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spk04: Good day, ladies and gentlemen, and welcome to the AVID Bioservices Second Quarter Fiscal 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call may be recorded. I would now like to hand the conference over to Tim Brons of AVID Investors Relations Group. Please go ahead, sir.
spk16: Thank you.
spk22: Good afternoon, and thank you for joining us. On today's call, we have Nick Green, President and CEO, Dan Hart, Chief Financial Officer, and Matt Quitniak, AVID's 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 October 31st, 2023. After our prepared remarks, we will welcome your questions. Before we begin, I'd like to caution that comments made during this conference call today, December 7th, 2023, 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 the company's filings with the Securities and Exchange Commission concerning these and other matters. Our earnings press release and this call will include discussion of certain non-GAAP information. You can find our earnings press release, including relevant non-GAAP reconciliations, on our corporate website at avidbio.com. With that, I will turn the call over to Nick Green, AVID's President and CEO.
spk09: Thank you, Tim. Thank you to everybody participating today via webcast. The second quarter revenues were impacted by a number of factors. These are now behind us, and we are looking ahead to the second half of the year with some optimism. We closed the quarter with an improved cash balance. We have now completed the expansion program started almost three years ago. Our backlog has achieved a new record high, and as we amend guidance, we expect significant growth over the first half with revenues approximating those achieved in the second half of fiscal year 2023, the highest six months in the company's history to date. During the second quarter, our team continued to execute on both business development and operational plans. Despite the financial challenges faced by many of our current and prospective customers, important programs continue to advance. Abbott's commercial team had another strong quarter, securing new business wins of approximately $35 million, resulting in a record backlog of $199 million. This work comes from both new and existing customers and stabs our capabilities, including our new cell and gene therapy services, or CGT services, as I will refer to them. As reported last quarter, While we continue to win more projects in the later phases of clinical development, we were pleased to see several early-stage programs advancing during the quarter, and we were delighted to see one of our customers receive FDA approval for a product which we are currently conducting a PPQ campaign to affect its transfer to Abbott.
spk17: In support of our new CGT services, the company was recently accepted into an industry partnership
spk09: with the California Institute of Regenerative Medicine, or CERN, which we feel both validates our newest business as well as increases our visibility in the industry.
spk02: CERN is dedicated to the advancement of manufacturing of adeno-associated adenovirus, as well as other cell and gene therapy programs within the state of California.
spk09: And Matt will provide a bit more information on this partnership shortly. In operations during the quarter, having successfully executed its planned annual maintenance shutdown, most important, we also completed construction of the company's CGMP manufacturing suites within our new world-class CGT development and manufacturing facility as scheduled. The newly launched manufacturing suites are currently undergoing final environmental monitoring and performance qualifications. And as we rapidly approach the start of calendar 2024, we are looking forward to being able to engage with potential customers with our offering complete. Matt and I will provide additional details on business development and operations for the period, following an overview of our second quarter fiscal 2024 financial results. And for that, I'll turn the call over to Dan.
spk13: Thank you, Nick. Before I begin, in addition to the brief financial overview I'll provide on the call today, additional details in our financial results are included in our press release issued prior to this call and in our Form 10-Q, which was filed today with the FCC. I'll now provide an overview of our financial results from operations for the quarter and six months ended October 31st, 2023. Revenues for the second quarter of fiscal 24 were $25.4 million, representing a 27% decrease as compared to revenues of $34.8 million recorded in the prior year period. For the first six months of fiscal 24, revenues were $63.1 million, a 12% decrease compared to $71.4 million in the prior year period. The decrease in revenues for both periods as compared to the prior year periods was primarily the fewer manufacturing runs, the reduction in process development services for early-stage customers, and reduction of revenue for changes in estimated variable consideration under a contract where some uncertainties have been resolved. Gross margin for the three months ended October 31, 2023 was negative 18%, compared to 12% for the same period in the prior year. Gross margin for the first six months of fiscal 24 was negative 1%, compared to a gross margin of 19% for the same period during fiscal 23. The decrease in gross margin percentage for both periods as compared to the same prior year periods was primarily driven by lower manufacturing volumes and costs related to expansions of both our capacity and our technical capabilities. This included adding staff and associated overhead, including depreciation expense, that will provide critical capacity for near and medium-term growth. Margins during the three and six-month end of October 31, 2023, were also impacted by the decision to defer a customer's PPQ campaign until after our annual maintenance shutdown, combined with a reduction of revenues for changes in estimated variable consideration under a contract where uncertainties have been resolved. The decrease in gross margin for the first six months of fiscal 24 was further impacted by a terminated project relating to the insolvency of one of our smaller customers and a delay in our ability to recognize revenues of a customer product pending the implementation of a process change. Excluding all of these factors, our second quarter and year-to-date adjusted gross margin percentages would have been two percentage points and one percentage point lower than the reported gross margin percentages in the same prior year periods, respectively. As disclosed previously, we expect the expense-related costs will continue to affect near-term margins. especially the related increase in depreciation costs. Importantly, as we increase our capacity utilization, we will begin to absorb these increased costs, leading to improved gross profit. SG&A expenses for the second quarter of fiscal 24 were $6.6 million, a decrease of 4% compared to $6.8 million recorded in the second quarter of fiscal 23. The decrease in SG&A for the second quarter was primarily due to a decrease in payroll and benefit expenses and other professional fees. SG&A expenses for the first six months of fiscal 24 were $12.89, a decrease of 3% compared to $13.2 million recorded in the prior year period. The decrease in SG&A for the six months was primarily due to decreases in legal, accounting, and other professional During the second quarter of fiscal 24, the company's net loss was $9.5 million, or 15 cents per basic and diluted share, compared to a net loss of $1.2 million, or 2 cents per basic and diluted share, for the second quarter of fiscal 23. For the first six months of fiscal 24, the company recorded a net loss of $11.6 million, or 18 cents per basic and diluted share, as compared to net income of approximately $400,000. or one cent per basic individual share during the same prior year period. For the second quarter of fiscal 24, the company had an adjusted EBITDA of negative $6 million. For the first six months of fiscal 24, the company had an adjusted EBITDA of negative $3.2 million. Our cash and cash equivalents on October 31st, 2023 were $31.4 million compared to $38.5 million on April 30th, 2023. The second quarter cash and cash equivalence balance represents a 26% increase compared to $24.9 million at the end of the first quarter of fiscal 24. At the end of the second quarter, we estimate our remaining fiscal 24 expansion-related capital expenditures to be approximately $2 million. In other financial news, during the quarter, the company entered into an amendment to its revolving credit agreement with Bank of America. This credit facility was amended to extend the maturity date to October 2024 from the initial maturity of March 2024. This amendment also included an increase in the related interest rate applied to any borrowings under the revolver. An increasingly allowable amount of the company can incur at any one time or face capital assets. The other material terms of the credit agreement remained unchanged. While the company has no current plans to draw down on this facility, Adam views this instrument as a valuable tool to ensure financial stability. This concludes my financial overview.
spk17: I will now turn the call over to Matt for an update on commercial activities during the quarter.
spk10: Thanks, Dan. I am pleased to report that our commercial team had another strong quarter. During the period, AVID recorded bookings of $35 million from new and existing customers, including a meaningful contract signed for the recently completed CGT facility. The company ended the quarter with a record backlog of $199 million, representing an increase of 35% as compared to $147 million at the end of the second quarter of fiscal 2023. While certain early-stage projects in our pipeline remain on hold pending customer financing events, we continue to see growth in our later stage and commercial project portfolio during the quarter. As a reminder, later stage projects are generally larger and take longer to complete as compared to earlier stage programs. For that reason, we expect that recognition of our backlog for these projects will extend beyond one year. As these later stage programs have significantly higher probability of regulatory approval in a shorter timeframe, we believe they are more likely to generate the recurring and ramping commercial revenues associated with such approval. While there is no guarantee that regulatory approval will be achieved for any program, we do believe that our pipeline, which remains weighted toward later stage projects, offers enhanced opportunity for regulatory success and ultimately for stable growth in the medium to long term. We are pleased to see continued growth in this segment of our backlog and remain committed to pursuing and supporting projects at every stage of development and manufacturing. We are in fact seeing some improvement in our early stage pipeline. We remain fully engaged with new and prospective customers at every phase and continue to build visibility for the Avid brand through consistent outreach and industry events. As Nick mentioned previously, AVID joined the CIRM Industry Resource Partner Program to provide development and CGMP manufacturing services to CIRM-funded programs. Currently, CIRM has $5.5 billion in funding from the state of California and has more than 161 active stem cell programs in their portfolio. AVID will assist CIRM's partners in accelerating gene therapy development and manufacturing through its suite of CDMO services. which span process and analytical development, cell banking, virus banking, drug substance manufacturing, and fill-finish activities. CIRM-funded programs will be offered access to AVID services in order to reduce the timelines required to advance through clinical development. All partnership activities will be performed in AVID's recently launched world-class CGT manufacturing facility. We are very pleased to have entered this validating partnership with CIRM which we believe will further strengthen our presence broadly among CDMOs, and more specifically as a manufacturer of CGT products. In closing, I'd like to reiterate how pleased we are with the commercial team's performance during the second quarter, and we are looking ahead with optimism to the second half of the year. This concludes my overview of commercial activities. I will now turn the call back over to Nick for an update on operations and other achievements during the period.
spk17: Thanks, Max. I will provide an overview of the company's operational activities.
spk09: First, have it successfully executed its planned annual maintenance shutdown during the quarter.
spk08: While this temporary shutdown contributed to the low revenues for the period, and it has done in price, it is an essential activity to ensure the efficiency of our systems, and we are very pleased to have this process complete for another year.
spk09: As we announced in October, we have completed the construction of our cell and gene therapy These newly launched suites, which are housed within the company's new world-class CGT development and manufacturing facility, are currently undergoing final environmental monitoring and performance qualifications. With the completion of this latest expansion project, Habit has now completed all phases of a broad multi-year expansion and will have deployed upwards of approximately $180 million of capital. from 2020 to 2023 into expansions of both revenue generating capacity and technical capabilities. Looking ahead, we are now well positioned to meet the manufacturing needs of current and future customers, advancing both mammalian and CGD products. Today, we estimate that our combined facilities have the potential to bring our total revenue generating capacity to up to $400 million annually, more than triple the revenue-generating capacity of our pre-expansion business. And while the operating costs associated with these facilities and service expansions have impacted our margins, we believe this new infrastructure has been a major contributor in attracting the later phase projects currently in our backlog, as well as positioning AVID to serve the large pharma segment of the market previously underserved by the business. This strategy is already paying off, demonstrated by the increase in customers with whom we work, aligned with a strong weight towards later phase. Further, we are now beginning to onboard projects for utilizing the capabilities offered by our CNGT services.
spk17: When we combine our new capacity and services
spk09: With decades of experience in biologics and commercial manufacturing, a track record that demonstrates our focus on quality and the talents finding early stage development through commercialization, we believe we have established an organization and brand that will continue to thrive in this growing and attractive market.
spk02: Not only did the quarter see the completion of our current expansion program,
spk09: It also saw the cessation of manufacture in the company's legacy small-scale stainless steel facility. And while the effect of this impacted the second quarter, as we look forward, Avid now benefits from all its mammalian GMP manufacturing under a single roof, with one of the most modern and high-quality facilities available in the industry. This will further enhance the company's ability to improve margins
spk17: as we continue the process of growing AbbVie and filling this capacity. As we are all more than aware, the downturn in the biotech funding has certainly impacted the business in the short term.
spk09: This, combined with other factors we have reported, has led to a disappointing first half of fiscal 2024.
spk08: And as a result, we are compelled to amend guidance to $137 to $147 million.
spk09: That being said, as we look forward, we have an improved cash position. We have seen an increase in our early-phase signings during the second quarter. We have completed all our current expansion activities, entered the second half with our backlog at an all-time high, and one of the products in our late-stage pipeline has already received FDA approval. As we look more closely at the second half of the year, we anticipate revenues approximating
spk17: half two of fiscal year 23, which represents the best half-year performance in the company's history.
spk09: As we approach the end of our 30th year, we are delighted to mark the completion of what has been a three-year program of increasing capacity, modernizing the asset base, as well as transforming the capabilities of the mammalian business, and at the same time, broadening the avid offering to include the new CNGT capabilities in both process development and now GMP manufacture. Also during our 30th year, we look back at where we came from as we retired the old stainless reactors, which marked the start of our CDMO business and close to 20 years of commercial manufacturing. While calendar 2023 has had its challenges, the team has worked diligently in pursuit of our goal. As we enter calendar 2024, Avid is a company with 30 years in biologics manufacturing, a 21-year regulatory track record, and more than 200 commercial batches under our belt, operating out of a modern asset base with capacity to accommodate commercial needs of our late-phase clinical programs, some of which we hope will soon become commercial products, and a business with an increasingly diverse customer base and pipeline. While there will be much of 2033 we will be happy to put behind us, it would not surprise me that we look back at this year as the start of a new phase, not only in how our company looks, but also in the market which we serve. I feel genuinely blessed to work with a team that has shown the fortitude to undertake such a monumental task. and one that has not wavered one bit in the pursuit of the targets we set ourselves. And I look forward with a high level of excitement at the prospect of filling this capacity and continuing to guide the future development of Abbott.
spk08: This concludes my prepared remarks for today. We can now open up the call for questions. Operator?
spk04: Thirdly, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. To remove yourself from the queue, simply press star 1-1 again. One moment for our first question. And our first question comes from the line of Jacob Johnson from Stevens. Your question, please.
spk20: Hey, thanks. Good afternoon. Maybe Nick, kind of leaving off or starting off where you just left off, I guess, can you On the backlog and the two key revenue and the 24 outlook. So pretty good bookings in the quarter, record backlog, but revenues down year over year. Can you just kind of help us square those two items? And I guess along those same lines, you know, you keep pointing to the backlog extending beyond a year. Has that backlog lengthened, like extended even further? Is it taking even longer to close that or? Are we just waiting for things like this PPQ campaign to hit? I know that's a lot, but I'll stop there with the first question.
spk09: No, thanks very much, Jacob, and good question. First, to sort of answer your last question as the backlog extended, the answer to that is no. Pretty much the stable in terms of where it is. So certainly no further spread. I think at the end of the day, what we've seen here, apart from some of the The things that Dan highlighted in the earnings in the first half, obviously, is the impact of the biotech defunding. But we'll continue to sign the business. And then it really is a matter of bringing through those late phase programs, which are just a lot bigger in size and take longer to execute. And you've got to line them up. I recently published on the website our investor presentation, which kind of shows you a good indication of the maturity of the pipeline that we have. And simply to put large volumes of material into that new asset, one has to, first of all, obviously attract the customer. The second thing then is to execute on the PPQ campaign, which ultimately will lead to a BLA filing and then the commercial volumes that come after that. And I think that, you know, for those of us that are in the market on a day-to-day basis, is that there's just unfortunately a natural time phase that that takes to execute. And once you've completed the PPQ campaign, you have to file that data along with the clinical data to the FDA and get approval, and then the commercial volumes come. And of course, one of the other issues is, of course, nobody's going to put a PPQ campaign together with a supplier that doesn't have that capacity to meet the commercial demand. So it's really just a transition of the businesses, as we've been trying to highlight from a what was originally a clinical company that was with a significant large commercial demand into one that's got a very much more diverse customer base with a significant number of late phase programs, which we're just trying to get executed, get that data off. And then obviously we look forward to at least an industry average of commercial approvals that we can then execute against. And, you know, actually we, We couldn't have asked for a better situation than we've got right now, which is that as we're concerning one of those in, they've already got approval. So that's about as fast as it ever goes. So looking forward to that one.
spk20: Got it. Thanks for that, Nick. And then maybe I guess for my follow-up on what you just alluded to, you know, I think in that deck, you suggest that these later stage opportunities could be $100 to $200 million in revenue opportunities. I think the inevitable question is what is the timeline for, you know, assuming all goes well, and I know that's impossible for any of us to handicap, but assuming all goes well, what is that, you know, is that a peak revenue that could be five years out or how should we think about the path to that kind of revenue potential?
spk09: Well, again, without trying to get into each of the individual ones, because they all have such different profiles, to be frank with you, you know, in terms of the size of the markets they serve and also the probability of success. So, I mean, you know, you could have four out of eight, for example, getting approval. And if all four of those are small ones, then the impact's not that great. If all four of those are the large ones, the impact's enormous. And then there's all the different timelines. So that's it. It's a really difficult question to ask, but to answer rather. But I think in general terms, you know, you look at the sort of growth that we've seen in this business in the past. I don't see we know the growth in the marketplace going forward and we know the capacity we've got. And, you know, you draw those lines and, you know, anywhere between sort of I think on the on the fast side would be three years to fill that capacity on the. On the longer side, you're probably looking at somewhere like six years. But anywhere in that window, I think, is not unreasonable. Obviously, we're aiming for as quickly as we possibly could. But it's, you know, the fact that we've got so many is really, really a good, strong indicator to us that we will be filling that capacity.
spk21: Got it. I'll leave it there. Thanks for taking the question.
spk09: Thanks, Jacob.
spk04: Thank you. One moment for our next question. And our next question comes from the line of Matt Hewitt from Craig Hallam. Your question, please.
spk07: Good afternoon. Thank you for taking the questions. Maybe the first one, I think, Matt, I think you mentioned in your prepared remarks that you did win a nice cell gene therapy contract during the quarter. I'm assuming that's on the manufacturing side, or is that a development, and did that come through the new CRM relationship?
spk10: That is an early stage project, yes, and it's in our PD group, and that's where it's going to span currently. There's potential in the future for that to grow, obviously, but the only piece that they've contracted for at this point until further development is the early phase work. Got it. Thank you.
spk09: It didn't come through CIRM, Matt, either. It was independent of CIRM.
spk18: That's right. That's right. Sorry. Okay. I was going to say that was really quick when it came through, the new partnership.
spk07: All right. And then, Nick, last quarter, I think you said that you had actually won a competitive displacement. Those are my words. But you had won some business from a competitor from a large pharma customer. And I'm curious, how has that business progressed? Is that opening up doors for other opportunities?
spk09: I'm trying to remember a competitor. We've certainly won business from large pharma and from competitors, but I don't know that we've won a large pharma bid from a competitor. I'm trying to think what that might have been. I don't remember it being from a big pharma, Matt. I think we've done both of those, but not together. All I can say is that all our business with... with the ones that we've been winning are continuing to progress well, so no issues on any of those. Okay, thank you.
spk17: Thanks, Mark. Thank you. One moment for our next question.
spk04: And our next question comes from the line of Paul Knight from KeyBank. Your question, please.
spk26: Yeah, and Dan, did you mention $2 million of CapEx remaining in the fiscal year?
spk12: I did, yes, Paul. Okay.
spk13: And if I could break that down for you. So in the first half, we've spent $21 million on CapEx, and we've incurred $8 million, which has now been spent. But outside of those dollars, we have an additional two to incur.
spk26: What is maintenance CapEx? after this fiscal year?
spk13: You know, it's going to be really low. You know, there's going to be some systems that we're going to need to continue to invest into. But as far as the assets, most of the assets are brand new. So we would likely be 2% ish, maybe sub 2% of revenues.
spk26: And your line of credit, the size on that?
spk13: The size of our line of credit is 50 million.
spk26: Okay. And then, Nick, on the cell and gene therapy portion of the business, Alliance for Regenerative Medicine is showing finally some sequential growth in trial activity. Are you seeing that?
spk09: Yeah. I mean, we literally have just opened the GMP assets poll, so it's probably a little early to say that what we're seeing is reflective of the market. I think we've seen some good engagement. I think probably a lot of that is because we're here now and we've got the assets as opposed to a market indication. But we certainly have seen a good flurry of activity. Obviously, signing another client there and a meaningful one is also quite encouraging as we come out of the gate. And we have an ongoing engagement with a number of clients. So we're I'm certainly hoping that that's not going to be the last in the near future. So we are encouraged by what we generally hear in the marketplace. But I think we're, you know, we're hoping to see a lot more of that as we go forward for sure.
spk26: And Nick, I think, you know, obviously this, the industry issue for Abbott has been centered around the lower level of early stage biotech financing. Are there any other features that stand out like in a positive or a negative way? Is, you know, the capacity opening up globally, is that bad for you or does it not matter? And, you know, we've got a lot of approvals this year. I mean, you know, what are the other factors that, and the last thing I think we all think about, right, is Is there more insuring? So excluding biotech financing, do you think the market dynamics are better or worse for you right now?
spk09: So it's interesting. It's a good question, and thanks for asking that one, Paul. But just trying to look at how I'm looking at the marketplace as we sit today. I remember six months ago, sort of sat there at the end of a really good year, where we were feeling really positive about what we'd just done. And then I was looking forward at what was going on in the marketplace. And, you know, I obviously had to report lower guidance going forward for the following year for the first time. You know, as I sit here today, we're clearly not happy with the last quarter. And I don't think anybody around here is going to make any other calls on that one. But contrary to that position that we had last year, at the beginning of the year, I actually feel more positive now about what's coming forward. So, you know, we've captured a good number of late phase programs. A lot of those are coming to us from other CDMOs, which sort of says that we're doing the right things. We've got those because we've got the capacity. I can't control what happens in terms of FDA approval. I only wish I could. So I wish I could sit here and tell you which ones of those are going to go forward. But, you know, the number of phase three programs I've got is not a lot different from the number of phase one programs. In my 40 years, I've never known that happen. So we're very buoyed by that. Again, I think Matt highlighted that in our signings, that we'd seen some early phase signings, which were completely devoid in quarter one, which is, again, another positive sign. And we kind of have some leading indicators in the conversations and the pipeline that we see behind that. and we've started to see some positivity there. I'm not going to turn around and tell you that there's a recovery and there's an enormous tidal wave coming. That's not the case. But I do think that we see a much more positive outlook going forward. And if we hit the guidance that we've just given, which we obviously would intend to do because that's what we've just provided, that would be similar to the back end of last year. And if we can hit the record revenues that we saw at the end of 23 and then continue that, then I think we're, you know, as I say at the beginning, we have a much more positive feeling to the business and the industry today than I did six months ago.
spk04: All right. Thank you. Thank you.
spk17: One moment for our next question. And our next question comes from the line of Max from
spk04: William Blair, your question, please.
spk19: Hey, good afternoon. Thanks for taking our questions. Maybe just starting off here, I was wondering if you can give some more detail around what exactly the change in estimated variable consideration under a contract where uncertainties have been resolved relates to and what the impact was in the quarter. And then similarly, what was the impact of your customer's decision to defer that PPQ campaign until after your annual maintenance shutdown? And is that campaign now ongoing?
spk13: Sure, Max. I'll start off with that. So the change of variable consideration is another way to say that it was a change in estimate, where the revenue recognized on certain programs was less than originally estimated at the beginning of that project. Under 606 revenue rec rules, where a percentage of completion shop, so some of those estimates can change during the period. So the impact of that in the quarter was roughly $2 million of gross profit, so around 8 percentage points. And as far as the deferral, deferral was a similar gross profit hit of roughly 8 percentage points. And as far as the batches themselves, Nick, I don't know.
spk09: Yeah. No, I mean, the decision was a mutual decision. PPQ campaigns are something where you're executing three batches identical. That's always a lot easier when you do them back to back to back. Where we were was that we would have had to split those across the shutdown, which we felt was better not to do that and keep them all in line or otherwise we would have had to move the shutdown, which again was not an ideal situation. It was a mutual decision between us and the customer. The program's now open ongoing and going as planned. So, you know, again, not what we ideally would have wanted to do, but I would always prefer to run a PPQ with three batches literally back to back.
spk19: Got it. That's helpful. Maybe just asking a follow-up to Jacob's earlier in terms of the backlog, right? I'm just wondering how confident are you in the actual quality of that work that you have in backlog? If there's any detail you can provide around, you know, what portion of your backlog is currently on hold and how that relates to maybe last quarter when we spoke and just in general, how you would characterize your visibility into whether or not that work is going to actually start to move forward here again in the near future. Thank you.
spk09: Our backlog typically converts at, you know, I would say north of 95 and probably closer to, uh, closer to the towards the 100 on that one so we don't we really it's firm business there's none of it on hold as per se um i do know i know of uh one program that i got news of last week that's actually been brought forward so when uh when den articulates that it's not getting not getting any longer uh in part i might argue that there's a little bit of uh pull in there but there's always a little bit of switch and uh you know swell forward and backwards but No material change, and certainly from a conversion perspective, we expect the vast majority, as I said, more than 95%, if not closer to 100% of that to execute.
spk19: Okay, and then if I could just sneak one more in here. I think previously when we talked, Nick, you talked about holding backlog flat year over year as being kind of a win here in fiscal 24. It's actually stepped up a little bit relative to where you're at at the end of last year, just because revenue is a little bit light here in the quarter, but Wondering how you're thinking about the outlook for bookings growth in the back half of the year, giving your commentary in particular around seeing a return of early stage projects in the mix during the quarter, and whether or not you're still thinking about flat backlog year over year as kind of the goal for fiscal 2024.
spk09: Yeah, I mean, my crystal ball's a little cloudy on that one. The difficulty I have, Max, is that is that signing from quarter to quarter, as we've talked in the past and I've mentioned also publicly, it's lumpy. We've seen 69 million signings in a quarter, and I think I've seen 29 million signings in a quarter. So it can be very erratic. I think, to be frank with you, if we can hold the backlog where we mentioned before, it would still be a reasonable result. I would say that there's a bit of optimism, but again, some of the opportunities that we're talking on and working on are quite significant and they're binary. And when you come second, you don't get 30% or 60%, you get zero. So it's always a little difficult in the short term to predict where that will be due to the lumpiness. But I don't think necessarily our opinions changed, but if it was going to go anywhere, it would certainly be going up and not down, I would have said.
spk03: Got it. Thank you again for taking our questions.
spk24: No problem. Thanks for the answer to questions.
spk04: Thank you. One moment for our final question for today. And our final question comes from the line of Sean Dodge from RBC Capital Markets. Your question, please.
spk06: Hey, good afternoon. This is Thomas Keller. I'm for Sean. Thanks for taking the questions. Just one for me on gross margins. How should we think about progression there over the balance of the year? Are there any specifics you can point to or other kind of one-time items we need to consider?
spk11: Yeah, Thomas.
spk13: So, you know, taking the first half aside, you know, it's still the second half at the revenue levels to hit, call it the midpoint of guide is still similar to what we've talked about going into this year and last quarter. and that there's going to be a gross margin impact for the additional cost and the additional depreciation that we have this year that would put it into the mid-teens area, which I would expect to be plus or minus that mid-teens area as you hit that top line for the second half of the year. So that's going to be diluted by the first half.
spk05: All right. Appreciate it. Thanks, Dan. I'll leave it there.
spk04: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Nick Green for any further remarks.
spk09: Yes, thank you, operator, and thank you to everybody participating on today's call. As we approach the end of calendar 23, we look forward with some optimism to the second half of our fiscal year and the beginning of 2024. and what the beginning of 2024 will hold for the business. We feel that the business is well positioned to generate cash from operations and in the near term with sustainable profitability within reach. We thank our customers for their trust and partnership, our investors for their continued support, and we wish to recognize our exceptional employees who continue to drive the success. Thank you again for participating today and for your continued support of Avid Bioservices.
spk04: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program.
spk17: You may now disconnect. Good day. Music. Thank you.
spk01: Thank you.
spk04: Good day, ladies and gentlemen, and welcome to the AVID Bioservices Second Quarter Fiscal 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference call may be recorded. I would now like to hand the conference over to Tim Franz of AVID Investors Relations Group. Please go ahead, sir.
spk16: Thank you. Good afternoon, and thank you for joining us.
spk22: On today's call, we have Nick Breen, President and CEO, Dan Hart, Chief Financial Officer, and Matt Quitniak, AVID's 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 October 31st, 2023. After our prepared remarks, we will welcome your questions. Before we begin, I'd like to caution that comments made during this conference call today, December 7th, 2023, 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 the company's filings with the Securities and Exchange Commission concerning these and other matters. Our earnings press release and this call will include discussion of certain non-GAAP information. You can find our earnings press release, including relevant non-GAAP reconciliations, on our corporate website at avidbio.com. With that, I will turn the call over to Nick Green, AVID's President and CEO.
spk09: Thank you, Tim. Thank you to everybody participating today via webcast. The second quarter revenues were impacted by a number of factors. These are now behind us, and we are looking ahead to the second half of the year with some optimism. We closed the quarter with an improved cash balance. We have now completed the expansion program started almost three years ago. Our backlog has achieved a new record high, and as we amend guidance, we expect significant growth over the first half with revenues approximating those achieved in the second half of fiscal year 2023, the highest six months in the company's history to date. During the second quarter, our team continued to execute on both business development and operational plans. Despite the financial challenges faced by many of our current and prospective customers, important programs continue to advance. Abbott's commercial team had another strong quarter, securing new business wins of approximately $35 million, resulting in a record backlog of $199 million. This work comes from both new and existing customers and stabs our capabilities, including our new cell and gene therapy services, or CGT services, as I will refer to them. As reported last quarter, While we continue to win more projects in the later phases of clinical development, we were pleased to see several early-stage programs advancing during the quarter, and we were delighted to see one of our customers receive FDA approval for a product which we are currently conducting a PPQ campaign to affect its transfer to Abbott.
spk17: In support of our new CGT services, the company was recently accepted into an industry partnership
spk09: with the California Institute of Regenerative Medicine, or CERN, which we feel both validates our newest business as well as increases our visibility in the industry.
spk02: CERN is dedicated to the advancement of manufacturing of adeno-associated adenovirus, as well as other cell and gene therapy programs within the state of California.
spk09: And Matt will provide a bit more information on this partnership shortly. In operations during the quarter, having successfully executed its planned annual maintenance shutdown, most important, we also completed construction of the company's CGMP manufacturing suites within our new world-class CGT development and manufacturing facility as scheduled. The newly launched manufacturing suites are currently undergoing final environmental monitoring and performance qualifications. And as we rapidly approach the start of calendar 2024, we are looking forward to being able to engage with potential customers with our offering complete. Matt and I will provide additional details on business development and operations for the period, following an overview of our second quarter fiscal 2024 financial results.
spk17: And for that, I'll turn the call over to Dan.
spk13: Thank you, Nick. Before I begin, in addition to the brief financial overview I'll provide on the call today, additional details in our financial results are included in our press release issued prior to this call and in our Form 10-Q, which was filed today with the SEC. I'll now provide an overview of our financial results from operations for the quarter and six months into October 31st, 2023. Revenues for the second quarter of fiscal 24 were $25.4 million, representing a 27% decrease as compared to revenues of $34.8 million recorded in the prior year period. For the first six months of fiscal 24, revenues were $63.1 million, a 12% decrease compared to $71.4 million in the prior year period. The decrease in revenues for both periods as compared to the prior year periods was primarily a the fewer manufacturing routes, the reduction in process development services for early-stage customers, and reduction of revenue for changes in estimated variable consideration under a contract where some uncertainties have been resolved. Gross margin for the three months ended October 31, 2023 was negative 18%, compared to 12% for the same period in the prior year. Gross margin for the first six months of fiscal 24 was negative 1%, compared to a gross margin of 19% for the same period during fiscal 23. The decrease in gross margin percentage for both periods as compared to the same prior year periods was primarily driven by lower manufacturing volumes and costs related to expansions of both our capacity and our technical capabilities. This included adding staff and associated overhead, including depreciation expense, that will provide critical capacity for near and medium-term growth. Margins during the three and six months ended October 31, 2023, were also impacted by the decision to defer a customer's PPQ campaign until after our annual maintenance shutdown, combined with a reduction of revenues for changes in estimated variable consideration under a contract where uncertainties have been resolved. The decrease in gross margin for the first six months of fiscal 24 was further impacted by a terminated project relating to the insolvency of one of our smaller customers and a delay in our ability to recognize revenues of a customer product pending the implementation of a process change. Excluding all of these factors, our second quarter and year-to-date adjusted gross margin percentages would have been two percentage points and one percentage point lower than the reported gross margin percentages in the same prior year periods, respectively. As disclosed previously, we expect the expense-related costs will continue to affect near-term margins. especially the related increase in depreciation costs. Importantly, as we increase our capacity utilization, we will begin to absorb these increased costs, leading to improved gross profit. SG&A expenses for the second quarter of fiscal 24 were $6.6 million, a decrease of 4% compared to $6.8 million recorded in the second quarter of fiscal 23. The decrease in SG&A for the second quarter was primarily due to a decrease in payroll and benefit expenses and other professional fees. SG&A expenses for the first six months of fiscal 24 were $12.89, a decrease of 3% compared to $13.2 million recorded in the prior year period. The decrease in SG&A for the six months was primarily due to decreases in legal, accounting, and other professional fees. During the second quarter of fiscal 24, the company's net loss was $9.5 million, or 15 cents per basic and diluted share, compared to a net loss of $1.2 million, or 2 cents per basic and diluted share, for the second quarter of fiscal 23. For the first six months of fiscal 24, the company recorded a net loss of $11.6 million, or 18 cents per basic and diluted share, as compared to net income of approximately $400,000. for one cent per basic and diluted share during the same prior year period. For the second quarter of fiscal 24, the company had an adjusted EBITDA of negative $6 million. For the first six months of fiscal 24, the company had an adjusted EBITDA of negative $3.2 million. Our cash and cash equivalents on October 31st, 2023 were $31.4 million compared to $38.5 million on April 30th, 2023. The second quarter cash and cash equivalence balance represents a 26% increase compared to $24.9 million at the end of the first quarter of fiscal 24. As of the end of the second quarter, we estimate our remaining fiscal 24 expansion-related capital expenditures to be approximately $2 million. In other financial news, during the quarter, the company entered into an amendment to its revolving credit agreement with Bank of America. This credit facility was amended to extend the maturity date to October 2024 from the initial maturity of March 2024. This amendment also included an increase in the related interest rate applied to any borrowings under the revolver. An increasingly allowable amount of the company can occur at any one time or based on capital assets. The other material terms of the credit agreement remained unchanged. While the company has no current plans to draw down on this facility, Adam views this instrument as a valuable tool to ensure financial stability. This concludes my financial overview.
spk17: I will now turn the call over to Matt for an update on commercial activities during the quarter.
spk10: Thanks, Dan. I am pleased to report that our commercial team had another strong quarter. During the period, AVID recorded bookings of $35 million from new and existing customers, including a meaningful contract signed for the recently completed CGT facility. The company ended the quarter with a record backlog of $199 million, representing an increase of 35% as compared to $147 million at the end of the second quarter of fiscal 2023. While certain early-stage projects in our pipeline remain on hold pending customer financing events, we continue to see growth in our later stage and commercial project portfolio during the quarter. As a reminder, later stage projects are generally larger and take longer to complete as compared to earlier stage programs. For that reason, we expect that recognition of our backlog for these projects will extend beyond one year. As these later stage programs have significantly higher probability of regulatory approval in a shorter timeframe, we believe they are more likely to generate the recurring and ramping commercial revenues associated with such approval. While there is no guarantee that regulatory approval will be achieved for any program, we do believe that our pipeline, which remains weighted toward later stage projects, offers enhanced opportunity for regulatory success and ultimately for stable growth in the medium to long term. We are pleased to see continued growth in this segment of our backlog and remain committed to pursuing and supporting projects at every stage of development and manufacturing. We are in fact seeing some improvement in our early stage pipeline. We remain fully engaged with new and prospective customers at every phase and continue to build visibility for the Avid brand through consistent outreach and industry events. As Nick mentioned previously, AVID joined the CIRM Industry Resource Partner Program to provide development and CGMP manufacturing services to CIRM-funded programs. Currently, CIRM has $5.5 billion in funding from the state of California and has more than 161 active stem cell programs in their portfolio. AVID will assist CIRM's partners in accelerating gene therapy development and manufacturing through its suite of CDMO services. which span process and analytical development, cell banking, virus banking, drug substance manufacturing, and fill-finish activities. CIRM-funded programs will be offered access to AVID services in order to reduce the timelines required to advance through clinical development. All partnership activities will be performed in AVID's recently launched world-class CGT manufacturing facility. We are very pleased to have entered this validating partnership with CIRM which we believe will further strengthen our presence broadly among CDMOs, and more specifically as a manufacturer of CGT products. In closing, I'd like to reiterate how pleased we are with the commercial team's performance during the second quarter, and we are looking ahead with optimism to the second half of the year. This concludes my overview of commercial activities. I will now turn the call back over to Nick for an update on operations and other achievements during the period.
spk17: Thanks, Max. I will provide an overview of the company's operational activities.
spk09: First, have it successfully executed its planned annual maintenance shutdown during the quarter.
spk08: While this temporary shutdown contributed to the low revenues for the period, it has done its part.
spk09: It is an essential activity to ensure the efficiency of our systems, and we are very pleased to have this process complete for another year. As we announced in October, we have completed the construction of our cell energy therapy manufacturing These newly launched suites, which are housed within the company's new world-class CGT development and manufacturing facility, are currently undergoing final environmental monitoring and performance qualifications. With the completion of this latest expansion project, Avid has now completed all phases of a broad multi-year expansion and will have deployed upwards of approximately $180 million of capital from 2020 to 2023 into expansions of both revenue generating capacity and technical capabilities. Looking ahead, we are now well positioned to meet the manufacturing needs of current and future customers, advancing both mammalian and CGD products. Today, we estimate that our combined facilities have the potential to bring our total revenue generating capacity to up to $400 million annually, more than triple the revenue-generating capacity of our pre-expansion business. And while the operating costs associated with these facilities and service expansions have impacted our margins, we believe this new infrastructure has been a major contributor in attracting the later phase projects currently in our backlog, as well as positioning AVID to serve the large pharma segment of the market previously underserved by the business. This strategy is already paying off, demonstrated by the increase in customers with whom we work, aligned with a strong weight towards later phase. Further, we are now beginning to onboard projects utilizing the capabilities offered by our CNGT services. When we combine our new capacity and services With decades of experience in biologics and commercial manufacturing, a track record that demonstrates our focus on quality and the talent spanning early stage development through commercialization, we believe we have established an organization and brand that will continue to thrive in this growing and attractive market.
spk02: Not only did the quarter see the completion of our current expansion program,
spk09: It also saw the cessation of manufacture in the company's legacy small-scale stainless steel facility. And while the effect of this impacted the second quarter, as we look forward, Avid now benefits from all its mammalian GMP manufacturing under a single roof, with one of the most modern and high-quality facilities available in the industry. This will further enhance the company's ability to improve margins
spk17: as we continue the process of growing AVI and filling this capacity. As we are all more than aware, the downturn in the biotech funding has certainly impacted the business in the short term.
spk09: This, combined with other factors we have reported, has led to a disappointing first half of fiscal 2024. And as a result, we are compelled to amend guidance to $137 to $147 million. That being said, as we look forward, we have an improved cash position. We have seen an increase in our early-page signings during the second quarter. We have completed all our current expansion activities, entered the second half with our backlog at an all-time high, and one of the products in our late-stage pipeline has already received FDA approval. As we look more closely at the second half of the year, we anticipate revenues approximating
spk17: half two of fiscal year 23, which represents the best half-year performance in the company's history.
spk09: As we approach the end of our 30th year, we are delighted to mark the completion of what has been a three-year program of increasing capacity, modernizing the asset base, as well as transforming the capabilities of the mammalian business, and at the same time, broadening the avid offering to include the new CNGT capabilities in both process development and now GMP manufacture. Also during our 30th year, we look back at where we came from as we retire the old stainless reactors, which marked the start of our CDMO business and close to 20 years of commercial manufacturing. While calendar 2023 has had its challenges, the team has worked diligently in pursuit of our goal. As we enter calendar 2024, Avid is a company with 30 years in biologics manufacturing, a 21-year regulatory track record, and more than 200 commercial batches under our belt, operating out of a modern asset base with capacity to accommodate commercial needs of our late-phase clinical programs, some of which we hope will soon become commercial products, and a business with an increasingly diverse customer base and pipeline. While there will be much of 2033 we will be happy to put behind us, it would not surprise me that we look back at this year as the start of a new phase, not only in how our company looks, but also in the market which we serve. I feel genuinely blessed to work with a team that has shown the fortitude to undertake such a monumental task. and one that has not wavered one bit in the pursuit of the targets we set ourselves. And I look forward with a high level of excitement at the prospect of filling this capacity and continuing to guide the future development of Abbott.
spk17: This concludes my prepared remarks for today.
spk08: We can now open up the call for questions.
spk17: Operator?
spk04: Thirdly, ladies and gentlemen, if you do have a question at this time, please press star 1-1 on your telephone. To remove yourself from the queue, simply press star 1-1 again. One moment for our first question. And our first question comes from the line of Jacob Johnson from Stevens. Your question, please.
spk20: Hey, thanks. Good afternoon. Maybe Nick, kind of leaving off or starting off where you just left off, I guess, can you On the backlog and the two key revenue and the 24 outlook. So pretty good bookings in the quarter, record backlog, but revenues down year over year. Can you just kind of help us square those two items? And I guess along those same lines, you know, you keep pointing to the backlog extending beyond a year. Has that backlog lengthened, like extended even further? Is it taking even longer to close that or? Are we just waiting for things like this PPQ campaign to hit? I know that's a lot, but I'll stop there with the first question.
spk09: No, thanks very much, Jacob, and good question. First, to sort of answer your last question as the backlog extended, the answer to that is no. Pretty much the stable in terms of where it is, so certainly no further spread. I think, you know, at the end of the day, what we've seen here, apart from some of the The things that Dan highlighted in the earnings in the first half, obviously, is the impact of the biotech defunding. But we'll continue to sign the business. And then it really is a matter of bringing through those late phase programs, which are just a lot bigger in size and take longer to execute. And you've got to line them up. I recently published on the website our investor presentation, which kind of shows you a good indication of the maturity of the pipeline that we have. And simply to put large volumes of material into that new asset, one has to, first of all, obviously attract the customer. The second thing then is to execute on the PPQ campaign, which ultimately will lead to a BLA filing and then the commercial volumes that come after that. And I think that, you know, for those of us that are in the market on a day-to-day basis is that there's just unfortunately a natural time phase that that takes to execute. And once you've completed the PPQ campaign, you have to file that data along with the clinical data to the FDA and get approval, and then the commercial volumes come. And of course, one of the other issues is, of course, nobody's going to put a PPQ campaign together with a supplier that doesn't have that capacity to meet the commercial demand. So it's really just a transition of the businesses, as we've been trying to highlight from a what was originally a clinical company that was with a significant large commercial demand into one that's got a very much more diverse customer base with a significant number of late phase programs, which we're just trying to get executed, get that data off, and then obviously look forward to at least an industry average of commercial approvals that we can then execute against. And, you know, actually we, We couldn't have asked for a better situation than we've got right now, which is that as we're concerning one of those in, they've already got approval. So that's about as fast as it ever goes. So looking forward to that one.
spk20: Got it. Thanks for that, Nick. And then maybe I guess for my follow-up on what you just alluded to, you know, I think in that deck, you suggest that these later stage opportunities could be $100 to $200 million in revenue opportunities. I think the inevitable question is, what is the timeline for, you know, assuming all goes well, and I know that's impossible for any of us to handicap, but assuming all goes well, is that, you know, is that a peak revenue that could be five years out? Or how should we think about the path to that kind of revenue potential?
spk09: Well, again, without trying to get into each of the individual ones, because they all have such different profiles, to be frank with you, you know, in terms of the size of the markets they serve and also the probability of success. So, I mean, you know, you could have four out of eight, for example, getting approval. And if all four of those are small ones and the impact's not that great, if all four of those are the large ones, the impact's enormous. And then there's all the different timelines. So that's it. It's a really difficult question to ask, but to answer rather. But I think in general terms, you know, you look at the sort of growth that we've seen in this business in the past. I don't see we know the growth in the marketplace going forward and we know the capacity we've got. And, you know, you draw those lines and, you know, anywhere between sort of I think on the on the fast side would be three years to fill that capacity on the. On the longer side, you're probably looking at somewhere like six years. But anywhere in that window, I think, is not unreasonable. Obviously, we're aiming for as quickly as we possibly could. But it's, you know, the fact that we've got so many is really, really a good, strong indicator to us that we will be filling that capacity.
spk21: Got it. I'll leave it there. Thanks for taking the question.
spk17: Thanks, Jacob.
spk04: Thank you. One moment for our next question. And our next question comes from the line of Matt Hewitt from Craig Hallam. Your question, please.
spk07: Good afternoon. Thank you for taking the questions. Maybe the first one, I think, Matt, I think you mentioned in your prepared remarks that you did win a nice cell gene therapy contract during the quarter. I'm assuming that's on the manufacturing side, or is that a development, and did that come through the new CRM relationship?
spk10: That is an early stage project, yes, and it's in our PD group, and that's where it's going to span currently. There's potential in the future for that to grow, obviously, but the only piece that they've contracted for at this point until further development is the early phase work. Got it.
spk09: Thank you. It didn't come through CIRM, Matt, either. It was independent of CIRM.
spk18: That's right. That's right. Sorry. Okay. I was going to say that was really quick when it came through, the new partnership.
spk07: All right. And then, Nick, last quarter, I think you said that you had actually won a competitive displacement. Those are my words. But you had won some business from a competitor from a large pharma customer. And I'm curious, how has that business progressed? Is that opening up doors for other opportunities?
spk09: I'm trying to remember a competitor. We've certainly won business from large pharma and from competitors, but I don't know that we've won a large pharma bid from a competitor. I'm trying to think what that might have been. I don't remember it being from a big pharma, Matt. I think we've done both of those, but not together. All I can say is that all our business with... with the ones that we've been winning, are continuing to progress well. So no issues on any of those. Okay, thank you.
spk17: Thanks, Mark. Thank you. One moment for our next question.
spk04: And our next question comes from the line of Paul Knight from KeyBank. Your question, please.
spk26: Yeah, Dan, did you mention $2 million of CapEx remaining in the fiscal year?
spk12: I did, yes, Paul. Okay.
spk13: And if I can break that down for you. So in the first half, we've spent $21 million on CapEx, and we've incurred $8 million, which has now been spent. But outside of those dollars, we have an additional two to incur.
spk26: What's maintenance CapEx? after this fiscal year?
spk13: You know, it's going to be really low. You know, there's going to be some systems that we're going to need to continue to invest into. But as far as the assets, most of the assets are brand new. So we would likely be 2% ish, maybe sub 2% of revenues.
spk26: And your line of credit, the size on that?
spk13: The size of our line of credit is 50 million.
spk26: Okay. And then, Nick, on the cell and gene therapy portion of the business, Alliance for Regenerative Medicine is showing finally some sequential growth in trial activity. Are you seeing that?
spk09: Yeah. I mean, we literally have just opened the GMP assets poll, so it's probably a little early to say that what we're seeing is reflective of the market. I think we've seen some good engagement. I think probably a lot of that is because we're here now and we've got the assets as opposed to a market indication, but we certainly have seen a good flurry of activity. Obviously signing another client there and a meaningful one is also quite encouraging as we come out of the gate. And we have an ongoing engagement with a number of clients. So we're I'm certainly hoping that that's not going to be the last in the near future. So, we are encouraged by what we generally hear in the marketplace. But I think we're, you know, we're hoping to see a lot more of that as we go forward for sure.
spk26: And Nick, I think, you know, obviously, the industry issue for Abbott has been centered around the lower level of early stage biotech financing. Are there any other features that stand out like in a positive or a negative way? Is, you know, the capacity opening up globally, is that bad for you or does it not matter? And, you know, we've got a lot of approvals this year. I mean, you know, what are the other factors that, and the last thing I think we all think about, right, is Is there more insuring? So, you know, excluding biotech financing, do you think the market dynamics are better or worse for you right now?
spk09: So it's interesting. It's a good question. And thanks for asking that one, Paul. But it's, you know, just trying to look at how I'm looking at the marketplace as we sit today. I remember a few, six months ago, sort of sat there at the end of a really good year and where we were feeling really positive about what we'd just done. And then I was looking forward at what was going on in the marketplace. And, you know, obviously I had to report lower guidance going forward for the following year for the first time. You know, as I sit here today, we're clearly not happy with the last quarter. And I don't think anybody around here is going to make any other calls on that one. But contrary to that position that we had last year, at the beginning of the year, I actually feel more positive now about what's coming forward. So, you know, we've captured a good number of late phase programs. A lot of those are coming to us from other CDMOs, which sort of says that we're doing the right things. We've got those because we've got the capacity. I can't control what happens in terms of FDA approval. I only wish I could. So I wish I could sit here and tell you which ones of those are going to go forward. But, you know, the number of phase three programs I've got is not a lot different from the number of phase one programs. In my 40 years, I've never known that happen. So we're very buoyed by that. Again, I think Matt highlighted that in our signings that we'd seen some early phase signings, which were completely devoid in quarter one, which is, again, another positive sign. And we kind of have some leading indicators in the conversations and the pipeline that we see behind that. and we've started to see some positivity there. I'm not going to turn around and tell you that there's a recovery and there's a nervous tidal wave coming. That's not the case. But I do think that we see a much more positive outlook going forward. And if we hit the guidance that we've just given, which we obviously would intend to do because that's what we've just provided, that would be similar to the back end of last year. And if we can hit the record revenues that we saw at the end of 23 and then continue that, then I think we're, you know, as I say at the beginning, we have a much more positive feeling to the business and the industry today than I did six months ago.
spk04: All right. Thank you. Thank you.
spk17: One moment for our next question. And our next question comes from the line of Max Schmock from
spk04: William Blair, your question, please.
spk19: Hey, good afternoon. Thanks for taking our questions. Maybe just starting off here, I was wondering if you can give some more detail around what exactly the change in estimated variable consideration under a contract where uncertainties have been resolved relates to and what the impact was in the quarter. And then similarly, what was the impact of your customer's decision to defer that PPQ campaign until after your annual maintenance shutdown? And is that campaign now ongoing?
spk13: Sure, Max. I'll start off with that. So, the change in variable consideration is another way to say that it was a change in estimate where the revenue recognized on certain programs was less than originally estimated at the beginning of that project. Under 606 revenue rec rules, where a percentage of completion shop, so some of those estimates can change during the period. So the impact of that in the quarter was roughly $2 million of gross profit, so around 8 percentage points. And as far as the deferral, deferral was a similar gross profit hit of roughly 8 percentage points. And as far as the batches themselves, Nick, I don't know.
spk09: Yeah. No, I mean, the decision was a mutual decision. PPQ campaigns are something where you're executing three batches identical. That's always a lot easier when you do them back to back to back. Where we were was that we would have had to split those across the shutdown, which we felt was better not to do that and keep them all in line or otherwise we would have had to move the shutdown, which again was not an ideal situation. It was a mutual decision between us and the customer. The program's now open ongoing and going as planned. So, you know, again, not what we ideally would have wanted to do, but I would always prefer to run a PPQ with three batches literally back to back.
spk19: Got it. That's helpful. Maybe just asking a follow-up to Jacob's earlier in terms of the backlog, right? I just wondering how confident are you in the actual quality of that work that you have in backlog? If there's any detail you can provide around, you know, what portion of your backlog is currently on hold and how that relates to maybe last quarter when we spoke and just in general, how you would characterize your visibility into whether or not that work is going to actually, uh, start to move forward here again in the near future. Thank you.
spk09: Yeah. Our backlog typically converts it, you know, I would say north of 95 and probably closer to, uh, closer to towards 100 on that one. So we really, it's firm business. There's none of it on hold, as per se. I do know of one program that I got news of last week that's actually been brought forward. So when Dan articulates that it's not getting any longer, in part, I might argue that there's a little bit of pull in there. But there's always a little bit of switch and, you know, swell forward and backwards. But No material change, and certainly from a conversion perspective, we expect the vast majority, as I said, more than 95%, if not closer to 100% of that to execute.
spk19: Okay, and then if I could just sneak one more in here. I think previously when we talked, Nick, you talked about holding backlog flat year over year as being kind of a win here in fiscal 24. It's actually stepped up a little bit relative to where you're at at the end of last year, just because revenue is a little bit light here in the quarter, but Wondering how you're thinking about the outlook for bookings growth in the back half of the year, giving your commentary in particular around seeing a return of early stage projects in the mix during the quarter, and whether or not you're still thinking about flat backlog year over year as kind of the goal for fiscal 2024.
spk09: Yeah, I mean, my crystal ball's a little cloudy on that one. The difficulty I have, Max, is that... is that signing from quarter to quarter, as we've talked in the past and I've mentioned also publicly, it's lumpy. We've seen 69 million signings in a quarter, and I think I've seen 29 million signings in a quarter. So it can be very erratic. I think, to be frank with you, if we can hold the backlog where we mentioned before, it would still be a reasonable result. I would say that there's a bit of optimism, but again, some of the opportunities that we're talking on and working on are quite significant and they're binary. And when you come second, you don't get 30% or 60%, you get zero. So it's always a little difficult in the short term to predict where that will be due to the lumpiness. But I don't think necessarily our opinions changed, but if it was going to go anywhere, it would certainly be going up and not down, I would have said.
spk03: Got it. Thank you again for taking our questions.
spk24: No problem. Thanks for the answer to questions.
spk04: Thank you. One moment for our final question for today. And our final question comes from the line of Sean Dodge from RBC Capital Markets. Your question, please.
spk06: Hey, good afternoon. This is Thomas Keller on for Sean. Thanks for taking the questions. Just one for me on gross margins. How should we think about progression there over the balance of the year? Are there any specifics you can point to or other kind of one-time items we need to consider?
spk11: Yeah, Thomas.
spk13: So, you know, taking the first half aside, you know, it's still the second half at the revenue levels to hit, call it the midpoint of guide is still similar to what we've talked about going into this year and last quarter. and that there's going to be a gross margin impact for the additional cost and the additional depreciation that we have this year that would put it into the mid-teens area, which I would expect to be plus or minus that mid-teens area as you hit that top line for the second half of the year. So that's going to be diluted by the first half.
spk05: All right. Appreciate it. Thanks, Dan. I'll leave it there.
spk04: Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Nick Green for any further remarks.
spk09: Yes, thank you, operator, and thank you to everybody participating on today's call. As we approach the end of calendar 23, we look forward with some optimism to the second half of our fiscal year and the beginning of 2024. and what the beginning of 24 will hold for the business. We feel that the business is well positioned to generate cash from operations and in the near term with sustainable profitability within reach. We thank our customers for their trust and partnership, our investors for their continued support, and we wish to recognize our exceptional employees who continue to drive the success. Thank you again for participating today and for your continued support of Avid Bioservices.
spk04: Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.
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