Good day, ladies and gentlemen, and welcome to the Avid Bioservices Third Quarter 2020 Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference may be recorded. I would now like to hand the conference over to Tim Brons of Avid's Investor Relations Group. Please go ahead.

Thank you. Good afternoon, and thank you for joining us. On today's call, we have Rick Hancock, Interim President and CEO; Dan Hart, Chief Financial Officer; and Timothy Compton, Chief Commercial Officer. Today, we will be providing an overview of Avid Bioservices contract development and manufacturing business, including updates on corporate activities and financial results for the quarter ended January 31, 2020. After our prepared remarks, we will welcome your questions. Before we begin, I'd like to caution that comments made during this conference call today, March 10, 2020, and will contain certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning the current belief of the company, which involves a number of assumptions, risks and uncertainties. Actual results could differ from these statements, and the company undertakes no obligation to revise or update any statement made today. I encourage you to review all of the company's filings with the Securities and Exchange Commission concerning these and other matters. With that, I will turn the call over to Rick Hancock, Interim President and CEO. Rick?

Thank you, Tim, and thank you to everyone who's dialed in and to those who are participating today via webcast. During the third quarter, Avid strengthened both its project pipeline and backlog; however, the company also faced production challenges during the quarter related to a problem with a specific piece of equipment, which resulted in termination of in-process manufacturing runs and the postponement of several other manufacturing runs scheduled to commence during the third quarter. Though we are now implementing the necessary corrections, the temporary production interruptions resulted in lower revenue and profits for the third quarter, and we expect it to also impact revenues and profits for the fourth quarter of fiscal 2020. And despite this challenge, Avid made progress with a number of operational projects during the period, which I'll discuss shortly. On the business development front, we are very pleased to welcome Timothy Compton to the Avid team, as our Chief Commercial Officer. During the third quarter, Tim, and his team, continued to expand our pipeline of business and our regional outreach. Tim and I will provide additional details on business development and operations following an overview of the third quarter and 9-month financial results. For that, I'll turn the call over to Dan Hart.

Thank you, Rick. Before I begin, I'd like to recommend to, everyone participating on today's call, refer to our 10-Q filing with the Securities and Exchange Commission, which we filed today for additional details. I'll now discuss our financial results from continuing operations for the third quarter and first 9 months of fiscal 2020, ended January 31, 2020. I'll first address our third quarter results. Revenue for the third quarter of fiscal 2020 were $13.6 million. While these revenues are lower-than-anticipated for the period, they are consistent with revenues of $13.8 million recorded during the third quarter of fiscal 2019. Despite the interruption of production during the third quarter of fiscal 2020, total revenues remained in line with the prior year period, due primarily to an increase in the number of in-process and completed manufacturing runs, offset by a decrease in process development revenue as compared to the third quarter of fiscal 2019. Gross margin for the third quarter of 2020 was 6%, a decrease as compared to the 15% gross margin in the prior year period. The decrease in gross margin for the 2020 quarter was primarily attributable to the costs associated with the production interruption described earlier, an increase in depreciation expense from the acquisition of new equipment and a net decrease in revenue. I'll now discuss operating expenses. Total SG&A expenses for the third quarter of fiscal 2020 were $3 million compared to $3.2 million for the third quarter of fiscal 2019. This decrease was primarily due to a decrease in accrued bonuses for fiscal year 2020, partially offset by an increase in employee separation-related costs. For the third quarter of fiscal 2020, the company recorded a consolidated net loss attributable to common stockholders of $3.5 million or $0.06 a share, as compared to a consolidated net loss attributable to common stockholders of $2.6 million or $0.05 a share, for the third quarter of fiscal 2019. Our backlog at the end of the third quarter 2020 was $58 million, an increase of 12% compared to the $52 million at the end of the second quarter of fiscal 2020 and an increase of 26% compared to the $46 million at the end of the last fiscal year. This increase in backlog compared to both the third quarter and the first 9 months of fiscal 2019 is primarily due to the increased demand in future manufacturing runs, including $3.1 million of third quarter revenue deferred due to the delay of in-process manufacturing runs. I'll now provide an overview of our results for the first 9 months of fiscal 2020. For the 9 months ended January 31, 2020, revenues were $47.2 million, a 29% increase as compared to revenues of $36.5 million during the prior year period. This significant increase was primarily the result of continued growth in the number and scope of customer projects. Gross margin for the 9 months ended January 31, 2020, was 11%, up slightly compared to 10% in the prior year period. This increase was primarily due to an increase in manufacturing runs partially offset by costs associated with payroll and related costs, higher facility and equipment related costs primarily associated with the production interruption during the third quarter, an increase in depreciation expense from the acquisition of new equipment, and general equipment repairs and maintenance costs. For the first 9 months of fiscal 2020, SG&A expenses were $11 million, a 19% increase compared to $9.3 million for the first 9 months of fiscal 2019. The increase in SG&A was primarily attributable to employee separation-related expenses and increased stock-based compensation. When excluding the separation-related expenses, SG&A increased 10% during the first 9 months of fiscal 2020 as compared to the prior year. For the first 9 months of fiscal 2020, the company recorded a consolidated net loss attributable to common stockholders of $9.3 million or $0.17 per share compared to a consolidated net loss attributable to common stockholders of $8.2 million or $0.15 per share for the first 9 months of fiscal 2019. Our cash and cash equivalents as of January 31, 2020, were $30.7 million as compared to $32.4 million as of the prior fiscal year ended April 30, 2019. We continue to have a strong balance sheet and wish to reiterate that we do not anticipate a need to raise additional funds until such time that we initiate the expansion of our facilities. Despite the strength of our backlog, the interruption in production during the third quarter will also impact revenues and profits for the fourth quarter of fiscal 2020. As a result, we are restating our revenue guidance for fiscal year 2020 to between $55 million and $59 million versus our prior revenue guidance of $64 million to $67 million. While we expect lower revenues and profits in the second half of fiscal 2020 than originally projected, we anticipate that the impact of the production interruption will be contained to fiscal 2020. This concludes my financial overview. I'll now turn the call over to Tim for an update on business development activities and achievements for the quarter.

Thanks, Dan. Hello, everyone. I'm very happy to be participating in my first earnings call with Avid Bioservices. My first few weeks at Avid have been exciting and productive, and yes, I look forward to sharing our progress with you. Before I provide an overview of the quarter's activities, I'd like to outline my near-term goals and objectives as Chief Commercial Officer. My first order of business will be to build an industry-leading BD team, and we're well on our way to achieving that goal. Beyond hiring, I'm also focused on closing potential new business that is currently in play. To this end, I'm working closely with our project management and operations team to ensure that we are highly responsive and coordinated in providing potential new customers with business winning proposals. Building upon the solid foundation that Avid has established, I plan to expand the team and our commitment to our customer-focused culture. I plan to work within the organization to improve our sales process and ultimately reduce the sales cycle, and also the strategy in place to accelerate new business wins, leveraging targeted marketing campaigns, industry conferences, thought leadership in fiscal 2021. Another important tool in driving business is the company's website. Avid recently launched a new website, which we continue to update with new and relevant content to optimize our visibility in the marketplace, and we are pleased to report that the new website is already generating qualified sales leads. I'll now turn to the third quarter on our efforts during the period. During the quarter, our team had a strong presence at several key industry conferences with the goals of expanding Avid's visibility, meeting with potential new customers and engaging with existing customers seeking manufacturing support for new projects. As a result, during the quarter, we signed agreements to add 1 new customer and multiple additional manufacturing campaigns with existing customers. These projects ranges scope from process development to CGMP manufacturing, taking advantage of the entire breadth of our services here at Avid. As we've disclosed in prior calls, one of our recently onboarded clients is one of the world's leading pharmaceutical companies. We are very pleased to announce that one of the project expansion orders signed during the third quarter, is for multiple additional clinical CGMP manufacturing runs for this company within our Myford facility at our largest scale. We believe that when existing customers expand their business with Avid, they are validating the skill of our team and the quality of our services. While we continue to aggressively pursue new customer projects, we are equally pleased to expand the scope of work with our current customers. This concludes my business overview, and I'll now hand the call back over to Rick. Rick?

Thank you, Tim. First, I'd like to welcome Tim to the Avid team. As we mentioned in January, Tim has extensive experience in commercial operations, including sales team management, business development, marketing and corporate development. In his new role, he will be responsible for driving the continued growth of Avid's CDMO business, including the ongoing expansion of the company's commercial and clinical client base. We are very happy to have Tim leading our commercial effort, and we look forward to his contributions. I'll pivot now to our ongoing search for a permanent CEO for the company. We continue to screen highly qualified candidates and we hope to fill the position soon. However, as we stated previously, we must be delivering on our search and take the time required to identify the ideal leader for this growing organization. We continue to make this search a priority, and we will report on our progress as warranted. Turning now to the business. While we're disappointed that the quarter's operational setback will negatively impact our fiscal 2020 results, the fundamentals of the business remain strong. We anticipate that we will be able to recover these lost 2020 revenue in fiscal 2021, and we remain optimistic about Avid's growth potential. With respect to operations, we continue to make progress with projects to enhance our Myford facility and plan for the future expansion of the facility in order to support the growth that we anticipate in fiscal 2021 and beyond. These improvements include installing a pharmaceutical-grade water system and upgrading key IT systems and general infrastructure. We expect the installation and validation of the water system to take place in late calendar 2020, and the IT system enhancements and general infrastructure upgrades to be completed by the end of fiscal 2021. In closing, I'd like to again state that we are disappointed with the results for the third quarter and the impact we expect in the fourth quarter. The results of the production interruption was that we were unable to complete several scheduled production runs with a resulting negative impact on revenue and profits. We are now using all conceivable internal and external resources to make the necessary correction to fully resolve this issue. Once these remediations are completed, we will perform additional testing and verification to ensure that the equipment is in proper working order. It is our expectation that this problem will be behind us soon, and as such, we anticipate that the impact will be contained to fiscal 2020. Looking to the future, we believe that we are well positioned for growth. To that end, we have hired experienced commercial leadership, and we are conducting the upgrades and enhancements required to support the needs of our clients. And we continue to strategically plan for the state of the art expansion that will support a growing customer base and sustainable revenue growth. This concludes my prepared remarks for today. We can now open the call up to questions. Operator?

[Operator Instructions]. Our first question comes from the line of Matt Hewitt with Craig-Hallum Capital.

Welcome, Tim. A couple of questions. If we could get a little bit more color on the production issue. Is this -- I guess, along those lines, number one, it's a piece of equipment. Is this an old piece of equipment or a new piece of equipment? And if it's an old piece of equipment, how quickly could it be replaced? And then, number two, along those same lines, what kind of impact does it have with your customers? What can you -- what are you doing to assure them that you can get this resolved so that you're not losing business?

You bet. So Matt, I'm unable to speak in great detail about the piece of equipment based on, we don't have permission from our client to talk specifically about that. But I can tell you that we're working extremely closely with our clients cooperatively and very transparently to resolve this issue. I believe that we have initiated the corrections as I stated, though once all the corrections are in place, it will take a bit of time to verify that everything has been completed properly and that the piece of equipment is in good working order. So we need to go through a number of steps to assure that, and then it can be released back into production. All of this is being done in cooperation with our clients. And as I stated, I just want to repeat, none of the work that fell out of this quarter has been canceled, it will all be made up as soon as the equipment repairs are completed.

And then I guess, Tim, for you. Does this pose any challenges as you're trying to sign new business? Or is this kind of -- are these types of issues kind of status quo for the industry and, therefore, they understand, they see the progress that you're making on the remediation front and, therefore, it really doesn't impact signing new business?

Yes. It's really how you get through these challenges. And to date, and in the future, we don't see any issues with onboarding new clients with our current operations.

Okay. Maybe one last one, then I'll hop back in the queue. Obviously, coronavirus is on everybody's mind these days. What type of impact, if any, are you seeing from the situation? Are you seeing customers possibly shifting business from one region to another? Or are you seeing new business opportunities as a result as they're looking for either treatments and/or other drugs? Just anything along those lines will be helpful.

You bet. Thank you for the questions. One thing that we're seeing immediately is a number of conferences that we are planning on attending have been canceled. This is beginning of conference season, and one by one, they've been falling off, DCAT probably being the largest. So we're just getting on the phone with people that we were planning to meet with in person, so not losing the contact time with our clients. In terms of supply chain, we haven't seen a great effect at this point. We're monitoring that very carefully. We hold inventories of a lot of critical materials for several quarters in advance. So that's not -- we don't do just on-time delivery because we know that some of these things do take a while to produce, so we haven't seen a big impact there. In terms of disruptions to our clients or to orders that they're placing, nothing has occurred to date. We are in constant contact with them. Clients are still traveling to our site for a person in the plant to monitor their production and development activities, so that hasn't changed yet. Of course, the health and safety of our workforce is our number one concern. So we've established our policy regarding employees, and we're addressing all of their questions. But here in Orange County, we haven't been impacted to any great extent so far.

Our next question comes from the line of Jacob Johnson with Stephens.

First, just on the equipment. Dan, did you say there was about a $3 million impact on the third quarter?

Yes, there's a $3.1 million impact in the third quarter.

Got it. And then, I mean as we think about the fourth quarter, and maybe all of fiscal '20, I think about $8 million to $9 million reduction in guidance. Is it fair to say sort of the balance of the reduction was due to the headwind you expect in the fourth quarter?

Jacob, that's right, yes. So that's what we're seeing currently. And as Rick noted in our prepared remarks that we're currently working on corrections to the critical piece of equipment. That being said, with revenues looking like they're also going to be impacted for the fourth quarter, just for edification, our cash flow, in addition to that will also be affected. So we're looking at a $6 million to $7 million cash burn for the quarter.

Got it. Got it. That's helpful. I guess, the question for Tim. Thanks for all the color on the strategy going forward. I guess 2 questions here. First, it sounds like your -- there's additional focus on web sales. Any other sort of big or small strategic shifts now that you're in charge of business development? And then it also sounds like you're adding salespeople. What are these people going to be focused on? Were there customers or areas where you felt you were underpenetrated previously?

Yes. To answer the first question, just really -- just to remain customer-focused is the big strategy and getting the brand and visibility in the marketplace. And the one great way to do that is with additional salespeople on the ground. And so our salespeople are going to be focused on spreading the word of the brand of Avid and also getting in front of customers and new customers, most importantly, and to focus on our portfolio.

Got it. Got it. And then maybe just last question here. Good to see you added a customer in the quarter and $20 million to the backlog. I don't know if you want to answer this or not, but could you tell us how much of that $20 million addition was from that one customer?

No, we're not going to break out the differences in the backlog, Jacob. I can appreciate the question. But we are seeing significant growth from our existing customers quarter-over-quarter.

Our next question comes from the line of Paul Knight with Janney Montgomery Scott.

Rick, is this equipment failure due to something that you put in that's new? And also, is there an FDA issue, where they have to come in and inspect facility?

It's not a new piece of equipment. Everything we do here is regulated by the FDA and quite a number of other international regulatory agencies so any time we do something, it's all done in preparation. The FDA can arrive any time for either scheduled or unscheduled visit. So any repairs that we make, any modifications to equipment and processes ought to be heavily documented and verifications performed. So along with any work that we're doing, there's a very significant quality and regulatory oversight and that consumes quite a bit of time and resources. But we don't do anything without operations and quality going hand-in-hand and thoroughly documenting and having that prepared for either our clients' review or any outside regulatory agencies.

Okay. And I guess, you've got customer audits to go through here in the current quarter, right?

Correct.

And then, Tim, could you talk -- lastly, on that, I guess, it's really the audits that take as much time as actually fixing equipment, right?

This is Rick. I'll chime in on that one. So audits are typically 1- to 3-day exercises. The team is very, very good at performing them. They're very efficient. So often, if people plan a three day audit, we get through it in 1.5 days. Just because there's a backroom that is pulling up documents as quickly as people ask for them. And all the paperwork is usually in very, very good order. So the audits themselves don't take terribly long time. There's typically a follow-up. So maybe in the audit, they might have a -- we show them everything that we have and then maybe there's some data that we need to gather to follow-on. So after the audit, maybe there's another week or so of correspondence to wrap them up. The work itself takes a certain amount of time. And then the verification, sometimes we need to do runs just to verify that everything is working properly and document all that and produce reports, that takes a significant amount of time.

Okay. And then Tim, welcome aboard. The question I have for you is this customer that you landed in the quarter, does that bring customer count to 22? Was this customer a major biopharmaceutical or was it a smaller one? And then lastly, we understand from other coverage that the monoclonal market is very strong, are you finding it a pretty positive selling environment?

Yes, it is a very positive selling environment, and we've got a lot of activity ongoing to respond to the clients that we have in our queue already in the sales cycle and add new clients to the sales cycle. The new onboarded client, can't speak to the size, but they do have a pipeline of opportunities in their organization.

And this is Rick. Just to clarify, our active client base right now is 14 active customers.

With multiple projects, right?

That's correct. That's correct. Of those, 12 have significant pipelines and we either have or are working with the clients to obtain additional molecules in their pipeline.

Okay. And what are customers saying they like about Avid versus your competition?

Tim, I'll let you tackle that one?

Yes, sure. Well, they certainly like our collaborative approach. They like our location, the ease of getting to Tustin, California, and our -- as well as our project management team and our regulatory compliance record. I think we've got probably one of the best regulatory compliance records in the industry, and we're certainly recognized for that.

If I could just add a couple of things there. I think one of the things that I hear frequently is, we're relatively small and nimble company for somebody who has capabilities from early-stage development all the way through commercial with, as Tim said, a tremendous commercial and regulatory track record. So for people who want to move quickly, from the very first time, Tim engages them in setting up confidentiality agreements. We turn that around very quickly. We have all of our management team here in-house, including our counsel. So whether it's a first confidentiality agreement to very complex multi-year contracts, we turn that around much more rapidly than our competitors. Based on our scale, we're easy to work with. And I think it really comes down to technical expertise and quality and regulatory track record.

Our next question comes from the line of Joe Munda with First Analysis.

Can you hear me okay?

Yes.

Yes, Joe.

So first off, you talked about the -- you're anticipating loss revenue coming back in 2021. Can you give us some sense of what that or you anticipate that to look like? Is it going to come all in 1 quarter? It comes evenly throughout the year? Any thoughts there would be great.

Well, Joe, I appreciate the question. Right now, it depends on the overall production schedule, because we do have a lot of other clients going through the production schedule, but we anticipate hitting those runs early in the year and being through those definitely through the first half of next year.

Okay. Okay. Then maybe you could talk a little bit -- there's definitely an uptick here in inventory and AR. Can you give us some background or color as to the increase there?

Sure. Some of the inventory buildup is just based on the in-process runs that were deferred, so we have that inventory on hand as of the end of the quarter, and we saw an increase in our AR because we bill a portion of our contractual relationships with clients when we sign them upfront. So we had some signings near the end of the third quarter, which kind of ticked up the AR at the end of the quarter.

Okay. That's helpful. And then in terms of your commentary around this piece of machinery. A, is it owned by the customer? Or B, is it a piece of equipment that's being used just by this -- that's being used just solely for this one customer or multiple customers using this piece of machinery?

So it is a piece of equipment that we own, and it can be used for multiple customers.

Okay. And -- but only one customer is being impacted by this?

I'm sorry, I can't comment on that. I apologize.

Okay, that's fine. And then flipping gears here. Switching gears to the new customer. You have a campaign here to get the word out. I'm curious, how did you land a new customer? How did it come in?

Sure. Tim, do you want to address that one?

Yes, sure. This new customer was in the queue prior to me joining, but customers can come in from all different angles. Trade shows; website; of course, our BD team and their network. And in fact, as I mentioned during -- earlier in the call, we're already getting qualified leads from our new website. And some of those qualified leads are already leading to generating NDAs and having discussions about how we can support those customers. So there's a lot of different avenues to come in. This -- the new customer who just come in, I'm not surely aware which avenue that one came in, as it was in the queue before I joined. But nonetheless, we did get them over the goal line and sign on with the company.

You bet. So this was before Tim's time. So this was a client that actually contacted us, became aware of our capabilities through our previous website. And we had some discussions, but then they needed to do more development work and it went quiet for some time. And then when Tim came onboard, he was able to reengage this customer and a couple of others that had also gone dormant as well and convert them back into active discussions.

Got you. Then I guess my last question. I mean you touched a little bit on it, but CEO search. Any thoughts on potentially a time line? Do you think it will carry into fiscal '21 year? Or do you hope to have somebody in the role within the next couple of months?

I'm very hopeful that we'll have somebody in the role in the next 2 to 3 months.

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

Thank you, Operator. And thank you to everyone participating on today's call. Again, while we are disappointed with the quarter's financial results and the impact it will have on fiscal 2020, we remain highly optimistic regarding the business overall. The health of the biologic CDMO industry is robust and growing, and we continue to build visibility in the sector. Our client relationships remain strong, as evidenced by our consistent ability to bring in additional work from these customers. To increase our business pipeline and backlog, we have brought in strong leadership for our commercial group and we are building an exceptional business development team. And finally, we remain excited for the expansion of our state-of-the-art facilities that we believe will be driven by the growth in demand for Avid's services. We look forward to updating you on these efforts and all our future advancements. Thank you again for participating today and for your continued support of Avid Bioservices.

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