Avid Bioservices(CDMO) - 2022 Q4 - Annual Report

PART I Business 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 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] - 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] - 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][24][25] Our Growth Strategy 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][29][31] - 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] - Upon completion of all expansions, the company estimates its total annual revenue-generating capacity could reach approximately $400 million[32] Our Facilities 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] - 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] Regulatory, Manufacturing & Other Business Aspects 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] - Operations rely on commercially available raw materials, sometimes from single-source suppliers, creating a potential business risk[39] 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 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][90] - The company focuses on talent acquisition and retention through competitive total rewards packages, including base salary, annual bonuses, and long-term equity awards[57][59] - In response to COVID-19, the company implemented health and safety measures such as remote work options, personal protective equipment, and temperature screening[62] - In fiscal 2022, the company engaged a third-party consultant to establish a more formal Environmental, Social, and Governance (ESG) and sustainability program[69] Risk Factors 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] - 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][84][85] - All manufacturing facilities are located in Orange County, California, increasing exposure to disruption from unforeseeable events in a single geographic area[93][94] - 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][112] Properties 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] Legal Proceedings The company is not currently involved in any legal proceedings expected to materially adversely affect its financial condition or operations PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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] - The company has never declared or paid cash dividends and does not anticipate paying any in the foreseeable future[175] Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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][190][192] Results of Operations 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] - 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] - 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] Critical Accounting Policies and Estimates 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][215] - 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][326] Liquidity and Capital Resources 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] 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] - The company has $143.8 million in aggregate principal of 1.25% Convertible Senior Notes due 2026[234][236] Quantitative and Qualitative Disclosures About Market Risk 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 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 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 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][333] - 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][355] - 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][400] - The company's top customer, Halozyme Therapeutics, Inc., accounted for 41% of total revenues in fiscal 2022[307] Controls and Procedures 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 Directors, Executive Compensation, Security Ownership, and Principal Accountant Fees 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][450][451] PART IV Exhibits and Financial Statement Schedules 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]