The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes ofAvid Bioservices, Inc. included in Part I Item 1 of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the fiscal
year endedApril 30, 2021 .
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements, including the anticipated future impact of the ongoing COVID-19 global pandemic on our business operations, that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results of operations to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Forward-looking statements are often identified by the use of words such as, but not limited to, "anticipate," "believe," "can," "continue," "could," "estimate," "expect," "intend," "may," "plan," "project," "seek," "should," "target," "will," "would" and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. These forward-looking statements are subject to numerous risks and uncertainties, including the risks and uncertainties described under the section titled "Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 , those identified in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q, and in other filings we may make with theSecurities and Exchange Commission from time to time. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statement. We qualify all of our forward-looking statements by these cautionary statements and, except as required by law, assume no obligation and do not intend to update these forward-looking statements. Overview We are a dedicated contract development and manufacturing organization ("CDMO") that provides a comprehensive range of services from process development to Current Good Manufacturing Practices ("CGMP") clinical and commercial manufacturing, focused on development and CGMP manufacturing of biologics for the biotechnology and biopharmaceutical industries. With 28 years of experience producing monoclonal antibodies and recombinant proteins, our services include CGMP clinical and commercial drug substance manufacturing, bulk packaging, release and stability testing and regulatory submissions support. We also provide a variety of process development services, including upstream and downstream development and optimization, analytical methods development, testing and characterization. Strategic Objectives
We have a growth strategy that seeks to align with the growth of the biopharmaceutical drug substance contract services market. That strategy encompasses the following objectives:
· Invest in additional manufacturing capacity and resources required for us to
achieve our long-term growth strategy and meet the growth-demand of our
customers' programs, moving from development through to commercial
manufacturing;
· Broaden our market awareness through a diversified yet flexible marketing
strategy;
· Continue to expand our customer base and programs with existing customers for
both process development and manufacturing service offerings; · Explore strategic opportunities both within our core business as well as in
adjacent and/or synergistic service offerings in order to enhance and/or
broaden our capabilities; and · Increase our operating profit margin to best in class industry standards.
22 Second Quarter Highlights
The following summarizes select highlights from our second quarter ended
· Reported revenues of
compared to the same prior year period;
· Reported net income attributable to common stockholders of
discussed in the "Facility Expansions" section below; and · Announced the expansion of our CDMO service offerings into the rapidly growing
cell and gene therapy market, which includes plans to construct a world-class,
purpose-built viral vector development and manufacturing facility as further
discussed in the "Facility Expansions" section below. Facility Expansions During fiscal year 2021, we announced plans for a two-phased expansion of our Myford facility. The first phase, which was initiated during the second quarter of fiscal 2021, will expand the production capacity of our existing Myford North facility by adding a second downstream processing suite. This phase is mechanically complete and is expected to be online during fiscal 2022 following completion of qualification and validation. The second phase, which was initiated during the fourth quarter of fiscal 2021 and is anticipated to be online during calendar 2022, will further expand our capacity through the build out of a second manufacturing train, including both upstream and downstream processing suites, within our Myford South facility. We estimate that the total cost to complete these two phases of expansion will be approximately$70 to$75 million . Upon completion, we estimate that the first and second phases of this expansion will result in a total revenue generating capacity of up to$270 million annually, depending on the mix of projects. InOctober 2021 , we announced plans to expand our CDMO service offerings into viral vector development and manufacturing services for the rapidly growing cell and gene therapy market. As part of this expansion, we plan to construct a world-class, purpose-built viral vector development and CGMP manufacturing facility within a building we are leasing inCosta Mesa, California (the "Viral Vector Facility"). Based on current projections, we expect the entire build out of our new Viral Vector Facility will take up to 18 months at an estimated cost of approximately$65 million to$75 million . The Viral Vector Facility's analytical and process development laboratories are expected to come online more rapidly, with the potential to be operational within eight months. Upon completion of the entire build out of the Viral Vector Facility, we estimate this expansion, combined with the ongoing Myford facility expansions, has the potential to bring our total revenue generating capacity to more than$350 million annually, depending on the mix of projects. Impact of COVID-19 Pandemic
InMarch 2020 , theWorld Health Organization declared the novel coronavirus ("COVID-19") outbreak a global pandemic. To date, the COVID-19 pandemic has not had a significant impact on our operations, as we have been able to continue to operate our manufacturing facilities and provide essential services to our customers. Additionally, in an effort to protect the health and safety of our employees and in compliance with state regulations, we have instituted a work-from-home policy for employeeswho can perform their job functions offsite, implemented daily temperature checking, social distancing requirements and other measures to allow manufacturing and other personnel essential to production to continue work within our manufacturing facilities, and suspended all non-essential employee travel. The full extent to which COVID-19 will directly or indirectly impact our business, financial condition, and results of operations will depend on future developments that are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning COVID-19, the actions taken to contain it or treat its impact and the economic impact on local, regional, national and international markets. We will continue to assess the potential impact of the COVID-19 pandemic on our business, financial condition, and results of operations. For a further discussion of potential risks to our business from the COVID-19 pandemic, please refer to "Part I, Item 1A-Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended April
30, 2021. 23
Performance and Financial Measures
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenues, gross profit, selling, general and administrative expenses and operating income.
We intend for this discussion to provide the reader with information that will assist in understanding our consolidated financial statements, the changes in certain key items in those consolidated financial statements from period to period and the primary factors that accounted for those changes. Revenues Revenues are derived from services provided under our customer contracts and are disaggregated into manufacturing and process development revenue streams. The manufacturing revenue stream generally represents revenue from the manufacturing of customer products derived from mammalian cell culture covering clinical through commercial manufacturing runs. The process development revenue stream generally represents revenue from services associated with the custom development of a manufacturing process and analytical methods for a customer's product. Gross Profit Gross profit is equal to revenues less cost of revenues. Cost of revenues reflects the direct cost of labor, overhead and material costs. Direct labor costs include personnel costs within the manufacturing, process and analytical development, quality assurance, quality control, validation, supply chain, project management and facilities functions. Overhead costs include the rent, common area maintenance, utilities, property taxes, security, materials and supplies, software, small equipment and deprecation costs of all manufacturing and laboratory locations.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses are composed of corporate-level expenses including personnel and support costs of corporate functions such as executive management, finance and accounting, business development, legal, human resources, information technology, and other centralized services. SG&A expenses include corporate legal fees, audit and accounting fees, investor relation expenses, non-employee director fees, corporate facility related expenses, and other expenses relating to our general management, administration, and business development activities. SG&A expenses are generally not directly proportional to revenues, but we expect such expenses to increase over time to support the needs of our growing company. Results of Operations The following table compares the unaudited condensed consolidated statements of operations for the three and six months endedOctober 31, 2021 and 2020 (in thousands): Three Months Ended Six Months Ended October 31, October 31, 2021 2020 $ Change 2021 2020 $ Change
Revenues$ 26,109 $ 21,064 $ 5,045 $ 56,863 $ 46,456 $ 10,407 Cost of revenues 16,923 14,646 2,277 36,286 31,494 4,792 Gross profit 9,186 6,418 2,768 20,577 14,962 5,615 Operating expenses: Selling, general and administrative 5,033 4,166 867 9,493 7,991 1,502 Total operating expenses 5,033 4,166 867 9,493 7,991 1,502 Operating income 4,153 2,252 1,901 11,084 6,971 4,113 Interest income 73 32 41 149 47 102 Interest expense (704 ) - (704 ) (1,407 ) (4 ) (1,403 ) Net income$ 3,522 $ 2,284 $ 1,238 $ 9,826 $ 7,014 $ 2,812 24
Three Months Ended
Revenues Revenues for the three months endedOctober 31, 2021 were$26.1 million compared to$21.1 million for the same period in the prior year, an increase of$5.0 million , or 24%. The increase in revenues can primarily be attributed to fees received from a customer during the current-year period for unutilized reserved capacity combined with an increase in process development revenues primarily associated with services provided to new customers. In addition, revenues for the prior-year period included the recognition of$1.7 million from changes in estimated variable revenue consideration as a result of completing performance obligations for certain projects, therefore increasing revenue recognized for those projects during the prior-year period. The increase in revenues was attributed to the following components of our revenue streams: $ millions
Net increase in manufacturing revenues
1.4 Total increase in revenues$ 5.0 Gross Profit Gross profit for the three months endedOctober 31, 2021 was$9.2 million compared to$6.4 million for the same period in the prior year, an increase of approximately$2.8 million , and gross margins for such periods were 35% and 30%, respectively. The$2.8 million increase in gross profit for the current-year period can primarily be attributed to increased revenues, partially offset by planned growth costs associated with payroll and benefits, and increased facility and equipment related costs. Additionally, the gross margin for the prior-year period includes the additional variable revenue consideration of
$1.7 million as described above.
Selling, General and Administrative Expenses
SG&A expenses were$5.0 million for the three months endedOctober 31, 2021 compared to$4.2 million for the same period in the prior year, an increase of approximately$0.9 million , or 21%. As a percentage of revenues, SG&A expenses for the three months endedOctober 31, 2021 and 2020 were 19% and 20%, respectively. The net increase in SG&A expenses was attributed to the following components: $ millions
Increase in stock-based compensation expense
0.2 Increase in advertising expenses 0.1
Decrease in payroll and benefit related expenses (0.2 ) Net increase in all other SG&A expenses
0.2 Total increase in SG&A expenses$ 0.9 Operating Income Operating income was$4.2 million for the three months endedOctober 31, 2021 compared to$2.3 million for the same period in the prior year. This$1.9 million improvement in year-over-year operating income can primarily be attributed to a$2.8 million increase in gross profit, partially offset by an increase in SG&A expense of approximately$0.9 million . Interest Expense Interest expense was$0.7 million for the three months endedOctober 31, 2021 compared to no interest expense for the same period in the prior year. The increase of$0.7 million can be attributed to interest expense related to our outstanding Convertible Notes issued inMarch 2021 (as described in Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements). 25
Six Months Ended
Revenues Revenues for the six months endedOctober 31, 2021 were$56.9 million compared to$46.5 million for the same period in the prior year, an increase of$10.4 million , or 22%. The increase in revenues can primarily be attributed to an increase in fees received from customers for unutilized reserved capacity combined with a increase in process development revenues primarily associated with services provided to new customers. In addition, revenues for the prior-year period included the recognition of$1.1 million from changes in estimated variable revenue consideration as a result of completing performance obligations for certain projects, therefore increasing revenue recognized for those projects during the prior-year period. The increase in revenues was attributed to the following components of our revenue streams: $ millions
Net increase in manufacturing revenues
5.2 Total increase in revenues$ 10.4 Gross Profit Gross profit for the six months endedOctober 31, 2021 was$20.6 million compared to$15.0 million for the same period in the prior year, an increase of approximately$5.6 million , and gross margins for such periods were 36% and 32%, respectively. The$5.6 million increase in gross profit for the current-year period can primarily be attributed to increased revenues, partially offset by planned growth costs associated with payroll and benefits, and increased facility and equipment related costs. Additionally, gross margin for the prior-year period includes the additional variable revenue consideration of
$1.1 million as described above.
Selling, General and Administrative Expenses
SG&A expenses were$9.5 million for the six months endedOctober 31, 2021 compared to$8.0 million for the same period in the prior year, an increase of approximately$1.5 million , or 19%. As a percentage of revenues, SG&A expenses for the six months endedOctober 31, 2021 and 2020 were both 17%. The net increase in SG&A expenses was attributed to the following components: $ millions
Increase in stock-based compensation expense
0.2 Increase in advertising expenses 0.2 Increase in consulting expenses 0.1
Decrease in payroll and benefit related expenses (0.3 ) Net increase in all other SG&A expenses
0.3 Total increase in SG&A expenses$ 1.5 Operating Income Operating income was$11.1 million for the six months endedOctober 31, 2021 compared to$7.0 million for the same period in the prior year. This$4.1 million improvement in year-over-year operating income can primarily be attributed to a$5.6 million increase in gross profit, partially offset by an increase in SG&A expense of approximately$1.5 million . 26 Interest Expense
Interest expense was$1.4 million for the six months endedOctober 31, 2021 compared to an inconsequential amount for the same period in the prior year. The increase of$1.4 million can be attributed to interest expense related to our outstanding Convertible Notes issued inMarch 2021 (as described in Note 3 of the Notes to Unaudited Condensed Consolidated Financial Statements).
Liquidity and Capital Resources
Our principal sources of liquidity are cash flows from operating activities as well as our cash and cash equivalents on hand.
As ofOctober 31, 2021 , we had cash and cash equivalents of$163.7 million . We believe that our existing cash on hand and our anticipated cash from operating activities will be sufficient to fund our operations for at least the next 12 months from the date of this Quarterly Report. We currently expect to finance our operations with our existing cash on hand and our anticipated cash flows from operations. If cash flows from operations are not sufficient to support our operations or capital requirements, including our ongoing two phases of expansion to our Myford facility and the planned build out of our Viral Vector Facility, then we may need to obtain additional equity or debt financing to fund our future operations and/or such expansions. We may raise these funds at the appropriate time, accessing the form of capital that we determine is most appropriate considering the markets available to us and their respective costs of capital, such as through the issuance of debt or through the public offering of securities. These financings may not be available on acceptable terms, or at all. Our ability to raise additional capital in the equity and debt markets is dependent on a number of factors including, but not limited to, the market demand for our common stock. The market demand or liquidity of our common stock is subject to a number of risks and uncertainties including, but not limited to, our financial results, economic and market conditions, and global financial crises and economic downturns, including those caused by widespread public health crises such as the COVID-19 pandemic, which may cause extreme volatility and disruptions in capital and credit markets. In addition, even if we are able to raise additional capital, it may not be at a price or on terms that are favorable to us. The following table presents our cash flows from operating, investing and financing activities for the six months endedOctober 31, 2021 and 2020 (in thousands): Six Months EndedOctober 31, 2021 2020
Cash, cash equivalents and restricted cash (1)
$ 36,014 Net cash provided by operating activities $ 3,661$ 8,133 Net cash used in investing activities$ (11,824 ) $ (2,980 ) Net cash provided by (used in) financing activities $ 1,923
$ (5,751 ) _________________
(1) As of
included
that was pledged as collateral under a letter of credit under the terms of a
facility lease agreement.
Net Cash Provided By Operating Activities
During the six months endedOctober 31, 2021 , net cash provided by operating activities decreased by$4.5 million to$3.7 million from$8.1 million of net cash provided by operating activities during the six months endedOctober 31, 2020 .
Net cash provided by operating activities for the six months endedOctober 31, 2021 was a result of net income of$9.8 million combined with non-cash adjustments to net income of$5.8 million related to depreciation and amortization, stock-based compensation and amortization of debt issuance costs, offset by cash flows from the net change in operating assets and liabilities of$12.0 million .
Net cash provided by operating activities for the six months endedOctober 31, 2020 was a result of net income of$7.0 million combined with non-cash adjustments to net income of$3.4 million related to depreciation and amortization and stock-based compensation, offset by cash flows from the net change in operating assets and liabilities of$2.3 million . 27
During the six months ended
Net cash used in investing activities for the six months ended
Net Cash Provided By (Used In) Financing Activities
During the six months endedOctober 31, 2021 , net cash provided by financing activities increased by$7.7 million to$1.9 million from$5.8 million of net cash used in financing activities during the six months endedOctober 31, 2020 . Net cash provided by financing activities for the six months endedOctober 31, 2021 consisted of proceeds from the issuance of common stock under our equity compensation plans of$1.9 million . Net cash used in financing activities for the six months endedOctober 31, 2020 consisted primarily of$4.4 million of cash used to repay in full a promissory note issued pursuant to the Paycheck Protection Program and$2.2 million of cash used to pay preferred dividends to holders of our Series E Preferred Stock, partially offset by proceeds from the issuance of common stock under our equity compensation plans of$0.9 million . Capital Expenditures
During the six months ended
Contractual Obligations Except as set forth below, during the six months endedOctober 31, 2021 , there were no material changes in our contractual obligations and commitments, as described in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 . During the six months endedOctober 31, 2021 , we entered into and/or amended certain operating and finance leases, which leases resulted in$22.9 million of total future minimum lease payments, of which,$0.2 million is expected to be paid in fiscal 2022,$1.9 million is expected to be paid in fiscal 2023,$2.1 million is expected to be paid in fiscal 2024,$2.1 million is expected to be paid in fiscal 2025,$2.2 million is expected to be paid in fiscal 2026, and$14.4 million is expected to be paid thereafter.
Critical Accounting Policies and Estimates
Our discussion and analysis of our consolidated financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP"). The preparation of our consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We review our estimates and assumptions on an ongoing basis. We base our estimates on historical experience and on assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what we anticipate and different assumptions or estimates about the future could change our reported results. During the six months endedOctober 31, 2021 , there were no significant changes in our critical accounting policies as previously disclosed by us in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedApril 30, 2021 , except for our critical accounting policies and estimates on stock-based compensation associated with performance stock units granted under our equity compensation plans, as described in Note 2, Summary of Significant Accounting Policies, in the accompanying notes to the unaudited condensed consolidated financial statements. 28
Recent Accounting Pronouncements
For a discussion of recent accounting pronouncements applicable to us, please refer to Note 2, Summary of Significant Accounting Policies, in the accompanying notes to our unaudited condensed consolidated financial statements. Backlog
Our backlog represents, as of a point in time, future revenue from work not yet completed under signed contracts. As ofOctober 31, 2021 , our backlog was approximately$120 million , as compared to approximately$118 million as ofApril 30, 2021 . While we anticipate the majority of our backlog will be recognized as revenue over the next twelve (12) months, our backlog is subject to a number of risks and uncertainties, including but not limited to: the risk that a customer timely cancels its commitments prior to our initiation of manufacturing services, in which case we may be required to refund some or all of the amounts paid to us in advance under those canceled commitments; the risk that a customer may experience delays in its program(s) or otherwise, which could result in the postponement of anticipated manufacturing services; the risk that we may not successfully execute on all customer projects; and the risk of a potential negative impact from the COVID-19 global pandemic, any of which could have a negative impact on our liquidity, reported backlog and future revenue and profitability.
© Edgar Online, source