U.S. markets closed

Edited Transcript of PPHM earnings conference call or presentation 9-Dec-19 9:30pm GMT

Q2 2020 Avid Bioservices Inc Earnings Call

Tustin Dec 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Avid Bioservices Inc earnings conference call or presentation Monday, December 9, 2019 at 9:30:00pm 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

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

* Jacob K. Johnson

Stephens Inc., Research Division - Analyst

* Joseph Pantginis

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

* Matthew Gregory Hewitt

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Michael Gokay

Janney Montgomery Scott LLC, Research Division - Associate

* Tim Brons

Vida Strategic Partners Inc. - EVP

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

Presentation

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

Operator [1]

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

Good day, ladies and gentlemen, and welcome to the Avid Bioservices Second Quarter 2020 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 ended October 31, 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, December 9, 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 everyone who has dialed in and to those who are participating today via webcast. During the second quarter, increased productivity and efficiency drove positive results across the organization, and I am happy to provide an overview of the progress made during the period.

I'll begin by stating that revenue for the second quarter of 2020 was the highest that Avid has recorded in the last 2 years. In addition, our backlog and other financial metrics were strong during the quarter, and Dan will provide more details regarding our financial results in a moment.

On the business development front, we continue to have a strong presence in the market, with the goal of attracting new business, and we are advancing multiple discussions to expand our scope of work with several current customers. Tracy will provide an update on these activities.

We also achieved several important milestones operationally during the quarter, and we believe -- that we believe will enhance our services offerings and contribute to the continued growth of our business. I will provide more details on these accomplishments following an overview of our second quarter financial results.

With that, I'll turn the call over to Dan.

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

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

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

Thank you, Rick. 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 discuss our financial results for continuing operations for the second quarter and the first 6 months of fiscal 2020, ended October 31, 2019. I'll first address our second quarter results.

Revenue for the quarter was considerably better than market estimates at $18.3 million, an increase of 80% as compared to $10.2 million for the same period of the prior year. This significant increase was primarily the result of an increase in the number of in-process and completed manufacturing runs during the quarter primarily for our largest customer.

Gross margin for the second quarter of 2020 was 18%, a significant increase as compared to the 3% gross margin in the prior year period. The increase in gross margin for the quarter was primarily attributed to revenue from an increased number of manufacturing runs, which was more than enough to offset the unexpected costs incurred at the beginning of our fiscal year.

I'll now address operating expenses. Total SG&A expenses for the second quarter of fiscal 2020 were $3.5 million compared to $2.8 million for the second quarter of fiscal 2019. This increase was primarily due to increases in both payroll and related expenses, and stock-based compensation. Also during the quarter, we entered into a lease amendment to terminate an operating lease for one of our nonmanufacturing facilities that was primarily utilized as warehouse space.

As part of the -- our continuing efforts to reduce costs and increase efficiencies, this quarter, we successfully consolidated our available warehouse space, thereby moving supplies and materials closer to manufacturing, which allowed for the termination of this lease. In connection with the lease termination, we recognized a onetime charge of $355,000.

As a result, our future lease and related payments have been reduced by approximately $1.3 million over the next 4 years and the termination freed up $250,000 of restricted cash that was pledged as collateral under a letter of credit required by the lease. The lease termination of this redundant warehouse space has no impact on our future expansion plans as we still have 42,000 square feet available within our Myford facility.

For the second quarter of fiscal 2020, the company recorded a consolidated net loss attributable to common stockholders of $1.9 million or $0.03 a share. This outcome was an improvement compared to a consolidated net loss attributable to common stockholders of $2.9 million or $0.05 a share for the second quarter of fiscal 2019, exceeding consensus estimates.

Our backlog at the end of the second quarter of 2020 was $52 million, a decrease of 16% compared to the $61 million at the end of the first quarter 2020 and an increase of 13% compared to the $46 million at the end of last fiscal year. This quarter-over-quarter decrease resulted from efficiencies that allowed us to increase manufacturing activity by initiating several runs in the second quarter that were originally scheduled for a later period and was partially offset by current period bookings.

Despite accelerating our production schedule, we continue to maintain a strong backlog, much of which we expect to recognize in fiscal 2020.

I'll now provide an overview of our results for the first 6 months of fiscal 2020. For the first 6 months ended October 31, 2019, revenues were $33.6 million, a 47% increase as compared to revenues of $22.8 million during the prior year period. As is the case with the quarter, the significant increase was primarily the result of continued growth in the number and scope of customer projects.

Gross margin for the 6 months ended October 31, 2019, was 13%, up significantly compared to the 7% in the prior year period. This increase was primarily due to an increase in manufacturing of customer projects, which was more than enough to offset the step-up in personnel costs required to accommodate growth and production demand, and a realignment of company's compensation structure to secure our existing workforce that occurred at the beginning of our fiscal year as well as equipment repairs and maintenance costs.

For the first 6 months of fiscal 2020, SG&A expenses were $8 million, a 33% increase compared to $6 million for the first 6 months of fiscal 2019. The increase in SG&A was primarily attributable to employee separation-related expenses and increased stock-based compensation. When excluding the separation-related expenses, SG&A increased 19% during the first 6 months of fiscal 2020 as compared to the prior year. Also included within the first half of fiscal 2020 was the lease termination charge of $355,000 that I mentioned earlier.

For the 6 months of fiscal 2020, the company recorded a consolidated net loss attributable to common stockholders of $6.1 million or $0.11 per share compared to a consolidated net loss attributable to common stockholders of $5.9 million or $0.11 per share for the first 6 months of fiscal 2019.

Our cash and cash equivalents at October 31, 2019, were $34 million as compared to $32.4 million as of the prior fiscal year ended April 30, 2019. Given the strength of our backlog and the visibility we have into current customer projections, we are reaffirming our revenue guidance for fiscal 2020 of $64 million to $67 million.

We are pleased with our financial performance during the quarter. The company continues to approach our near-term milestone of operational breakeven, which we believe will position the company to achieve both industry-standard margins and sustainable profitability.

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

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

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

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

Thanks, Dan. As Rick mentioned, during the quarter, we continued our efforts in attracting new customers and advancing new business with our existing customers. We continue to focus on increasing the awareness of our services and our strength as an industry leader through technical presentations, webinars and conference participation.

During the second quarter, Avid's business team continued to execute an aggressive visibility campaign with participation at industry events, including the Bioprocessing Summit in August, Biotech Week in Contract Pharma in September and World ADC and Outsourced Pharma in October as well as local industry events. We recently hosted a technical seminar in Cambridge along with industry colleagues.

Each of these events gives us access to potential new customers, provides an excellent platform to promote Avid's latest enhancements and accomplishments, and the opportunity to provide insight into advancing molecules from concept to market from a CDMO perspective.

This quarter, we hosted a number of potential new client visits at Avid for technical due diligence visits as well as quality audits, both critical gating items in the outsourcing process. The feedback we received from customer audits is universally positive. We also continue to prospect for new opportunities across the industry by meeting with potential new clients at their facilities.

I will now address the opportunities represented by the new client prospects mentioned above. First, these new projects are diverse, ranging from customers interested in Avid's development and early-phase manufacturing experience to interest in our late-phase and commercial experience, including access to the space we have for expansion to meet their future commercial demand.

I am also pleased to announce the forward movement and execution of new business opportunities with our existing clients. We are currently expanding work that will result in the advancement of existing projects to the next phase of manufacture, progressing molecules from smaller scale manufacture to our larger 2,000-liter scale in Myford and increasing batch numbers.

In an earlier earnings call, we announced supporting other clients with their process validation activity. Recent completion of these activities will enable certain clients to submit their biologics license application filings, which will trigger the scheduling of future pre-approval inspections estimated to occur within the next 2 years related to the anticipated approval of this particular molecule.

For those products approved during -- using processes validated at Avid, the commercial manufacturing will be conducted at Avid. As we have stated previously, for this reason, we see each process validation completed today as opportunity to build commercial business in the future.

Also during the quarter, we completed multiple other batch manufactures for earlier-phase client molecules. As we announced in early July, Avid signed 2 new contract manufacturing service agreements to support the development of novel drug candidates. The onboarding of these projects has been completed and they are progressing towards manufacture. The agreements include the addition of one of the world's leading pharmaceutical companies to Avid's list of customers as well as the expansion of the relationship with one of the company's existing biotechnology customers.

All of these opportunities are a result of Avid's commitment to quality, reliability and collaboration to ensure the success of our clients. These also demonstrate a path to continued growth in our backlog and revenue.

I'm pleased with the activity ongoing at Avid with respect to enhancing the biopharmaceutical industry's awareness of Avid and our capabilities, including our available 2,000-liter capacity, room for expansion and growth of our pipeline of activity, projects and partnership opportunities with new and existing clients.

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

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

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

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

Thank you, Tracy. First, I'd like to welcome Rich Richieri back to the Avid team. As we announced in October, Rich previously spent 15 years with Avid Bioservices and its former parent company, Peregrine Pharmaceuticals, in the role of Senior Vice President of Manufacturing.

During that time, Rich was instrumental in establishing and growing Avid's CDMO business and helping the company diversify its production capabilities. He spent the past 5 years serving as an Adviser and Acting Head of Biologics Production for Syngene International, a global discovery, development and manufacturing organization serving the pharmaceutical industry.

Rich rejoins Avid as Chief Operations Officer, with responsibility for overseeing process development, clinical and commercial manufacturing, technical support and facilities. In this role, Rich will be focused on streamlining operations, building internal efficiencies and strategic planning for future growth. In addition, Rich will work with our business development team to optimize every aspect of our customer experience.

Given his global CDMO experience, combined with his Avid-specific expertise, we are very happy to have Rich in this important leadership role.

In other leadership matters, we continue our search for a permanent CEO for the company. We are actively screening highly qualified candidates, and we look forward to providing an update soon.

In the meantime, we continue to grow the business and advance all core objectives. Our team has the expertise required to execute all the company's strategic goals and no projects or programs are being delayed pending the arrival of a new CEO. As a case in point, we are pleased to report that during the second quarter, we officially launched our expanded process development facility and services at an open house event attended by customers, prospective customers, vendors and community leaders.

This purpose-built, state-of-the-art facility, which houses Avid's expanded upstream and downstream process development capabilities, represents an important new opportunity for the company. It allows us to expand our existing relationships and attract new business by offering support to customers that seek to outsource their PD work.

Equally important, this PD capability allows us to expand our scope of services beyond biologics into the diagnostics and general biologics research and development sectors. We are very pleased to officially launch this new lab in service, and we believe it will make great contributions to Avid's continued growth.

In other operations news, we have entered into the final design stage for the construction of a new pharmaceutical-grade water system in the Myford facility. Installation of this system, which will supply water to multiple manufacturing systems, is a critical step in creating the manufacturing efficiencies required to increase our output and strengthen our margins. As with the rest of our Myford facility, this system will be state-of-the-art, and we anticipate installation in calendar 2020.

Lastly, during the second quarter, Avid conducted its annual maintenance overhaul. During these overhauls, certain of our facilities may be partially or completely shut down so that we can conduct a comprehensive evaluation of our facilities and equipment. Last year, both facilities were down for more than 3 weeks. However, due to the significant amount of work that was done during last year's evaluation, the process was shorter this year, with Franklin down for less than 2 weeks and only a partial shutdown at Myford, affecting only the exterior of the building.

In light of this shutdown, we are particularly proud of the increase in both revenue and margins during the quarter, which we believe reflect an organizational resilience that is rare with larger CDMOs.

In closing, I'd like to highlight a few takeaways. Our business development effort continues to be wide-reaching and robust. Our reputation in the industry for quality products and regulatory success continues to grow, allowing us to engage with a growing pool of potential new customers. It also allows us to expand our relationships with existing customers, providing us with an opportunity to pitch new projects and services.

Operationally, we continue to improve and enhance our equipment, facilities and systems. The opening of the new process development lab, the successful completion of our annual maintenance overhaul and upcoming installation of a new pharmaceutical-grade water system all reflect the dedication we have to maintaining the highest standards possible.

Financially, revenues for the quarter were the highest since Avid transitioned to a pure-play CDMO. We also achieved an 18% gross margin, which is -- which represents a significant increase year-over-year as well as quarter-over-quarter. Expenses remained in line with expectations and our backlog continues to be strong. Importantly, during the quarter, we nearly achieved breakeven income from operations despite the deferral of revenue during the first half of fiscal 2020 caused by unplanned equipment repairs in Q1 and our annual maintenance overhaul in Q2.

Productivity and efficiency contributed significantly to Avid's strong second quarter results, and we expect our financial performance will continue to track positively with these factors. We believe that Avid has turned an important corner, creating a stronger platform from which to achieve increased revenues, improved margins and sustainable profitability.

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 comes from Joe Pantginis with H.C. Wainwright.

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

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

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

I wanted to ask a couple of related questions. First, with regard to Myford and the -- for example, the new water system that you're putting in, is this to be considered sort of a course of normal business with regard to the costs? Or how should we view that with regard to costs going forward?

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

Daniel R. Hart, Avid Bioservices, Inc. - CFO [3]

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

The Myford water-for-injection system is an enhancement to the overall systems and the utilities within our Myford facility. We do have the structure of a water-for-injection system within our Franklin facility. It's just time for us to add as we continue to look at expansion into our Myford facility, which will also help with increasing our margins. As far as overall operational cost, I would imagine all in for one of these complicated type systems would be somewhere in the realm of about $2 million to $3 million.

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

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

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

Got it. No, that's very helpful. And then with regard to your commentary with regard to scope of work, obviously, when you talk about the backlog number, you've always stated that you don't include future potential work that you have projected but that might not be signed as an example. How do you view the scope of work with regard to when you might look to open up new facilities that you have capacity for?

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

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [5]

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

Right. So I believe you're referring to that 42,000 square feet of space in the Myford facility, which is located right next to the facilities that are built out already. So we're preparing contingency plans to build that out as soon as the demand is solid. It'll probably be based on continuing to increase the use of the existing facility. We still have some room for revenue growth in Myford. Franklin is pretty busy, but there's room for growth in Myford. And then based on discussions that we have, long-term projections for some of the commercial products, we have the plans to build that out. And we're just waiting for some of that capacity to have clear visibility of the usage of some of that future capacity, and then we'll pull the trigger.

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

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

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

Got it. And again, that's very helpful. And then lastly, with regard to your overall corporate strategy, Halozyme recently, for example, one of your biggest clients, they had some corporate updates/volatility. How are you prepared to, sort of, weather any volatility with regard to your biggest clients? Even though I -- it appears that there was no impact to you guys from Halozyme.

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

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [7]

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

Right. That's a great question. We've obviously had significant discussions with Halozyme. As we understand it, we won't have any negative impact for the discontinuation of one of their products. Halozyme, as they have stated, will be very, very focused on their enhanced platform. And the materials that we produce here at Avid support that enhanced platform. So no negative impact can be anticipated there. And in fact, they will probably be more focused on expanding efforts in that area.

In terms of our other major clients, as Tracy noted, we've had a number of them go through their -- the scale-up for their commercial production and just waiting to see how those timelines develop. But that's all very positive for us in terms of future commercial work. So the trends are very positive right now in the biotech industry in general, and we're very fortunate that a number of our clients are expanding their programs and are very, very healthy at this point.

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

Operator [8]

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

Our next question comes from Paul Knight with Janney.

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

Michael Gokay, Janney Montgomery Scott LLC, Research Division - Associate [9]

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

It's Mike on for Paul. We were modeling down sequentially given the planned shutdowns that you guys mentioned in Q1. Can you just talk a little bit more about the dynamics that you mentioned earlier in the call that led to the increase, and then kind of the weakness in the backlog in Q2 as compared to Q1?

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

Daniel R. Hart, Avid Bioservices, Inc. - CFO [10]

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

Sure, Mike. Pleasure to speak with you. Thanks for the questions. The -- I guess what -- how I would phrase the increase in revenues for the second quarter was truly based on us being able to find some efficiencies in the overall capacity of our facilities to bring in some of the manufacturing projects that were scheduled to start later on in the quarter or even the next quarter. So we had the ability and the opportunity to pull in some of those projects. Because for the most part, the shutdown in our Franklin facility and the shutdown we had in our Myford facility went extremely well. It went ahead of schedule, and we were able to open back up and schedule production quicker than we had originally anticipated.

As far as the backlog, our backlog will ebb and flow quarter-over-quarter. It just all depends on how much revenue we recognize during the period and how much we sign. And given our business, we don't necessarily sign -- change orders and contracts for new molecules every week, every month, every quarter. So it depends on the timing of those major programs and when they come in. So we will see some volatility in our backlog. But in general, it should remain fairly strong on a trend towards growth.

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

Michael Gokay, Janney Montgomery Scott LLC, Research Division - Associate [11]

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

Great. And then with the 3-process validation campaigns complete, do you have any visibility from your communications with clients on when they expect to either file or hear a decision from the regulatory agencies? And then those 3 potentially commercial products, how does that compare to how many commercial products you support now?

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

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [12]

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

Sure. So obviously, we're in very, very active discussions with our clients about their future plans. They have certain things that they can control in terms of when they complete their submissions. And then once it goes to the agency, it moves a little bit beyond their control. There's certain waiting periods. And then depending on what the agency comes back with, they may request additional information or things like that.

So we plan capacity for the earliest date that they may require production. But beyond that, it's just very frequent updates, and we don't have tremendous visibility when they will get approval. But just having a number of those -- and I would say the odds of them getting approval, in my opinion, is very high based on what the projects are or what the molecules are. But having the existing commercial production that we do, 3 different molecules and then a number of others going into commercial in the future is very gratifying.

I think as a CDMO, having a substantial amount of our capacity taken up by commercial products and holding that steady while we bring in earlier-stage programs as well, there's a lot of benefits. One is that we can look at the calendar early in the year and have a very good idea of capacity utilization.

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

Operator [13]

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

Our next question comes from Matt Hewitt with Craig-Hallum Capital.

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

Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [14]

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

Congratulations on the very strong quarter.

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

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [15]

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

Thanks, Matt.

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

Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [16]

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

One, maybe if you could help us a little bit, given the efficiencies that you're able to find on the manufacturing side in Q2 that allowed you to either start some projects early from later in the quarter or even pulling from Q3, are those efficiencies expected to continue? Meaning, will you be continuing to kind of pull forward some of that backlog from Q3 and Q4 earlier into the year?

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

Daniel R. Hart, Avid Bioservices, Inc. - CFO [17]

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

Well, Matt, that's a great question. I think you're spot on. The reality is as we continue to fill the pipe and to look at the remainder of the year, it's not necessarily all of the backlog shifted forward. We had the opportunity to move some of those projects forward. But as far as looking for the rest of the year, like we stated in the prepared comments, we're still looking at $64 million to $67 million for the year. And our backlog is at $52 million, which a majority of that typically winds out within 12 months and we look -- most of that coming into our fiscal 2020 year. We're still in plenty of active discussions with our clients in increasing our overall backlog and look to continue to move towards that growth.

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

Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [18]

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

Okay. All right. And then shifting gears to gross margin, a very strong quarter. Some of that was being able to get the facilities back up and running faster than expected. But as we look at the next few quarters for this year and, I guess, looking out a little bit further, how should we be thinking about gross margin? Where do you see that kind of exiting the year? And then I've got a follow-up to that as well.

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

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

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

Well, Matt, I'm not going to guide towards what the overall margin's going to look like, but I will say that our incremental margins going forward -- since we're a largely fixed-cost business, our incremental margins going forward will be somewhere between the 50% and 70% range, so most of that will be dropping to the bottom line. So I would anticipate that our margins will be stronger than where we ended last year in the fiscal year of 13%. We should continue to beat those margins.

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

Matthew Gregory Hewitt, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [20]

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

That's great. And then, I guess, the follow-up is regarding the new water treatment capabilities, you mentioned that, that would also help margins. What kind of a pop or boost would you expect that to give to gross margin?

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

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [21]

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

Not terribly significant to gross margin. Where it'll make a greater contribution is inefficiencies, moving projects through the Myford facility at a slightly accelerated rate. It's something that our customers will be happy to see. Right now, we purchase the water for injection that we use in 200-liter drums. And it's a little bit of a logistical challenge moving those throughout the supply chain. So this will just contribute to the overall productivity of that facility.

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

Operator [22]

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

And our next question comes from Jacob Johnson with Stephens.

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

Jacob K. Johnson, Stephens Inc., Research Division - Analyst [23]

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

Congrats on the strong quarter. Just one question on guidance. It implies sort of a slowdown in the second half of the year. Outside the benefit from pulling forward some of the revenues in the second quarter, are there any other puts and takes we need to think about for the back half of your fiscal 2020?

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

Daniel R. Hart, Avid Bioservices, Inc. - CFO [24]

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

No, Jacob. Thanks for calling in and thanks for the question. Looking at the remainder of the fiscal year, there's no seasonality per se or facility shutdowns per se that we're anticipating for the rest of the year, and we will continue to produce within the manufacturing capacity for the remainder of the second half.

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

Jacob K. Johnson, Stephens Inc., Research Division - Analyst [25]

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

Got it. And then in October, you opened the expanded process development lab. Obviously, it's going to generate its own revenue stream. But is that important to your business development efforts, including building out your manufacturing pipeline?

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

Richard B. Hancock, Avid Bioservices, Inc. - Interim President, CEO & Director [26]

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

It really is. In the past, we were slightly constrained in terms of process development. So we're focused on bringing on projects that were more mature, where the bulk of the process development work had already been completed, and they could transition pretty rapidly to our clinical manufacturing. This rounds us out and allows us to take on very, very early-stage projects, and also allows us to do additional process development work on projects that we're completing already, whether it's a scale-up or looking for more efficiencies in either their upstream or downstream process.

It also opens us up to doing stand-alone process development projects. And typically, PD has a pretty healthy margin associated with it. So by being able to do a purely process development project, we can start working with a customer -- a new customer doing very specific activities in PD and get the relationship going and then progress to additional work.

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

Jacob K. Johnson, Stephens Inc., Research Division - Analyst [27]

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

Got it. And then, Dan, just one quick point of clarification. The $2 million to $3 million for the new water system, will that be a capital expenditure in terms of accounting for it? Or will that flow through the OpEx line?

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

Daniel R. Hart, Avid Bioservices, Inc. - CFO [28]

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

It will absolutely be a capital item that's going to the balance sheet.

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

Operator [29]

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

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 [30]

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

Thank you, operator. The progress made during the second quarter has placed us in a strong position for growth, and we look forward to updating you on our future advancements. Thank you again for participating today and for your continued support of Avid Bioservices.

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

Operator [31]

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

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.