Avid Bioservices, Inc. (NASDAQ:CDMO) Q2 2023 Results Conference Call December 6, 2022 4:30 PM ET Company Participants Tim Brons - IR Nick Green - President and CEO Dan Hart - CFO Matt Kwietniak - Chief Commercial Officer Conference Call Participants Sean Dodge - RBC Capital Markets Matt Hewitt - Craig-Hallum Capital Group Jacob Johnson - Stephens Paul Knight - KeyBanc Operator Good day, ladies and gentlemen. And welcome to the Avid Bioservices Second Quarter Fiscal 2023 Financial Results Conference Call. At ...

PART I - FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations [Item 1. Condensed Consolidated Financial Statements (Unaudited)](index=3&type=section&id=Item%201.%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements, including the balance sheets, statements of operations and comprehensive income (loss), statements of stockholders' equity, and statements of cash flows, along with detailed notes explaining the company's accounting policies, debt, leases, equity compensation, income taxes, and commitments and contingencies [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity at specific points in time **Condensed Consolidated Balance Sheet Highlights (in thousands):** | Metric | October 31, 2022 | April 30, 2022 | | :---------------------------------- | :--------------- | :------------- | | Total Current Assets | $145,941 | $180,023 | | Property and Equipment, Net | $139,386 | $92,955 | | Total Assets | $441,850 | $429,843 | | Total Current Liabilities | $82,377 | $75,761 | | Convertible Senior Notes, Net | $140,097 | $139,577 | | Total Liabilities | $260,655 | $255,317 | | Total Stockholders' Equity | $181,195 | $174,526 | - Total assets increased by **$12 million** from April 30, 2022, to October 31, 2022, primarily driven by an increase in property and equipment, net, which grew by approximately **$46.4 million**[11](index=11&type=chunk) - Cash and cash equivalents decreased significantly from **$126.2 million** to **$77.3 million** during the six-month period[11](index=11&type=chunk) [Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20and%20Comprehensive%20Income%20(Loss)) This section outlines the company's financial performance over specific periods, including revenues, expenses, and net income or loss **Condensed Consolidated Statements of Operations Highlights (in thousands, except per share):** | Metric | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | | :---------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Revenues | $34,757 | $26,109 | $71,449 | $56,863 | | Gross Profit | $4,147 | $9,186 | $13,264 | $20,577 | | Operating Income (Loss) | $(2,684) | $4,153 | $51 | $11,084 | | Net Income (Loss) | $(1,156) | $3,522 | $408 | $9,826 | | Basic Net Income (Loss) Per Share | $(0.02) | $0.06 | $0.01 | $0.16 | | Diluted Net Income (Loss) Per Share | $(0.02) | $0.06 | $0.01 | $0.15 | - Revenues increased by **33%** for the three months ended October 31, 2022, and by **26%** for the six months ended October 31, 2022, compared to the prior year periods[13](index=13&type=chunk) - Gross profit decreased significantly, resulting in an operating loss for the three months and a substantial drop in operating income for the six months, primarily due to increased cost of revenues[13](index=13&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) This section details changes in the company's equity over time, reflecting contributions, distributions, and net income or loss **Condensed Consolidated Statements of Stockholders' Equity Highlights (in thousands):** | Metric | October 31, 2022 | April 30, 2022 | October 31, 2021 | | :---------------------------------- | :--------------- | :------------- | :--------------- | | Total Stockholders' Equity | $181,195 | $174,526 | $51,105 | | Additional Paid-In Capital | $612,102 | $605,841 | $600,266 | | Accumulated Deficit | $(430,969) | $(431,377) | $(549,223) | - Total stockholders' equity increased from **$174.5 million** at April 30, 2022, to **$181.2 million** at October 31, 2022, driven by common stock issued under equity compensation plans and stock-based compensation expense, partially offset by net loss[15](index=15&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section reports on the cash generated and used by the company across operating, investing, and financing activities **Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended October 31, in thousands):** | Metric | 2022 | 2021 | | :------------------------------------------ | :------- | :------- | | Net Cash (Used in) Provided by Operating Activities | $(8,771) | $3,661 | | Net Cash Used in Investing Activities | $(41,432) | $(11,824) | | Net Cash Provided by Financing Activities | $1,329 | $1,923 | | Net Decrease in Cash, Cash Equivalents and Restricted Cash | $(48,874) | $(6,240) | | Cash, Cash Equivalents and Restricted Cash, End of Period | $77,642 | $164,025 | - The company experienced a significant net decrease in cash, cash equivalents, and restricted cash of **$48.9 million** for the six months ended October 31, 2022, primarily due to cash used in operating and investing activities[19](index=19&type=chunk) - Investing activities saw a substantial increase in cash usage, primarily for the purchase of property and equipment, rising from **$11.8 million** in 2021 to **$41.4 million** in 2022[19](index=19&type=chunk) [Notes to Condensed Consolidated Financial Statements (Unaudited)](index=8&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements%20(Unaudited)) This section provides detailed explanations and additional information supporting the condensed consolidated financial statements [Note 1 – Description of Company and Basis of Presentation](index=8&type=section&id=Note%201%20%E2%80%93%20Description%20of%20Company%20and%20Basis%20of%20Presentation) This note describes the company's business and the accounting principles used in preparing the financial statements - Avid Bioservices, Inc. operates as a dedicated contract development and manufacturing organization (CDMO) providing comprehensive services for biologics in the biotechnology and biopharmaceutical industries[21](index=21&type=chunk) - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP and SEC regulations for Form 10-Q, reflecting all necessary recurring adjustments[22](index=22&type=chunk) [Note 2 – Summary of Significant Accounting Policies](index=8&type=section&id=Note%202%20%E2%80%93%20Summary%20of%20Significant%20Accounting%20Policies) This note outlines the key accounting policies applied in the preparation of the condensed consolidated financial statements [Revenue Recognition](index=8&type=section&id=Revenue%20Recognition) This section details the company's policies and methods for recognizing revenue from its various service offerings - Revenue is disaggregated into manufacturing and process development streams, both recognized over time using an input method based on work-in-process costs[25](index=25&type=chunk)[26](index=26&type=chunk)[28](index=28&type=chunk) **Revenue Streams (in thousands):** | Revenue Type | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | | :----------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Manufacturing Revenues | $27,614 | $22,013 | $59,095 | $47,688 | | Process Development Revenues | $7,143 | $4,096 | $12,354 | $9,175 | | Total Revenues | $34,757 | $26,109 | $71,449 | $56,863 | - During the three and six months ended October 31, 2022, the company recognized **$8.3 million** and **$26.9 million**, respectively, from contract liabilities recorded in prior periods[30](index=30&type=chunk) - Changes in estimates for variable consideration resulted in an **$11.2 million** decrease in revenues for the three and six months ended October 31, 2021, due to a customer dispute over cancellation fees[36](index=36&type=chunk) [Restricted Cash](index=10&type=section&id=Restricted%20Cash) This section explains the nature and amount of cash held for specific purposes and not available for general use - Restricted cash of **$0.4 million** is maintained as collateral for a letter of credit under an operating lease[39](index=39&type=chunk) **Cash, Cash Equivalents and Restricted Cash (in thousands):** | Metric | October 31, 2022 | April 30, 2022 | October 31, 2021 | April 30, 2021 | | :------------------------------------------ | :--------------- | :------------- | :--------------- | :------------- | | Cash and Cash Equivalents | $77,292 | $126,166 | $163,675 | $169,915 | | Restricted Cash | $350 | $350 | $350 | $350 | | Total Cash, Cash Equivalents and Restricted Cash | $77,642 | $126,516 | $164,025 | $170,265 | [Accounts Receivable, Net](index=11&type=section&id=Accounts%20Receivable%2C%20Net) This section describes the company's policies for managing and valuing its outstanding customer balances - An allowance for doubtful accounts of **$17.2 million** as of October 31, 2022, and **$18.4 million** as of April 30, 2022, was deemed necessary, primarily due to a dispute with a customer over cancellation fees[42](index=42&type=chunk) [Inventory](index=11&type=section&id=Inventory) This section outlines the valuation methods and composition of the company's inventory - Inventory consists of raw materials, valued at the lower of cost (FIFO method) or net realizable value, with periodic reviews for impairment[43](index=43&type=chunk) [Property and Equipment](index=11&type=section&id=Property%20and%20Equipment) This section details the company's fixed assets, including their valuation, depreciation, and amortization policies - Property and equipment are recorded at cost less accumulated depreciation, computed using the straight-line method over estimated useful lives[44](index=44&type=chunk) **Property and Equipment, Net (in thousands):** | Category | October 31, 2022 | April 30, 2022 | | :---------------------------------- | :--------------- | :------------- | | Leasehold Improvements | $48,349 | $37,345 | | Laboratory and Manufacturing Equipment | $34,360 | $30,089 | | Construction-in-Progress | $77,138 | $43,809 | | Total Property and Equipment, Gross | $166,823 | $117,412 | | Less: Accumulated Depreciation and Amortization | $(27,437) | $(24,457) | | Total Property and Equipment, Net | $139,386 | $92,955 | - Depreciation and amortization expense increased to **$1.8 million** for the three months and **$3.4 million** for the six months ended October 31, 2022, from **$1.0 million** and **$2.0 million**, respectively, in the prior year[46](index=46&type=chunk) [Leases](index=12&type=section&id=Leases) This section describes the company's accounting for operating and finance leases, including related assets and liabilities - Operating leases with terms greater than one year are included in ROU assets and lease liabilities, recognized at the lease commencement date based on the present value of lease payments[47](index=47&type=chunk) - Finance leases are included as assets within property and equipment, net, and a lease liability equal to the present value of minimum lease payments[49](index=49&type=chunk) [Impairment](index=12&type=section&id=Impairment) This section explains the company's policy for assessing and recognizing impairment losses on long-lived assets - Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that their carrying value may not be recoverable; no impairment losses were recognized for the six months ended October 31, 2022 and 2021[51](index=51&type=chunk) [Stock-Based Compensation](index=12&type=section&id=Stock-Based%20Compensation) This section details the accounting treatment for stock options, restricted stock units, and other equity awards - Stock options, restricted stock units (RSUs), and performance stock units (PSUs) are accounted for under ASC 718, with fair value measured at grant date and expensed over requisite service periods[52](index=52&type=chunk) [Debt Issuance Costs](index=13&type=section&id=Debt%20Issuance%20Costs) This section describes the accounting for costs incurred in connection with issuing debt instruments - Debt issuance costs for convertible senior notes are recorded as a deduction against the principal value of the debt and amortized to interest expense using the effective interest method[54](index=54&type=chunk) [Comprehensive Income (Loss)](index=13&type=section&id=Comprehensive%20Income%20(Loss)) This section clarifies the components of comprehensive income or loss beyond net income - Comprehensive income (loss) equals net income (loss) for all periods presented, indicating no other comprehensive income components[55](index=55&type=chunk) [Fair Value Measurements](index=13&type=section&id=Fair%20Value%20Measurements) This section outlines the methodologies and hierarchy used for fair value measurements of financial instruments - Fair value measurements are categorized into a three-level hierarchy based on input observability[56](index=56&type=chunk) - Cash equivalents are classified as Level 1, while convertible senior notes are considered a Level 2 financial liability due to limited trading activity[57](index=57&type=chunk) [Accounting Standards Not Yet Adopted](index=13&type=section&id=Accounting%20Standards%20Not%20Yet%20Adopted) This section discusses new accounting pronouncements that have not yet been implemented and their potential impact - The company is evaluating the impact of ASU No. 2016-13, 'Financial Instruments – Credit Losses (Topic 326)', which is effective for fiscal years beginning after December 15, 2022 (fiscal year 2024)[58](index=58&type=chunk) [Note 3 – Debt](index=14&type=section&id=Note%203%20%E2%80%93%20Debt) This note provides details on the company's debt obligations, including convertible senior notes and related terms [Convertible Senior Notes Due 2026](index=14&type=section&id=Convertible%20Senior%20Notes%20Due%202026) This section details the terms, carrying amounts, and interest expense associated with the company's convertible senior notes - In March 2021, the company issued **$143.8 million** in 1.25% exchangeable senior notes due 2026, with net proceeds of **$138.5 million**[60](index=60&type=chunk) - The notes are senior unsecured obligations, convertible into cash, common stock, or a combination, at an initial conversion price of approximately **$21.21 per share**[61](index=61&type=chunk)[62](index=62&type=chunk) **Convertible Senior Notes Carrying Amount (in thousands):** | Metric | October 31, 2022 | April 30, 2022 | | :----------------------- | :--------------- | :------------- | | Principal | $143,750 | $143,750 | | Unamortized Issuance Costs | $(3,653) | $(4,173) | | Net Carrying Amount | $140,097 | $139,577 | - As of October 31, 2022, the estimated fair value of the Convertible Notes was approximately **$149.7 million** (Level 2 fair value)[70](index=70&type=chunk) **Interest Expense on Convertible Notes (in thousands):** | Metric | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | | :--------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Contractual Interest Expense | $411 | $449 | $635 | $898 | | Amortization of Issuance Costs | $260 | $255 | $520 | $509 | | Total Interest Expense | $671 | $704 | $1,155 | $1,407 | [Capped Call Transactions](index=15&type=section&id=Capped%20Call%20Transactions) This section describes the capped call transactions entered into to mitigate potential dilution from convertible notes - The company entered into capped call transactions for **$12.8 million** to reduce potential dilution from convertible notes, with a cap share price of approximately **$28.02 per share**[72](index=72&type=chunk) - The capped calls are accounted for as equity classification and were recorded as a reduction to additional paid-in capital[74](index=74&type=chunk) [Note 4 – Leases](index=16&type=section&id=Note%204%20%E2%80%93%20Leases) This note provides information on the company's lease agreements, including lease costs and maturity schedules - The company leases office, manufacturing, laboratory, and warehouse space under operating lease agreements with terms ranging from 7 to 12 years, including renewal options and scheduled rent increases[75](index=75&type=chunk) **Components of Operating Lease Cost (in thousands):** | Metric | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | | :------------------ | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Operating Lease Cost | $1,090 | $989 | $2,173 | $1,777 | | Variable Lease Cost | $408 | $201 | $797 | $399 | | Short-Term Lease Cost | $197 | $114 | $327 | $216 | | Total Lease Cost | $1,695 | $1,304 | $3,297 | $2,392 | **Lease Liabilities Maturities as of October 31, 2022 (in thousands):** | Fiscal Year Ending April 30, | Operating Leases | Finance Lease | Total | | :--------------------------- | :--------------- | :------------ | :------ | | 2023 (remaining period) | $2,216 | $314 | $2,530 | | 2024 | $4,140 | $629 | $4,769 | | 2025 | $4,060 | $629 | $4,689 | | 2026 | $4,167 | $629 | $4,796 | | 2027 | $4,199 | $419 | $4,618 | | Thereafter | $28,708 | $0 | $28,708 | | Total Lease Payments | $47,490 | $2,620 | $50,110 | | Less: Imputed Interest | $(8,029) | $(272) | $(8,301) | | Total Lease Liabilities | $39,461 | $2,348 | $41,809 | [Note 5 – Equity Compensation Plans](index=18&type=section&id=Note%205%20%E2%80%93%20Equity%20Compensation%20Plans) This note details the various equity compensation plans, including stock options, RSUs, PSUs, and the ESPP [Stock Incentive Plans](index=18&type=section&id=Stock%20Incentive%20Plans) This section outlines the shares reserved and available for issuance under the company's stock incentive plans - As of October 31, 2022, **8,522,436 shares** of common stock were reserved for issuance under stock incentive plans, with **4,191,195 shares** outstanding and **4,331,241** available for future grants[81](index=81&type=chunk) [Stock Options](index=18&type=section&id=Stock%20Options) This section summarizes the activity and outstanding balances of stock options granted to employees and directors **Stock Option Activity (Six Months Ended October 31, 2022, in thousands):** | Metric | Stock Options | Weighted Average Exercise Price | | :-------------------------- | :------------ | :------------------------------ | | Outstanding at May 1, 2022 | 2,505 | $6.88 | | Exercised | (180) | $6.79 | | Canceled or Expired | (36) | $8.57 | | Outstanding at October 31, 2022 | 2,289 | $6.86 | [Restricted Stock Units](index=18&type=section&id=Restricted%20Stock%20Units) This section details the activity and outstanding balances of restricted stock units granted by the company **Restricted Stock Unit Activity (Six Months Ended October 31, 2022, in thousands):** | Metric | Shares | Weighted Average Grant Fair Value | | :-------------------------- | :----- | :-------------------------------- | | Outstanding at May 1, 2022 | 642 | $14.89 | | Granted | 652 | $18.05 | | Vested | (209) | $11.67 | | Forfeited | (24) | $16.64 | | Outstanding at October 31, 2022 | 1,061 | $17.43 | [Performance Stock Units](index=18&type=section&id=Performance%20Stock%20Units) This section describes the performance-based equity awards granted to executives, contingent on financial metrics - PSUs are granted to executives with annual vesting over three fiscal year performance periods, with the number of shares vesting dependent on predetermined financial metrics (**0% to 200% of target**)[84](index=84&type=chunk) **Performance Stock Unit Activity (Six Months Ended October 31, 2022, in thousands):** | Metric | Shares | Weighted Average Grant Fair Value | | :-------------------------- | :----- | :-------------------------------- | | Outstanding at May 1, 2022 | 233 | $25.31 | | Granted | 609 | $18.09 | | Outstanding at October 31, 2022 | 842 | $20.09 | [Employee Stock Purchase Plan](index=19&type=section&id=Employee%20Stock%20Purchase%20Plan) This section explains the terms and activity of the employee stock purchase plan - Under the ESPP, employees can purchase common stock at **85%** of the lower fair market value on the first or last trading day of the six-month offering period[87](index=87&type=chunk) - During the six months ended October 31, 2022, **27,711 shares** were purchased at **$12.97 per share**, with **1,004,251 shares** reserved for issuance[87](index=87&type=chunk) [Stock-Based Compensation](index=19&type=section&id=Stock-Based%20Compensation) This section reports the total stock-based compensation expense recognized across different financial statement categories **Stock-Based Compensation Expense (in thousands):** | Category | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | | :---------------------------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Cost of Revenues | $1,045 | $693 | $1,732 | $1,161 | | Selling, General and Administrative | $1,741 | $1,249 | $2,951 | $2,080 | | Total Stock-Based Compensation | $2,786 | $1,942 | $4,683 | $3,241 | - Total estimated unrecognized compensation cost for non-vested stock options and RSUs was **$2.0 million** and **$17.1 million**, respectively, as of October 31, 2022[89](index=89&type=chunk) - Unrecognized compensation cost for non-vested PSUs was **$11.8 million**, expected to be recognized over a weighted average vesting period of **1.4 years**, subject to performance metric achievement[89](index=89&type=chunk) [Note 6 – Income Taxes](index=20&type=section&id=Note%206%20%E2%80%93%20Income%20Taxes) This note provides details on the company's income tax expense or benefit and the reconciliation of the effective tax rate - For the three and six months ended October 31, 2022, the company recorded an income tax benefit of **$(2.1) million** and **$(1.4) million**, respectively, with effective tax rates of **64.3%** and **141.8%**[92](index=92&type=chunk) - The tax benefit differs from the U.S. federal statutory rate of **21%** due to state income taxes, stock-based compensation, non-deductible officers' compensation, and transportation fringe benefits[92](index=92&type=chunk) [Note 7 – Net Income (Loss) Per Common Share](index=20&type=section&id=Note%207%20%E2%80%93%20Net%20Income%20(Loss)%20Per%20Common%20Share) This note explains the calculation of basic and diluted net income or loss per common share - Basic net income (loss) per common share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding[94](index=94&type=chunk) - Diluted net income (loss) per common share includes the potential dilutive effects of stock options, unvested RSUs and PSUs, ESPP shares, and Convertible Notes, if not anti-dilutive[94](index=94&type=chunk) **Net Income (Loss) Per Share (in thousands, except per share amounts):** | Metric | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Net Income (Loss) | $(1,156) | $3,522 | $408 | $9,826 | | Weighted Average Basic Common Shares Outstanding | 62,204 | 61,414 | 62,054 | 61,276 | | Weighted Average Dilutive Common Shares Outstanding | 62,204 | 63,602 | 63,574 | 63,606 | | Basic Net Income (Loss) Per Share | $(0.02) | $0.06 | $0.01 | $0.16 | | Diluted Net Income (Loss) Per Share | $(0.02) | $0.06 | $0.01 | $0.15 | **Potential Dilutive Securities Excluded (in thousands):** | Security Type | Three Months Ended Oct 31, 2022 | Three Months Ended Oct 31, 2021 | Six Months Ended Oct 31, 2022 | Six Months Ended Oct 31, 2021 | | :---------------- | :------------------------------ | :------------------------------ | :---------------------------- | :---------------------------- | | Stock Options | 1,404 | 47 | 51 | 38 | | RSUs and PSUs | 429 | 247 | 640 | 157 | | ESPP | 4 | 0 | 0 | 0 | | Convertible Notes | 6,776 | 6,776 | 6,776 | 6,776 | | Total | 8,613 | 7,070 | 7,467 | 6,971 | [Note 8 – Commitments and Contingencies](index=21&type=section&id=Note%208%20%E2%80%93%20Commitments%20and%20Contingencies) This note discloses the company's significant commitments and potential contingent liabilities, including legal proceedings [Humanigen Arbitration](index=21&type=section&id=Humanigen%20Arbitration) This section details the ongoing arbitration proceedings with Humanigen, Inc. regarding alleged breach of contract - The company filed a Demand for Arbitration against Humanigen, Inc. in December 2021, claiming over **$20.5 million** in damages for breach of contract and anticipatory breach[99](index=99&type=chunk) - Humanigen filed counterclaims, which the state court compelled to arbitration in October 2022, leading Humanigen to refile its claims in arbitration in November 2022[99](index=99&type=chunk) - The company withdrew its claim for anticipatory breach under the Letter Agreement due to Humanigen's failure to obtain Emergency Use Authorization[99](index=99&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition And Results of Operations](index=21&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20And%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations, including an overview of the business, strategic objectives, key highlights, facility expansions, and a detailed comparison of financial performance for the three and six months ended October 31, 2022, versus the prior year [Overview](index=22&type=section&id=Overview) This section provides a general description of the company's business as a contract development and manufacturing organization - Avid Bioservices, Inc. is a CDMO specializing in process development and CGMP clinical and commercial manufacturing of biologics for the biotechnology and biopharmaceutical industries[104](index=104&type=chunk) - The company has **29 years of experience** in producing monoclonal antibodies and recombinant proteins, offering services including product manufacturing, bulk packaging, testing, and regulatory support[104](index=104&type=chunk) [Strategic Objectives](index=22&type=section&id=Strategic%20Objectives) This section outlines the company's key goals for growth, market expansion, and operational efficiency - The company's growth strategy includes investing in additional manufacturing capacity, broadening market awareness, expanding its customer base and service offerings, exploring strategic opportunities, and increasing operating profit margin[105](index=105&type=chunk) [Second Quarter Highlights](index=23&type=section&id=Second%20Quarter%20Highlights) This section summarizes the company's significant achievements and financial performance during the second fiscal quarter - Revenues for the second quarter ended October 31, 2022, were **$34.8 million**, a **33% increase** year-over-year[107](index=107&type=chunk) - The company expanded its customer base and ended the quarter with a backlog of approximately **$147 million**[107](index=107&type=chunk) - Progress continued on the second phase of the Myford facility expansion and the construction of the cell and gene therapy facility[107](index=107&type=chunk) [Facility Expansions](index=23&type=section&id=Facility%20Expansions) This section details the ongoing projects to increase manufacturing and development capacity, including estimated costs and timelines - The second phase of the Myford facility expansion, adding a second manufacturing train, is anticipated to be online in **Q1 2023**, with an estimated remaining cost of **$14 million**[108](index=108&type=chunk) - The new cell and gene therapy (CGT) facility's analytical and process development laboratories are operational, with CGMP manufacturing suites expected online in **mid-2023**, at an estimated remaining cost of **$39 million**[109](index=109&type=chunk) - An expansion of mammalian cell culture process development capacity is expected to be completed by the end of **Q1 2023**, costing approximately **$6 million**[110](index=110&type=chunk) - Upon completion, combined facilities are estimated to have the potential for up to **$400 million** in annual revenue generating capacity[111](index=111&type=chunk) [Impact of COVID-19 Pandemic](index=23&type=section&id=Impact%20of%20COVID-19%20Pandemic) This section assesses the effects of the COVID-19 pandemic on the company's operations and financial performance - The COVID-19 pandemic has not had a significant impact on operations to date, as manufacturing facilities have continued to operate and provide essential services[112](index=112&type=chunk) [Performance and Financial Measures](index=23&type=section&id=Performance%20and%20Financial%20Measures) This section identifies the key metrics used by management to evaluate the company's business performance - Key indicators for assessing business performance include revenues, gross profit, selling, general and administrative expenses, operating income, and interest expense[114](index=114&type=chunk) [Results of Operations](index=24&type=section&id=Results%20of%20Operations) This section provides a detailed analysis of the company's revenues, expenses, and profitability for the reported periods **Consolidated Statements of Operations Comparison (in thousands):** | Metric | 3 Months Ended Oct 31, 2022 | 3 Months Ended Oct 31, 2021 | Change (3 Months) | 6 Months Ended Oct 31, 2022 | 6 Months Ended Oct 31, 2021 | Change (6 Months) | | :---------------------------------- | :-------------------------- | :-------------------------- | :---------------- | :-------------------------- | :-------------------------- | :---------------- | | Revenues | $34,757 | $26,109 | $8,648 | $71,449 | $56,863 | $14,586 | | Cost of Revenues | $30,610 | $16,923 | $13,687 | $58,185 | $36,286 | $21,899 | | Gross Profit | $4,147 | $9,186 | $(5,039) | $13,264 | $20,577 | $(7,313) | | Selling, General and Administrative | $6,831 | $5,033 | $1,798 | $13,213 | $9,493 | $3,720 | | Operating Income (Loss) | $(2,684) | $4,153 | $(6,837) | $51 | $11,084 | $(11,033) | | Net Income (Loss) | $(1,156) | $3,522 | $(4,678) | $408 | $9,826 | $(9,418) | [Three Months Ended October 31, 2022 Compared to Three Months Ended October 31, 2021](index=25&type=section&id=Three%20Months%20Ended%20October%2031%2C%202022%20Compared%20to%20Three%20Months%20Ended%20October%2031%2C%202021) This section compares the company's financial performance for the three-month period ending October 31, 2022, against the same period in the prior year [Revenues](index=25&type=section&id=Revenues) This section analyzes the changes in revenue for the three-month period, highlighting key drivers of growth or decline - Revenues increased by **$8.6 million (33%)** to **$34.8 million**, primarily due to an increase in manufacturing runs and process development services for new customers[122](index=122&type=chunk) [Gross Profit](index=25&type=section&id=Gross%20Profit) This section examines the factors influencing the company's gross profit and gross margin for the three-month period - Gross profit decreased by **$5.0 million** to **$4.1 million (12% gross margin)** from **$9.2 million (35% gross margin)**, mainly due to increased compensation, benefits, facility, and equipment costs[123](index=123&type=chunk) - Growth-related costs, including labor, overhead, and depreciation, contributed an incremental **11% decrease** in margin, split evenly between mammalian and cell and gene therapy operations[123](index=123&type=chunk) - Gross profit is expected to continue to be impacted in the short-term by ongoing hiring and additional facility/equipment costs for anticipated growth[124](index=124&type=chunk) [Selling, General and Administrative Expenses](index=25&type=section&id=Selling%2C%20General%20and%20Administrative%20Expenses) This section details the changes in selling, general, and administrative expenses and their impact on profitability - SG&A expenses increased by **$1.8 million (36%)** to **$6.8 million**, primarily driven by higher compensation and benefit-related expenses (**$1.1 million**), legal and accounting fees (**$0.2 million**), and consulting fees (**$0.2 million**)[125](index=125&type=chunk) [Operating Income (Loss)](index=26&type=section&id=Operating%20Income%20(Loss)) This section discusses the company's operating income or loss, reflecting the overall profitability from core operations - Operating income shifted to a loss of **$2.7 million** from an income of **$4.2 million**, a **$6.8 million decrease**, attributed to the **$5.0 million** decrease in gross profit and **$1.8 million** increase in SG&A expenses[127](index=127&type=chunk) [Income Tax Benefit](index=26&type=section&id=Income%20Tax%20Benefit) This section explains the income tax benefit recorded and its effect on the company's net income - An income tax benefit of **$2.1 million** was recorded, compared to no benefit in the prior year, due to the recording of a full quarter of income tax benefit in the current period[128](index=128&type=chunk) [Six Months Ended October 31, 2022 Compared to Six Months Ended October 31, 2021](index=26&type=section&id=Six%20Months%20Ended%20October%2031%2C%202022%20Compared%20to%20Six%20Months%20Ended%20October%2031%2C%202021) This section compares the company's financial performance for the six-month period ending October 31, 2022, against the same period in the prior year [Revenues](index=26&type=section&id=Revenues) This section analyzes the changes in revenue for the six-month period, highlighting key drivers of growth or decline - Revenues increased by **$14.6 million (26%)** to **$71.4 million**, driven by increased manufacturing runs and process development services for new customers[129](index=129&type=chunk) **Revenue Streams Increase (Six Months Ended October 31, in millions):** | Revenue Type | Increase | | :--------------------------- | :------- | | Net Increase in Manufacturing Revenues | $11.4 | | Net Increase in Process Development Revenues | $3.2 | | Total Increase in Revenues | $14.6 | [Gross Profit](index=26&type=section&id=Gross%20Profit) This section examines the factors influencing the company's gross profit and gross margin for the six-month period - Gross profit decreased by **$7.3 million** to **$13.3 million (19% gross margin)** from **$20.6 million (36% gross margin)**, primarily due to higher compensation, benefits, facility, and equipment costs[130](index=130&type=chunk) - Growth-related costs, including labor, overhead, and depreciation, contributed an incremental **9% decrease** in margin, split evenly between mammalian and cell and gene therapy operations[130](index=130&type=chunk) [Selling, General and Administrative Expenses](index=27&type=section&id=Selling%2C%20General%20and%20Administrative%20Expenses) This section details the changes in selling, general, and administrative expenses and their impact on profitability - SG&A expenses increased by **$3.7 million (39%)** to **$13.2 million**, mainly due to higher compensation and benefit-related expenses (**$2.3 million**), legal and accounting fees (**$0.5 million**), and consulting fees (**$0.3 million**)[133](index=133&type=chunk) [Operating Income](index=27&type=section&id=Operating%20Income) This section discusses the company's operating income, reflecting the overall profitability from core operations - Operating income decreased by **$11.0 million** to **$0.1 million**, attributed to the **$7.3 million** decrease in gross profit and **$3.7 million** increase in SG&A expenses[134](index=134&type=chunk) [Interest Expense](index=27&type=section&id=Interest%20Expense) This section analyzes the company's interest expense, including factors contributing to its change - Interest expense decreased by **$0.2 million (13%)** to **$1.2 million**, primarily due to **$0.3 million** in interest capitalized as construction-in-progress during the current year[135](index=135&type=chunk) [Income Tax Benefit](index=27&type=section&id=Income%20Tax%20Benefit) This section explains the income tax benefit recorded and its effect on the company's net income - An income tax benefit of **$1.4 million** was recorded, compared to no benefit in the prior year, due to the recording of net income tax benefit in the current period[136](index=136&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's ability to generate and manage cash, including its cash position and funding needs - As of October 31, 2022, the company had **$77.3 million** in cash and cash equivalents, which is believed to be sufficient to fund operations for at least the next 12 months[137](index=137&type=chunk) - Additional equity or debt financing may be required to support operations or capital requirements, particularly for facility expansions, with availability and terms dependent on market conditions[139](index=139&type=chunk) [Cash Flows](index=28&type=section&id=Cash%20Flows) This section analyzes the company's cash movements from operating, investing, and financing activities **Cash Flow Activities (Six Months Ended October 31, in thousands):** | Activity | 2022 | 2021 | Change | | :------------------------------------------ | :------- | :------- | :------- | | Net Cash (Used in) Provided by Operating Activities | $(8,771) | $3,661 | $(12,432) | | Net Cash Used in Investing Activities | $(41,432) | $(11,824) | $(29,608) | | Net Cash Provided by Financing Activities | $1,329 | $1,923 | $(594) | - Net cash used in operating activities was **$8.8 million** in 2022, a decrease from **$3.7 million** provided in 2021, primarily due to a net change in operating assets and liabilities of **$16.3 million**[141](index=141&type=chunk) - Net cash used in investing activities significantly increased to **$41.4 million** in 2022 from **$11.8 million** in 2021, mainly for property and equipment acquisitions related to facility expansions[143](index=143&type=chunk) - Net cash provided by financing activities decreased to **$1.3 million** in 2022 from **$1.9 million** in 2021, due to lower proceeds from common stock issuance and principal payments on a finance lease[144](index=144&type=chunk) [Cash Requirements](index=29&type=section&id=Cash%20Requirements) This section outlines the company's future cash obligations, including debt, lease payments, and capital expenditures [Convertible Senior Notes](index=29&type=section&id=Convertible%20Senior%20Notes) This section details the principal amount outstanding for the company's convertible senior notes - As of October 31, 2022, the aggregate principal amount outstanding for the 1.25% exchangeable senior notes due 2026 was **$143.8 million**[149](index=149&type=chunk) [Leases](index=29&type=section&id=Leases) This section summarizes the company's outstanding lease obligations and their maturity schedule - Outstanding lease obligations totaled **$50.1 million** as of October 31, 2022, with **$2.5 million** payable in the remainder of fiscal 2023 and **$4.8 million** in fiscal 2024[150](index=150&type=chunk) [Capital Expenditures](index=29&type=section&id=Capital%20Expenditures) This section discusses the company's investments in property and equipment, including planned future expenditures - Capital expenditures for the six months ended October 31, 2022, were **$41.4 million**, with an additional **$8.5 million** in accrued capital expenditures[151](index=151&type=chunk) - Total capital expenditures for fiscal 2023 are anticipated to be approximately **$85 million to $95 million**, primarily for mammalian and cell and gene therapy facility expansions[151](index=151&type=chunk) [Critical Accounting Policies and Estimates](index=29&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section confirms that there were no significant changes to critical accounting policies during the reporting period - There were no significant changes in critical accounting policies during the six months ended October 31, 2022, as previously disclosed in the Annual Report on Form 10-K[152](index=152&type=chunk) [Recent Accounting Pronouncements](index=30&type=section&id=Recent%20Accounting%20Pronouncements) This section refers to the notes to financial statements for information on recently issued accounting standards - Information on recent accounting pronouncements is provided in Note 2, 'Summary of Significant Accounting Policies,' of the condensed consolidated financial statements[154](index=154&type=chunk) [Backlog](index=30&type=section&id=Backlog) This section provides information on the company's current backlog of orders and its anticipated revenue recognition - As of October 31, 2022, the company's backlog was approximately **$147 million**, a decrease from **$153 million** as of April 30, 2022[155](index=155&type=chunk) - The majority of the backlog is anticipated to be recognized as revenue over the next twelve months, but it is subject to risks such as customer cancellations, postponements, and supply chain delays[155](index=155&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=30&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that there were no material changes in market risks during the six months ended October 31, 2022, compared to those described in the Annual Report on Form 10-K - No material changes in market risks occurred during the six months ended October 31, 2022, as compared to the disclosures in the Annual Report on Form 10-K[156](index=156&type=chunk) [Item 4. Controls And Procedures](index=30&type=section&id=Item%204.%20Controls%20And%20Procedures) This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=30&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section reports on management's assessment of the effectiveness of the company's disclosure controls and procedures - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of October 31, 2022[158](index=158&type=chunk) [Changes in Internal Control over Financial Reporting](index=30&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section discloses any material changes in the company's internal control over financial reporting during the period - There were no significant changes in internal control over financial reporting during the quarter ended October 31, 2022, that materially affected or are reasonably likely to materially affect it[159](index=159&type=chunk) PART II - OTHER INFORMATION This section includes information on legal proceedings, risk factors, and exhibits filed with the report [Item 1. Legal Proceedings](index=31&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 8, 'Commitments and Contingencies,' for details on legal proceedings, including the Humanigen arbitration - Legal proceedings information is incorporated by reference from Note 8, 'Commitments and Contingencies,' in the unaudited condensed consolidated financial statements[162](index=162&type=chunk) [Item 1A. Risk Factors](index=31&type=section&id=Item%201A.%20Risk%20Factors) This section refers to the Annual Report on Form 10-K for a detailed discussion of business risks and states that no material changes to these risk factors have occurred - For a detailed discussion of business risks, refer to Part I, Item 1A, 'Risk Factors' in the Annual Report on Form 10-K for the fiscal year ended April 30, 2022[163](index=163&type=chunk) - There have been no material changes to the previously disclosed risk factors[163](index=163&type=chunk) [Item 6. Exhibits](index=31&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including certificates, certifications, and XBRL data files - The exhibits include the Restated Certificate of Incorporation, certifications from the Executive Officer and Financial Officer, and various XBRL data files[164](index=164&type=chunk) SIGNATURES This section contains the signatures of the company's authorized officers, including the President and Chief Executive Officer, and the Chief Financial Officer, certifying the report - The report is signed by Nicholas S. Green, President and Chief Executive Officer, and Daniel R. Hart, Chief Financial Officer, on December 6, 2022[170](index=170&type=chunk)

Financial Data and Key Metrics Changes - Revenues for Q1 fiscal 2023 were $36.7 million, a 19% increase from $30.8 million in the prior year period, primarily driven by increased manufacturing revenues [9] - Gross margin for Q1 fiscal 2023 was 25%, down from 37% in Q1 fiscal 2022, impacted by increased costs associated with business growth and facility expansions [10][11] - Net income for Q1 fiscal 2023 was $1.6 million or $0.03 per basic share, compared to $6.3 million or $0.10 per basic share in Q1 fiscal 2022 [13] - Adjusted EBITDA for Q1 fiscal 2023 was $6.2 million, a 5% sequential increase over Q4 fiscal 2022 [13] - Cash and cash equivalents as of July 31, 2022, were $115.1 million, down from $126.2 million on April 30, 2022 [13] Business Line Data and Key Metrics Changes - The commercial team signed $41 million in new project orders during the quarter, contributing to a record backlog of $157 million, a 43% increase from $110 million at the end of Q1 fiscal 2022 [16] - The company is expanding its process development capabilities for both mammalian and cell and gene therapy businesses, with expectations for new capabilities to come online in Q1 calendar 2023 [6][24] Market Data and Key Metrics Changes - The company is focusing on leading biotechnology regions in North America, expanding outreach and presence in these key markets [17] - The backlog contains no COVID-related business, indicating a shift towards more stable project agreements [16] Company Strategy and Development Direction - The company is in the midst of a broad expansion of facilities and capabilities to attract new customers and support existing ones [21] - The strategy includes enhancing analytical and process development capabilities, which are essential for onboarding new clients [45] - The company aims to maintain high-quality standards and timely delivery to strengthen its market position [41] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the future, citing strong demand and a solid backlog, despite potential pressures on margins due to ongoing expansions [27][29] - The company anticipates a temporary impact on margins due to increased costs associated with staffing and facility expansions, but expects margins to improve as capacity is filled [27][39] Other Important Information - The company is relocating its corporate office to a larger space in the Myford facility, which will consolidate operations and administrative teams [28] - The company is preparing for annual maintenance shutdowns in Q2, which will temporarily reduce available capacity [28] Q&A Session Summary Question: Impact of biotech funding slowdown on bookings - Management noted a typical summer slowdown but indicated improved performance compared to prior years, with strong issuance rates [31] Question: Visibility on fiscal 2023 guidance - Management affirmed that the outlook for the full year remains on track, with a good start to the year and increased backlog [32][33] Question: Business development trends in cell and gene therapy - Management confirmed the signing of the first client for the new cell and gene therapy capabilities and ongoing discussions with other parties [36] Question: Factors driving new customer wins - Management attributed success to proactive investment in capacity, quality track record, and timely delivery of products [41] Question: Size and future plans for the sales team - The sales team currently consists of four members, with no immediate plans for further expansion [43]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number: 001-32839 AVID BIOSERVICES, INC. (Exact name of Registrant as specified in its charter) Delaware (State or other ...

Avid Bioservices, Inc. (NASDAQ:CDMO) Q4 2022 Earnings Conference Call June 29, 2022 4:30 PM ET Company Participants Tim Brons - Investor Relations Nick Green - President and Chief Executive Officer Dan Hart - Chief Financial Officer Matt Kwietniak - Chief Commercial Officer Conference Call Participants Sean Dodge - RBC Capital Markets Jacob Johnson - Stephens Matt Hewitt - Craig-Hallum Capital Operator Good day ladies and gentlemen and welcome to the Avid Bioservices Fourth Quarter and Fiscal Year End 2022 ...

[PART I](index=5&type=section&id=PART%20I) [Business](index=5&type=section&id=Item%201.%20Business) Avid Bioservices is a dedicated CDMO specializing in biopharmaceutical drug substances from mammalian cell culture, executing a growth strategy focused on capacity expansion, customer diversification, and operational efficiency [Overview, Business Strategy & Competitive Strengths](index=5&type=section&id=Overview,%20Business%20Strategy%20%26%20Competitive%20Strengths) Avid is an experienced CDMO expanding into cell and gene therapy, leveraging expertise in mammalian cell culture and a strong regulatory track record - Avid is a CDMO with **29 years of experience**, providing services from process development to CGMP manufacturing for biopharmaceuticals derived from mammalian cell culture[19](index=19&type=chunk) - The company is expanding into the cell and gene therapy market, with a new purpose-built CGMP facility under construction, expected to be fully online in **mid-calendar 2023**[20](index=20&type=chunk) - Competitive strengths include expertise in mammalian cell culture, a broad spectrum of services supporting products from early-stage to commercial, a strong regulatory track record with **no FDA Form 483 observations since 2013**, and modern infrastructure utilizing single-use bioreactors[22](index=22&type=chunk)[24](index=24&type=chunk)[25](index=25&type=chunk) [Our Growth Strategy](index=6&type=section&id=Our%20Growth%20Strategy) The company's growth strategy involves diversifying its customer base, expanding process development, and significantly increasing manufacturing capacity to reach $400 million in annual revenue - The company's growth strategy includes diversifying its customer base, expanding process development capabilities, and significantly increasing its manufacturing footprint[28](index=28&type=chunk)[29](index=29&type=chunk)[31](index=31&type=chunk) - A two-phase expansion of the Myford facility is underway, with the second phase (Myford South) expected to be online in the **first calendar quarter of 2023**, alongside a new cell and gene therapy facility under construction[32](index=32&type=chunk) - Upon completion of all expansions, the company estimates its total annual revenue-generating capacity could reach approximately **$400 million**[32](index=32&type=chunk) [Our Facilities](index=8&type=section&id=Our%20Facilities) The company is undergoing major expansions at its Myford facility and constructing a new Cell and Gene Therapy Facility in California - The Myford facility in Orange County, CA, is undergoing a major expansion, adding a second manufacturing train (Myford South) expected to be online in **Q1 calendar 2023**[36](index=36&type=chunk) - A new purpose-built Cell and Gene Therapy Facility is under construction in Costa Mesa, CA, with an estimated cost of **$65 million to $75 million**, with CGMP manufacturing suites expected to be online in **mid-calendar 2023**[38](index=38&type=chunk) [Regulatory, Manufacturing & Other Business Aspects](index=8&type=section&id=Regulatory,%20Manufacturing%20%26%20Other%20Business%20Aspects) The company maintains a strong regulatory track record but faces risks from single-source raw material suppliers and customer concentration - The company has a strong regulatory track record, with successful audits by the FDA, EMA, ANVISA, Health Canada, and others[40](index=40&type=chunk) - Operations rely on commercially available raw materials, sometimes from single-source suppliers, creating a potential business risk[39](index=39&type=chunk) Customer Concentration | Fiscal Year | Revenue from Top 3 Customers (%) | | :--- | :--- | | 2022 | 60% | | 2021 | 76% | | 2020 | 63% | Backlog Growth | Date | Backlog Amount (Millions USD) | | :--- | :--- | | April 30, 2022 | $153 million | | April 30, 2021 | $118 million | [Human Capital](index=11&type=section&id=Human%20Capital) The company employs 327 individuals in Orange County, CA, focusing on talent acquisition, retention, and implementing health and safety measures, including an ESG program - As of April 30, 2022, the company had **327 employees** (321 full-time, 6 part-time), all based in Orange County, CA, with none represented by labor unions[56](index=56&type=chunk)[90](index=90&type=chunk) - The company focuses on talent acquisition and retention through competitive total rewards packages, including base salary, annual bonuses, and long-term equity awards[57](index=57&type=chunk)[59](index=59&type=chunk) - In response to COVID-19, the company implemented health and safety measures such as remote work options, personal protective equipment, and temperature screening[62](index=62&type=chunk) - In fiscal 2022, the company engaged a third-party consultant to establish a more formal Environmental, Social, and Governance (ESG) and sustainability program[69](index=69&type=chunk) [Risk Factors](index=14&type=section&id=Item%201A.%20Risk%20Factors) The company identifies significant risks including customer concentration, uncertainties in capital investments, reliance on third-party suppliers, geographic concentration, and the competitive CDMO industry - A significant portion of revenue comes from a limited number of customers, with the top three accounting for **60% of revenue in fiscal 2022**[81](index=81&type=chunk) - The expansion into viral vector development and manufacturing for the cell and gene therapy market involves significant risks, including potential construction delays, cost overruns, and competition from established players[83](index=83&type=chunk)[84](index=84&type=chunk)[85](index=85&type=chunk) - All manufacturing facilities are located in Orange County, California, increasing exposure to disruption from unforeseeable events in a single geographic area[93](index=93&type=chunk)[94](index=94&type=chunk) - The company's ability to use its significant federal (**$384 million**) and state (**$312 million**) Net Operating Loss (NOL) carryforwards to offset future taxable income may be subject to limitations[111](index=111&type=chunk)[112](index=112&type=chunk) [Properties](index=32&type=section&id=Item%202.%20Properties) The company's corporate offices and CDMO facilities are all leased and located in Orange County, California, totaling approximately 239,000 square feet - All corporate and manufacturing facilities are leased and located in Orange County, California, totaling approximately **239,000 square feet**[167](index=167&type=chunk) [Legal Proceedings](index=32&type=section&id=Item%203.%20Legal%20Proceedings) The company is not currently involved in any legal proceedings expected to materially adversely affect its financial condition or operations [PART II](index=33&type=section&id=PART%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=33&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) The company's common stock trades on NASDAQ under "CDMO", has never paid cash dividends, and does not anticipate doing so in the foreseeable future - Common stock is traded on The NASDAQ Capital Market under the symbol **"CDMO"**[173](index=173&type=chunk) - The company has never declared or paid cash dividends and does not anticipate paying any in the foreseeable future[175](index=175&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=35&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a 25% revenue increase to $119.6 million in fiscal 2022, stable gross margin, a significant non-cash income tax benefit, and major capital expenditure plans for facility expansions [Fiscal Year 2022 Highlights & Facility Expansion](index=35&type=section&id=Fiscal%20Year%202022%20Highlights%20%26%20Facility%20Expansion) Fiscal 2022 highlights include a 25% revenue increase and significant facility expansions projected to boost annual revenue capacity to $400 million FY 2022 Financial Highlights | Metric | FY 2022 (Millions USD) | Change vs FY 2021 | | :--- | :--- | :--- | | Revenues | $119.6 million | +25% | | Net Income | $127.7 million | - | | Backlog | $153 million | +$35 million | - The company is advancing a two-phased expansion of its Myford facility and constructing a new Cell and Gene Therapy Facility, which together are expected to increase total potential revenue capacity to approximately **$400 million annually**[189](index=189&type=chunk)[190](index=190&type=chunk)[192](index=192&type=chunk) [Results of Operations](index=38&type=section&id=Results%20of%20Operations) Fiscal 2022 saw a 25% revenue increase driven by manufacturing and process development, stable gross margin, and a $115.0 million non-cash income tax benefit Comparison of Operating Results (Fiscal Years 2022 vs. 2021) | Metric | FY 2022 (in thousands) | FY 2021 (in thousands) | $ Change (in thousands) | | :--- | :--- | :--- | :--- | | Revenues | $119,597 | $95,868 | $23,729 | | Gross Profit | $36,648 | $29,307 | $7,341 | | Operating Income | $15,422 | $12,243 | $3,179 | | Net Income | $127,672 | $11,212 | $116,460 | - The **25% increase** in FY 2022 revenue was driven by a **$15.6 million** increase in manufacturing revenues and an **$8.1 million** increase in process development revenues[203](index=203&type=chunk) - Gross margin was **31%** for both fiscal 2022 and 2021, with the increase in gross profit attributed to higher revenues, partially offset by increased costs related to business growth and facility expansions[205](index=205&type=chunk) - A non-cash income tax benefit of **$115.0 million** was recorded in fiscal 2022 due to the release of the company's valuation allowance on deferred tax assets[209](index=209&type=chunk) [Critical Accounting Policies and Estimates](index=40&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) Revenue is recognized over time based on costs incurred, and the company released its valuation allowance against deferred tax assets in Q4 fiscal 2022 due to sustained profitability - Revenue from both manufacturing and process development is recognized over time using an input method based on costs incurred to date relative to total estimated costs for the performance obligation[214](index=214&type=chunk)[215](index=215&type=chunk) - In **Q4 fiscal 2022**, the company released its entire valuation allowance against deferred tax assets, determining it is now more likely than not that these assets will be realized, based on revenue growth and sustained profitability[225](index=225&type=chunk)[326](index=326&type=chunk) [Liquidity and Capital Resources](index=42&type=section&id=Liquidity%20and%20Capital%20Resources) As of April 30, 2022, the company held $126.2 million in cash, with anticipated capital expenditures of $85 to $95 million for fiscal 2023, primarily funded by cash and operating cash flows - As of April 30, 2022, the company had cash and cash equivalents of **$126.2 million**[226](index=226&type=chunk) Cash Flow Summary (Fiscal Years 2022 vs. 2021) | Cash Flow Activity | FY 2022 (in thousands) | FY 2021 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $9,465 | $31,182 | | Net cash used in investing activities | ($56,411) | ($9,864) | | Net cash provided by financing activities | $3,197 | $112,335 | - Anticipated capital expenditures for fiscal 2023 are approximately **$85 million to $95 million**, primarily for the ongoing Myford facility expansion and the new Cell and Gene Therapy Facility construction[239](index=239&type=chunk) - The company has **$143.8 million** in aggregate principal of **1.25% Convertible Senior Notes due 2026**[234](index=234&type=chunk)[236](index=236&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=44&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company reports minimal market risk, as cash is held in money market funds and convertible notes bear fixed interest, limiting exposure to interest rate fluctuations [Financial Statements and Supplementary Data](index=45&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents the company's audited consolidated financial statements for fiscal year 2022, including balance sheets, income statements, cash flows, and notes, with an unqualified auditor's opinion [Consolidated Financial Statements](index=48&type=section&id=Consolidated%20Financial%20Statements) Key financial statements for fiscal years 2020-2022 show significant revenue growth, improved profitability, and changes in assets and liabilities Key Balance Sheet Items (as of April 30) | Account | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $126,166 | $169,915 | | Total Assets | $429,843 | $265,510 | | Convertible senior notes, net | $139,577 | $96,949 | | Total Liabilities | $255,317 | $187,774 | | Total Stockholders' Equity | $174,526 | $77,736 | Key Income Statement Items (for year ended April 30) | Account | 2022 (in thousands) | 2021 (in thousands) | 2020 (in thousands) | | :--- | :--- | :--- | :--- | | Revenues | $119,597 | $95,868 | $59,702 | | Gross Profit | $36,648 | $29,307 | $3,932 | | Operating Income (Loss) | $15,422 | $12,243 | ($10,940) | | Net Income (Loss) | $127,672 | $11,212 | ($10,466) | | Diluted EPS | $1.84 | $0.06 | ($0.27) | [Notes to Consolidated Financial Statements](index=53&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) Notes detail the adoption of ASU 2020-06, the issuance of convertible senior notes, the release of the deferred tax asset valuation allowance, and significant customer concentration - The company adopted **ASU 2020-06** on May 1, 2021, which simplified the accounting for convertible instruments, resulting in re-combining the debt and equity components of its convertible notes into a single instrument on the balance sheet[332](index=332&type=chunk)[333](index=333&type=chunk) - In March 2021, the company issued **$143.8 million** of **1.25% Convertible Senior Notes due 2026**, and entered into capped call transactions to reduce potential stock dilution upon conversion[336](index=336&type=chunk)[355](index=355&type=chunk) - The company fully released its valuation allowance against deferred tax assets in **Q4 FY2022**, resulting in a non-cash income tax benefit of **$115.0 million**, based on a history of recent profitability and positive future outlook[326](index=326&type=chunk)[400](index=400&type=chunk) - The company's top customer, Halozyme Therapeutics, Inc., accounted for **41% of total revenues in fiscal 2022**[307](index=307&type=chunk) [Controls and Procedures](index=78&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal controls over financial reporting were effective as of April 30, 2022, a conclusion affirmed by the independent auditor [PART III](index=82&type=section&id=PART%20III) [Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees](index=82&type=section&id=Items%2010-14) Information for items 10 through 14, covering governance, compensation, ownership, and accountant fees, is incorporated by reference from the company's 2022 Definitive Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the registrant's definitive proxy statement for the annual meeting of stockholders[448](index=448&type=chunk)[450](index=450&type=chunk)[451](index=451&type=chunk) [PART IV](index=84&type=section&id=PART%20IV) [Exhibits and Financial Statement Schedules](index=84&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section provides an index of consolidated financial statements, schedules, and exhibits, including details on the allowance for doubtful accounts - Schedule II shows an ending balance for the allowance for doubtful accounts of **$18.4 million** for the year ended April 30, 2022, up from zero in the prior two years[464](index=464&type=chunk)

Avid Bioservices (NASDAQ:CDMO) Q3 2022 Earnings Conference Call March 8, 2022 4:30 PM ET Company Participants Tim Brons – Executive Vice President of Vida Strategic Partners Nick Green – President and Chief Executive Officer Dan Hart – Chief Financial Officer Matt Kwietniak – Chief Commercial Officer Conference Call Participants Sean Dodge – RBC Capital Markets Jacob Johnson – Stephens Matt Hewitt – Craig-Hallum Paul Knight – KeyBanc Operator Good day, ladies and gentlemen, and welcome to the Avid Bioservic ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 31, 2022 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission file number: 001-32839 AVID BIOSERVICES, INC. (Exact name of Registrant as specified in its charter) Delaware (State or oth ...

Avid Bioservices, Inc. (NASDAQ:CDMO) Q2 2022 Earnings Conference Call December 7, 2021 4:30 PM ET Company Participants Tim Brons - Investor Relations Nick Green - President and Chief Executive Officer Dan Hart - Chief Financial Officer Matt Kwietniak - Chief Commercial Officer Conference Call Participants Sean Dodge - RBC Capital Markets Jacob Johnson - Stephens Matt Hewitt - Craig-Hallum Capital Paul Knight - KeyBanc Disclaimer*: This transcript is designed to be used alongside the freely available audio r ...

Financial Performance - Revenues for the second quarter ended October 31, 2021, were $26.1 million, an increase of 24% or $5.0 million compared to the same period in the prior year[117]. - Net income attributable to common stockholders for the second quarter was $3.5 million, or $0.06 per basic and diluted share[117]. - Gross profit for the three months ended October 31, 2021, was $9.2 million, with gross margins of 35%, compared to $6.4 million and 30% in the prior year[130]. - Revenues for the six months ended October 31, 2021 were $56.9 million, an increase of $10.4 million or 22% compared to $46.5 million for the same period in the prior year[135]. - Gross profit increased to $20.6 million for the six months ended October 31, 2021, up approximately $5.6 million, with gross margins improving from 32% to 36%[136]. - Operating income for the second quarter was $4.2 million, an increase of $1.9 million year-over-year, attributed to a $2.8 million increase in gross profit[131]. - Operating income improved to $11.1 million, a $4.1 million increase year-over-year, driven by higher gross profit[137]. - Interest expense for the second quarter was $0.7 million, attributed to outstanding Convertible Notes issued in March 2021[132]. - Interest expense was $1.4 million for the six months ended October 31, 2021, attributed to outstanding Convertible Notes issued in March 2021[140]. - Net cash provided by operating activities decreased by $4.5 million to $3.7 million compared to $8.1 million in the prior year[144]. Expenses and Costs - Selling, general and administrative (SG&A) expenses increased to $5.0 million, a rise of approximately 21% compared to $4.2 million in the prior year[131]. - SG&A expenses rose to $9.5 million, an increase of approximately $1.5 million or 19%, maintaining 17% of revenues for both periods[137]. - Capital expenditures for the six months ended October 31, 2021 were $11.8 million, with anticipated annual expenditures of $55 to $65 million for facility expansions[153]. Expansion Plans - The company plans to expand its CDMO service offerings into the cell and gene therapy market, including a new viral vector development facility with an estimated cost of $65 million to $75 million[119]. - The ongoing expansion of the Myford facility is expected to cost approximately $70 million to $75 million and will increase total revenue-generating capacity to up to $270 million annually[118]. - The total revenue-generating capacity, including the new viral vector facility and ongoing expansions, is projected to exceed $350 million annually[119]. Operational Insights - The company has not experienced significant operational impacts from the COVID-19 pandemic, maintaining essential services and implementing safety measures[120]. - Backlog as of October 31, 2021 was approximately $120 million, up from $118 million as of April 30, 2021[159]. - The company may need additional equity or debt financing if cash flows from operations are insufficient to support ongoing expansions[142]. Cash Position - Cash and cash equivalents as of October 31, 2021 totaled $163.7 million, sufficient to fund operations for at least the next 12 months[141].