that came in that was more at the Phase II stage. Well, that pretty much covers it. And pretty good range, I mean, in -- when you look at those customers. And yes, just to reiterate, those customers were signed at the (inaudible) of late 2018. Yes, just wanted to share that comment.

--------------------------------------------------------------------------------

Joseph Pantginis, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [4]

--------------------------------------------------------------------------------

Sure. Sure. No, thanks for the clarification. And then my next 2 questions is more of a reminder or refresher if you don't mind and it's focusing on backlog. So the first part is with regard to the backlog increasing and your prepared comments, talking about the facilities that you already have with regard to Franklin and Myford, what is sort of a trigger number, if you will, that will allow you to then actively expand your capacity?

--------------------------------------------------------------------------------

Daniel R. Hart, Avid Bioservices, Inc. - CFO [5]

--------------------------------------------------------------------------------

Joe, this is Dan. I appreciate the question. The backlog is a little tricky. Because as we've discussed in the past, the backlog is only the signed contractual firm relationship that we have with the clients. It's not the entirety of our, call it, our opportunity pipeline in any work that we see from our customer forecast. So it just depends on the overall kind of operation and financial forecast that we're looking at from our customers, not necessarily just the backlog number that is reported.

--------------------------------------------------------------------------------

Joseph Pantginis, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [6]

--------------------------------------------------------------------------------

Understood. Understood. And then you actually answered part of the next question with regard to -- when you talk about the backlog number, you did remind us, obviously, that it's the signed contractual work. So what else does the number not include?

--------------------------------------------------------------------------------

Daniel R. Hart, Avid Bioservices, Inc. - CFO [7]

--------------------------------------------------------------------------------

So there's a lot of -- so the programs that we're running for our clients, they run multiple months, multiple quarters, multiple years. And those forecasts that we have from our clients, we can see as to where that particular project or program is going. However, contractually, we may only sign up for some limited portion of that entire program.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

And our next question will come from the line of Paul Knight with Janney Montgomery.

--------------------------------------------------------------------------------

Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [9]

--------------------------------------------------------------------------------

Rick and maybe Tracy as well on this question, and that is I think you were considering expanding the sales force, where are you with those efforts? What you do want to do for -- as far as on that?

--------------------------------------------------------------------------------

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [10]

--------------------------------------------------------------------------------

Right. So we do have one current opening for a sales rep, and Tracy and her team are continuing to evaluate where to put additional resources. Tracy has built a very, very strong internal business operations team and they handle some of the activities that might normally be handled by external sales reps. So we don't feel that we need a tremendous number of field representatives at this time to cover our industry, but we are monitoring that. So looking for people, field representatives to be focused in the hubs of biotech activity.

--------------------------------------------------------------------------------

Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [11]

--------------------------------------------------------------------------------

Okay. And then -- and Dan, on the case of backlog, is there a change in the way you're recognizing or reporting backlog? You're talking about it being in the next 12 months, but is your recording of it any different than you've done in the past? Is it a more conservative approach or no change? And then on the second question regarding -- I think Dan would want to talk to this as the rollout of quarters in 2020, will it start kind of, let's say, down sequentially? How do you want us to think about rolling out quarters in an upcoming fiscal or current rather?

--------------------------------------------------------------------------------

Daniel R. Hart, Avid Bioservices, Inc. - CFO [12]

--------------------------------------------------------------------------------

Yes. As far as the -- your first question on backlog, there's no change into how we account for or report our backlog. So the cadence of that backlog is merely a factor of, if you're looking at a period-over-period, it's the beginning balance, you take out any revenue, you're recognizing anything that we've signed, you add back to it. There's no difference as far as the content of that backlog, it's all based on contractual relationships.

As far as your second question, we're not necessarily giving quarter-over-quarter guidance as far as what that revenue looks like. But as we've said in our prepared remarks, the revenues -- the guidance that we're providing for fiscal '20 is $64 million to $67 million.

--------------------------------------------------------------------------------

Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [13]

--------------------------------------------------------------------------------

And Rick, if you could talk to business conditions now, customer interest, customer inquiries, how was it now versus one year ago? Is it better? Expanded? What's the tone of customer and demand right now?

--------------------------------------------------------------------------------

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [14]

--------------------------------------------------------------------------------

Great question. So it remains extremely strong. As Tracy mentioned, we were just at Bio recently, and our customers and our potential customers, we had quite a number of meetings. They continue to be very healthy. They're able to access the funds that they need to bring innovative molecules to the market, and we continue to be in the sweet spot for where a lot of those drugs are being developed. So not really huge blockbuster products but more niche, orphan indications and follow along biosimilars, they really fit very well with our capacity. And as Tracy mentioned in her remarks, quite a number of those products moved through the clinical development process very quickly. So having a CDMO with a commercial history is very critical. Obviously, the industry is very, very strong at this point. A lot of the antibodies and other mammalian derived proteins being developed from early research, all the way through later clinical trials and moving towards approval.

--------------------------------------------------------------------------------

Paul Richard Knight, Janney Montgomery Scott LLC, Research Division - MD, Head of Healthcare Research & Senior Equity Research Analyst [15]

--------------------------------------------------------------------------------

And then my last question, Rick, is what are the 2 or 3 things that customers, do you think, are finding most appealing about your offering? Is it you can do early-stage work? Is it your physical location? What do you think are the key touch points that customers are liking?

--------------------------------------------------------------------------------

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [16]

--------------------------------------------------------------------------------

Yes. So I think first and foremost, it's our tremendous regulatory history. That's where the key differentiator is that makes Avid unique compared to a lot of other people who can develop mammalian proteins. So the number of years that we've had of commercial experience, the number of countries that we have approval for, that really sets us apart. And then as you hit on, I think the ability to take projects from early-phase development up through clinical trials and rapidly to commercialization is very attractive, the flexibility in our platforms and I think the expertise in process development, in regulatory, in quality and of course, in manufacturing. In terms of geography, which you mentioned, that is just something that does help us with the Bay Area, Seattle, San Diego clients and the Los Angeles area. Certainly, being in the same time zone, when we have a person in the plant where we're doing production, they can just fly down from San Francisco, be here for the today and fly back. So it is very attractive. We also do get quite a bit of work from the East Coast as well. And those POPs love to come out to beautiful Southern California, particularly in the winter. So we use our geography as a strong advantage. So I'd say, it's a combination of those factors, but really, one of our keys, I think, is our regulatory history.

--------------------------------------------------------------------------------

Operator [17]

--------------------------------------------------------------------------------

And our next question will come from the line of Steve Schwartz with First Analysis.

--------------------------------------------------------------------------------

Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [18]

--------------------------------------------------------------------------------

Well, to carry on one question from Joe and Paul, with respect to the backlog. So in the press release, you note $19.7 million from existing customers, and I think as you stated in one of your early responses, if you back up the $17.1 million in revenue booked, it looks like you added $2.6 million to the backlog from existing customers with the $3 million difference then -- does that mean there's about $400,000 added to the backlog from new customers? Am I reading those numbers right?

--------------------------------------------------------------------------------

Daniel R. Hart, Avid Bioservices, Inc. - CFO [19]

--------------------------------------------------------------------------------

No. I think, Steve, if I were to help clarify that, we began the quarter with backlog of $43 million, and during the quarter we recognized $17.1 million of revenue. In addition, we signed additional contractual relationships with existing customers of $19.7 million. So adding those 3 numbers together is where we end up at our $46 million backlog at the end of April.

--------------------------------------------------------------------------------

Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [20]

--------------------------------------------------------------------------------

Okay. But then that would suggest, right, that the backlog add from $43 million to $46 million was all from existing customers?

--------------------------------------------------------------------------------

Daniel R. Hart, Avid Bioservices, Inc. - CFO [21]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [22]

--------------------------------------------------------------------------------

That's right? Okay. Okay. No, that clarifies it. That's perfect then. Okay. And then not to harp on the question that Paul suggested about the rollout of revenue across the year, but it would really be helpful, there's really no way you can tell us, kind of, maybe what the first half looks like versus second half? Is it -- should we just presume like 50-50, is it more like 40-60?

--------------------------------------------------------------------------------

Daniel R. Hart, Avid Bioservices, Inc. - CFO [23]

--------------------------------------------------------------------------------

Steve, we're not giving quarterly guidance at this point. All that I could tell you is that our annual is $64 million to $67 million.

--------------------------------------------------------------------------------

Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [24]

--------------------------------------------------------------------------------

Got it. Got it. Okay. And in Tracy's prepared remarks talking about the validations, just so I understand this correctly, in FY '19 you did 2 process validations. It sounds like the first one was for Halozyme and then the second one was not. Or was that also a Halozyme process?

--------------------------------------------------------------------------------

Tracy L. Kinjerski, Avid Bioservices, Inc. - VP of Business Operations [25]

--------------------------------------------------------------------------------

Yes. There was only one for Halozyme.

--------------------------------------------------------------------------------

Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [26]

--------------------------------------------------------------------------------

Okay. And then the one that's underway for FY '20 is not Halozyme either. Is that correct?

--------------------------------------------------------------------------------

Tracy L. Kinjerski, Avid Bioservices, Inc. - VP of Business Operations [27]

--------------------------------------------------------------------------------

Yes. It is not. That's correct.

--------------------------------------------------------------------------------

Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [28]

--------------------------------------------------------------------------------

Okay. Sounds good. And just to, I guess, echo what you stated in your -- and make sure I got this correctly, there's really no way for us to get a sense of when that might transform itself into revenue from a validation to actual production. Is that correct?

--------------------------------------------------------------------------------

Tracy L. Kinjerski, Avid Bioservices, Inc. - VP of Business Operations [29]

--------------------------------------------------------------------------------

To commercial? Right, we really need to wait for the filings and the approvals, the inspections, et cetera.

--------------------------------------------------------------------------------

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [30]

--------------------------------------------------------------------------------

A lot of those activities are -- essentially, all of those activities are beyond our control.

--------------------------------------------------------------------------------

Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [31]

--------------------------------------------------------------------------------

Okay. And then with respect to gross margin. So there -- very nice improvement in FY '19. And in the release, you stated a couple of reasons behind that. So I just want to make sure I understand with respect to product mix. And you are starting to present these numbers in the filings, but if we could just talk about it? When you refer to mix, is it the mix between development work versus production work? Is it a mix of what's going through actual production? Can you give us a little color around that?

--------------------------------------------------------------------------------

Daniel R. Hart, Avid Bioservices, Inc. - CFO [32]

--------------------------------------------------------------------------------

It's all of the above. In addition to that, it's also the type of effort, whether it's just a service or service-inclusive materials. And also based on the type of work that we're doing, if we're doing analytical development or if we're doing straight up manufacturing, in addition to the scale of the manufacturing, is also different in that type of margin. So it's all of the above.

--------------------------------------------------------------------------------

Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [33]

--------------------------------------------------------------------------------

Okay. And how is it you saw the reduction in direct manufacturing cost? Is that sustainable? Or was it just within the quarter?

--------------------------------------------------------------------------------

Daniel R. Hart, Avid Bioservices, Inc. - CFO [34]

--------------------------------------------------------------------------------

No. That overall reduction was essentially a change that we went through near the end of last year into this year. So going forward, we won't see significant reductions such as that, though we'll continue to focus on cost control and looking at spending wisely, just anything that's affecting our gross profit margins. But that was kind of as we transitioned into a pure play CDMO.

--------------------------------------------------------------------------------

Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [35]

--------------------------------------------------------------------------------

Okay. Okay. And then my last question is around SG&A. And you saw significant reduction in FY '19. What should we expect going forward for FY '20? I mean there's going to be $0.5 million in there, paid out to Roger, right? So there's -- you're going to have like a double CEO salary that is going to be in there. But aside from that, is there anything else we need to be aware of? Considering the big gap between FY '18 and FY '19?

--------------------------------------------------------------------------------

Daniel R. Hart, Avid Bioservices, Inc. - CFO [36]

--------------------------------------------------------------------------------

Steve, as well we've said in the past, it still holds true, is we don't see any significant increases in SG&A. You don't -- we're not at a point where we need to add a bunch of head count or any other type of operational cost within SG&A. We can fully leverage that. We'll see some growth as the business grows, but it's not going to be anywhere near the growth of the revenue rate or cost of sales.

--------------------------------------------------------------------------------

Steven Schwartz, First Analysis Securities Corporation, Research Division - Analyst [37]

--------------------------------------------------------------------------------

Yes. Okay. Fantastic. Well, very nice quarter, everyone. Nice to see the inflection coming through here.

--------------------------------------------------------------------------------

Daniel R. Hart, Avid Bioservices, Inc. - CFO [38]

--------------------------------------------------------------------------------

Thank you, Steve.

--------------------------------------------------------------------------------

Operator [39]

--------------------------------------------------------------------------------

At this time, I would like to hand the call back over to Rick Hancock for any closing remarks.

--------------------------------------------------------------------------------

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [40]

--------------------------------------------------------------------------------

Thank you, again, for participating today. And thank you for your continued support of Avid Bioservices. We look forward to updating you again in the near future.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.