Avid Bioservices Inc (CDMO) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Avid Bioservices Fourth Quarter and Year-end Fiscal 2018 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 Roger Lias, President and CEO; and Tracy Kinjerski, Vice President of Business Operations.

Today, we will be providing an overview of Avid Bioservices contract development and manufacturing business including updates on corporate activities, financial results for fiscal 2018 and guidance for fiscal 2019. 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, July 16, 2018, 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 Roger Lias, President and CEO. Roger?

Thank you, Tim, and thanks to all of who've dialed in and those who are participating via webcast today.

Beyond reporting our financial results for the fourth quarter and fiscal year ended April 30, 2018, we have several goals for today's call. After I've provided a financial overview and an update on our adoption of the new ASC 606 revenue recognition standard, Tracy will provide some detail regarding our new client onboarding process and how these customers may impact our top and bottom line throughout the year. And finally, I'll provide our financial guidance for fiscal 2019.

I would like to start by stating that I'm extremely pleased with the speed and efficiency with which we have been able to transition our business model to a pure-play biologics contract development and manufacturing organization. In a short period, we've established a targeted business development operation that is actively building visibility for Avid Bioservices within our fast growing but competitive marketplace. I believe that the changes we have effected position us very well for strong growth and a related efficient progression to cash and EBITDA generation.

I would now like to introduce Avid Bioservices' new Chief Financial Officer and provide a review of our fourth quarter and year-end 2018 fiscal results. I'm very pleased to be able to announce that after a comprehensive search, Dan Hart will be joining the Avid Bioservices team as our new CFO. Dan brings considerable experience from both the private and public sectors, most recently a CFO at ENO Holdings (sic) [Realty ONE Group], a family of companies focused on the residential real estate market. And prior to that a Senior Vice President and CFO at Management Consultants, SM&A. I'm exceptionally pleased that we've been able to attract a candidate with Dan's experience and integrity to Avid Bioservices.

Dan will formally start his duties on August 1, and I look forward to introducing him more formally in the coming months. Since the previous CFO's departure, we've been fortunate to have an extremely experienced temporary CFO onboard, who has provided his considerable expertise during the year-end process and the implementation of the new ASC 606 revenue recognition procedures, which I will discuss later in my comments.

Our temporary CFO will remain in place until Dan is situated in his new role, and I'm very grateful to him for his invaluable assistance during the transition period.

I'll now discuss our financial results for the fourth quarter and full year ended April 30, 2018, starting with revenue. We have consistently projected revenues of between $50 million and $55 million for the fiscal year 2018 and we're pleased to report that we have achieved this goal.

Revenue for the full year fiscal 2018 was $53.6 million compared to $57.6 million for fiscal 2017. Revenue for the fourth quarter of 2018 was $6.9 million compared to $17.9 million for the same period of the prior year. This decrease is primarily the result of a slowing in demand from our 2 lead customers, which we anticipated and have previously disclosed.

In the past, we've had a significant reliance on a small customer base leaving us vulnerable to such demand fluctuations. Since January, we've been working aggressively to increase market visibility and to expand and diversify our client base. To that end, we've successfully secured multiple new customers that are currently in varying stages of being onboarded and revenue generation, and we are in active discussions with many additional potential customers.

Importantly, we are also seeing healthy growth generated from existing customer projects. As a result, our committed backlog has increased significantly by 48.2% to $57.8 million under ASC 605 revenue recognition standard compared to the backlog of $39 million reported in our fiscal 2018 third quarter earnings call.

While we expect the majority of the backlog to be recognized as revenue in fiscal 2019, it's important to point out that the backlog may cover multiple fiscal years. The highly technical and customized nature of our business makes it difficult to precisely predict in advance the amount of backlog that may be recognized as revenue in a specific fiscal year, since for many projects process development or technology transfer work needs to be completed prior to entering the manufacturing phase of a contract, and the phasing of revenue is subject to technical progress.

Project time lines may also be impacted by clinical and regulatory factors outside of the control of Avid. As a result, and in common with other biologics CDMOs, our manufacturing schedule has to remain flexible and is updated on an almost continuous basis.

For both the fourth quarter and fiscal full year 2018, margins declined as compared to the prior year periods. Gross margin for the fourth quarter was negative 28% and gross margin for fiscal 2018 was a negative 5%. These margins are compared to positive 34% for both the fourth quarter of 2017 and the full fiscal year 2017. These declines in the amount of $2.8 million during the quarter and $14 million for the full fiscal year were mostly driven by idle capacity during the fiscal year and a batch failure caused by a competent issue outside of Avid's control during the quarter. These margins are clearly well below our expectations for the business going forward.

It's important to note that installation of our large-scale 3 by 2,000 liters manufacturing capacity in the Myford facility occurred in calendar year 2017 and the new capacity by definition always begins life empty. In addition, it should be remembered that much of this capacity was anticipated to be required for the manufacture of bavituximab.

Even the fixed cost associated with highly regulated biologics manufacturing under current good manufacturing practices, margins will be impacted until capacity utilization is increased. To affect the required improvements, we continue an aggressive effort to both expand our customer base and to extend current client projects to increase our backlog and enhance capacity utilization.

We also continue to evaluate our overall cost structure and to implement-related operational efficiencies to better align it with the future needs of the business. In addition, we anticipate seeing improved future contribution from process development services as we expand our capabilities in this area. Avid has formerly been underserved in this function that not only generates direct revenue but is also critically important for technology transfer of existing manufacturing processes into our facilities.

Importantly, it also ensures that we remain current on the many technological advances being made in the bioprocessing field. In support of this vitally important and growing component of our business, we've initiated the expansion and improvement of our process development laboratories and are delighted that Dr. Magnus Schroeder has joined Avid as Vice President of Process Sciences. Magnus brings many years of industry experience, including direct experience in the biologic CDMO space. And he will manage our process development function as an individual profit center for the first time in Avid's history.

Turning now to operating expenses. Total SG&A expenses for the fourth quarter of fiscal 2018 were $4.2 million compared to $4.5 million for the fourth quarter of fiscal 2017. It's important to note, however, that SG&A results for the fourth quarter included nonrecurring expenses of approximately $1.2 million comprising a write-off related to previously purchased capital equipment, that is no longer required to support the Avid business, and one-time charges associated with the transition to the pure-play CDMO model.

For the full year 2018, total SG&A expenses were $16.5 million compared to $18.1 million for the full fiscal year 2017. The decreases in both the quarter and year were driven primarily by the elimination of costs associated with the company's former drug development business and the streamlining of Avid operations.

For the fourth quarter of 2018, the company recorded consolidated net income attributable to common share -- stockholders of $1.6 million or $0.03 per share compared to a consolidated net loss attributable to common stockholders of $6.7 million or $0.16 per share for the same prior year quarter. For the full fiscal year 2018, the company recorded a consolidated net loss attributable to common stockholders of $26.5 million or $0.56 per share compared to a consolidated net loss attributable to common stockholders of $32.8 million or $0.88 per share for full fiscal year 2017. The improvements in both the 2018 fourth quarter and the fiscal year were primarily the result of the sale of Avid's legacy R&D assets to Oncologie, Inc. for $8 million and the associated discontinued operations.

Cash and cash equivalents as of April 30, 2018, were $42.3 million compared to $46.8 million at the fiscal year ended April 30, 2017. As just mentioned, in February of this year, the primary PS-targeting R&D assets were assigned to Oncologie, Inc., an emerging biopharmaceutical company with a focus and expertise in the development of immuno-oncology assets. Under the terms of this agreement, Avid is entitled to receive $8 million in upfront payments over 6 months, $6 million of which has already been received according to the contractually agreed schedule. We anticipate receipt of the remaining $2 million in the second quarter of fiscal 2019.

In addition, Avid is eligible to receive up to $95 million in payments subject to Oncologie's attainment of certain development, regulatory and commercialization milestones as well as royalties on net sales that are upward tiering into the mid-teens. One of the most valuable aspects of this deal is that Oncologie has also entered into a master services agreement with Avid for future contract development and manufacturing activities in support of bavituximab and potentially other products.

I would now like to take some time to discuss the new ASC 606 revenue recognition standard and how it impacts Avid's business in reporting. While we are pleased to have achieved our revenue guidance for the year, the comparison of Q4 2018 versus Q4 2017 revenue highlights the very lumpy nature of the CDMO business.

On May 1, 2018, we adopted the new revenue recognition standard, commonly referred to as ASC 606. This new standard will have a significant impact on how we recognize and report revenue going forward, and we believe that it will lead to variability in quarter-to-quarter and year-to-year comparisons that we've seen in the past. By way of background, we have previously recognized all revenue on any particular project or specific project components at the single point in time when all deliverables were completed. As an example, revenue from our manufacturing run previously has been recognized when the drug substance has been shipped to the client and all other deliverables have been completed.

As of May 1, however, the new revenue recognition standard requires us to recognize revenue over a period of time for the majority of the services that we provide, including manufacturing services. Accordingly, during fiscal year 2019, revenue for a manufacturing run will now be recognized over the duration of the entire manufacturing process, which might be a 4-month period, and the amount of revenue that we'll recognize will be based on a percentage of completion of that manufacturing run at the end of each month.

We have adopted this new standard on a modified-retrospective basis. For fiscal 2019, our statement of operations will report revenue under the new standard based on a percentage of completion for the majority of our revenue. And for comparison purposes, we will separately disclose in the footnotes to our financial statements the amount of revenue that would have been recognized during the fiscal year if they had been reported under the previous point in time methodology. For future fiscal years, we will report only under the new ASC 606 standard.

As part of the implementation of the new standard, on May 1, 2018, we analyzed all partially completed revenue projects that were ongoing at the time and the amount of revenue we will recognize in fiscal 2019 will include only the amount of revenue associated with work not completed as of April 30, 2018.

As an example, if a $1 million manufacturing service was 80% complete as of April 30, then the amount of revenue we will recognize in fiscal 2019 under ASC 606 will be equal only to the value of the work yet to be completed, in other words, 20% of $1 million or $200,000. The amount of revenue and associated cost related to the 80% proportion of the services that had already been completed as of April 30 and allocated to the period prior to May 1 will be reported as a onetime adjustment to retained earnings in fiscal 2019.

As a result of the adoption of 2 ASC -- excuse me, as a result of the adoption of ASC 606, therefore, Avid's forecasted revenues for the fiscal year 2019 decreased by the amount of revenue associated with projects in process but not completed at April 30. We estimate this decrease to be between $9 million and $12 million. Revenues will also, of course, increase at year-end 2019 by the proportion of revenue for ongoing programs at that time that would not have been recorded under the prior accounting standards.

Additionally, the cumulative adjustment to retained earnings is in the range of $2 million to $4 million. While this change presents certain complications, over time, we believe the adoption of ASC 606 will smooth our financial reporting as it eliminates much of the lumpy reporting caused by the previous standard. As such, we believe that it will provide a better indicator of Avid Bioservices business in the future, and leading us in this transition will be one of Dan Hart's first priorities as Avid's new CFO.

This concludes my financial overview. I'll now turn the call over to Tracy Kinjerski, Vice President of Business Operations, to discuss Avid's strategy for growth. Tracy?

Thanks, Roger. Today, I will provide an update on our business and our recent business development activities, an overview of our current clients and project mix and review our planned approach to client and project portfolio management going forward. For the past 25 years, Avid has operated as an excess capacity manufacturer. As such, until January of this year, we worked with only a small number of clients concurrently with one another. In fact, in fiscal 2017, 98% of Avid's revenue was generated by only 3 customers. In contrast with recent changes in our business mission to a dedicated CDMO during fiscal 2018, our client mix altered rapidly with 6 customers generating 98% of Avid's revenue. We are very pleased with this diversification.

That said, we recognize this model clearly demands continued market focus and increased reach to support our goals of expanding capacity utilization, growth and customer diversification. To support this effort, I am pleased to announce that in recent weeks our business development team has been significantly strengthened by the addition of Sandra Carbonneau and Michael Faughnan. Their primary focus will be to cover the U.S. and Canada, with Sandy overseeing the Eastern regions of North America and Michael overseeing the Western regions.

Sandy's appointment, in particular, represents the first time that Avid has had dedicated coverage in the Eastern part of the U.S., which significantly enhances our market reach. In addition, Roger and I will support international opportunities. Both Sandy and Mike are industry veterans with very long direct biologic CDMO experience at companies such as Cytovance Biologics, Lonza and WuXi Biologics. Along with considerable knowledge of the biotherapeutics market and services, both Sandy and Mike bring with them a wide network of industry contacts. Combined with Roger and my network contacts and experience, I am confident that we've built an exceptional business development team.

All of us at Avid has been exceptionally pleased with the rapid establishment of a strong CDMO business operations function comprised of business development, marketing and project management. In a short period of time, this effort has generated very robust market interest from a wide range of potential customers. Through our many recent discussions with members of the financial community, it has become clear that the biologic CDMO market is difficult to accurately model and that more visibility is desired regarding our client onboarding process, and how a new client impacts our financial performance during the specified period of time.

Every client program we undertake is customized. There is simply no one-size-fits-all model that will deliver realistic and reliable forward-looking forecasts. Biologics contract manufacturing is a long slow burn business that cannot be accurately analyzed over short time cycles. Sales cycles are long and incredibly complex. Once the customer has been signed, it still takes time to transition projects to the higher revenue generating manufacturing phase regardless of whether we are developing a new process on behalf of an early-stage customer for transferring in an established client process to support validation in commercial manufacturing campaigns.

Not all early-stage programs and not all later stage or commercial programs are created equally, nor do they advance on a standard or typical time line.

By way of illustration, we currently have early-stage projects that may require a single GMP manufacturing batch at 200 liters scale to third phase 1 clinical requirement, while another project appearing similar on paper might require multiple batches at 1,000-liters scale for early phase clinical trial purposes.

Additionally, one process development program may require 6 months before progressing to clinical manufacturing and another may require 18 or 24 months. Equally, we have current clients requiring commercial manufacturing at differing volumetric scales ranging from 200 to 2,000 liters.

Product mix also significantly impacts our revenue opportunity. In addition to seeking later stage and typically larger-scale manufacturing opportunities to increase capacity utilization, it is imperative that we also continue to convert opportunities for process development and clinical stage manufacturing work. Not only are these earlier-stage projects immediately revenue generating and profitable but they will also deliver a strong and high probability of pipeline of future late stage and commercial manufacturing opportunities and assurance of capacity utilization.

The highly complex technical and regulatory attributes of our business render very sticky making it unusual for early-stage projects to transfer elsewhere as they progress to later-stage development and manufacturing, and less driven by unresolvable capacity limitations or by the previous manufacturer's inability to deliver commercial compliance of the type Avid has been providing for the past 15 years.

Our aim is to focus on resources -- our resources on identifying, contracting and maintaining a diverse mix of clients and project portfolios enabling us over the long term to fill current capacity and to preemptively predict the need for expansion of capacity to ensure we can meet client needs and for the retention of long-term clients.

In addition to new clients and projects, it is extremely important to understand that the expansion of existing client projects is a high probability and a very important component of our future growth. I am pleased to confirm that we are seeing excellent growth and potential from within our current customer base and the expansion of existing projects as they progress through development and also for new projects recently contracted. We are proud of the high percentage of our client base, which represents repeat business.

By way of examples, we have an existing client for whom we started work on a single product in 2017 and for whom we are now working on development of 3 different products with a fourth under discussion. Similarly, one of the new clients that was signed within the past 6 months, while still in process development, has already approached us about the potential for additional manufacturing batches beyond those initially scoped for that project.

Project expansion as well as onboarding of new projects will contribute considerably to future revenue growth.

In summary, we are very pleased with the progress we have made acquiring new clients and the advancement of activities with our existing clients.

That concludes my overview for today. I'll now turn the call back over to Roger.

Thank you, Tracy, for a great update on our business development activities and on our client mix. We will be looking forward to providing additional granularity during the remainder of the financial year.

Fiscal year 2018 was a restructuring year for the company and fiscal year 2019 represents a transition. Today, Avid's customer base and project mix are broader and more diverse than at any time in the past and it is our goal to continue to build new and existing client relationships with emerging biopharmaceutical companies and pharmaceutical multinationals alike, both domestically and in international markets.

With our newest clients now making a meaningful contribution to revenue, we believe we have already significantly mitigated the risk associated with reliance on too few clients, and we continue to expand our customer base to further reduce this risk and to build a position of greater strength to support a breakthrough year in fiscal 2020.

While immediate focus is on filling capacity and driving revenue growth from our current mammalian-drive drug substance service offering, the opportunity to expand Avid's offering without straying from core areas of experience and expertise or needing to significantly expand business development reach are considerable. In addition to organic growth of the current offering, examples of immediately adjacent potential future expansion opportunities include drug product manufacture in support of clinical stage clients, manufacture of proteins derived from microbial fermentation and expansion of our development services in areas such as cell line development, cell banking, formulation development, analytical services and so on. We will assess future growth opportunities in the coming months. Beyond these areas, we watch with interest the growth and demand for services related to viral and cellular manufacture associated with gene therapy and immuno-cellular therapies such as CAR-T products, while diversion rate present, all represent potential future opportunities for Avid Bioservices.

Finally, with the backdrop of the CDMO landscape and our escalating business development activities, we provide revenue guidance for the full fiscal year 2019 of $51 million to $55 million under the new ASC 606 revenue recognition standard based on our current backlog of $57.8 million and current assumptions. It should be remembered that between $9 million and $12 million of revenue that may have been recognized during the fiscal year under the previous ACS 605 revenue recognition standard is moved to retained earnings.

Given our financial expectations for fiscal 2019, along with the indications of interest we are receiving from multiple existing and potential new customers, we believe that we are well positioned for cash generation on our path to achieving breakeven. Despite our confidence, we are not currently in a position to assign exact timing to when we may achieve this goal. While the current backlog, potentially recognizable during this fiscal year, positions us extremely well and we believe that we will be successful in onboarding multiple additional new customers this year, as previously discussed early stage project time lines are variable.

Timing of conversion of backlog to revenue cannot be predictive to certainty and may be adjusted based on customer and regulatory or clinical variables that are out of Avid's control or based on scientific and technical progress on the project. We are basing guidance on our current business snapshot and on conservative assumptions. I believe that taking this approach to reporting at this juncture is in the best interest of Avid and that we will be able to provide considerably more granularity in guidance as the timing of breakeven as the year progresses and we will update accordingly.

This concludes my prepared remarks for today. And I will now open the call up for questions. Operator?

(Operator Instructions) And our first question is from Joe Pantginis from H.C. Wainwright.

Can you hear me okay?

Yes.

I'd like to focus on 2 things, Roger. First, internally with regard to expanding your customer base, can you discuss what types of companies you're getting interest from and as well are any of those companies x U.S.?

Yes. Well, I'm pleased to say we -- and I'll maybe allow Tracy to make a few comments as well. But I'll kick-off. We're getting interest from across the spectrum. We get interest from perhaps traditional, emerging entrepreneurial biotech companies, certainly plenty of it. But also we've entertained a good deal, a different of interest from pharmaceutical multinationals. The difference really between the two is the timing with which they move and their planning and the business-development cycles. We're able to typically convert the more fast-paced entrepreneurial opportunities more quickly whereas the pharmaceutical multinationals are very often planning years and ahead. And they also typically have a much more involved process, involving numerous audits, not just quality but the HNS. We host these on a regular basis and that's, I think, a good sign looking forward.

With respect to where they come from? We're still proactively looking primarily at, I wouldn't say the U.S., I should say North America, we have Canadian interest as well. And we are currently dealing with international inquiries somewhat more reactively based on resource availability. But we do currently have onboard. We have existing clients from both within U.S. and from Southeast Asia. So I expect that international interest to increase.

No, that's very helpful. And then, not to put you on spot, but I want to do focus on Avid eventually with the question. From a macro standpoint, the biologics arena has been really expanding from a macro standpoint. How are you seeing the overall CDMO market develop right now? And where do you see Avid fitting in based on your flexibility across the spectrum?

Yes, the overall market is very strong. I think we can agree. I mean just by way of some -- sort of, off the top of my head some examples. I think Zion Market Research assessed the value of the overall global biologics outsourcing market, I think, in excess of $8 billion back in 2016, and they were predicting growth to sort of $23 billion area in 2024. I think that's a growth rate of around 17% over that period. So -- and that's supported I think by similar data by -- from Frost & Sullivan and others. More specifically, of course, we specialize in mammalian manufacturing. We don't currently do microbial manufacturing. And certainly over 90% of all the biologics license applications filed with the FDA to-date, I think, have been from the type of technology that we offer to our client base. So I think overall, the market is very strong. It is competitive. We have -- huge barriers to entry, but we're seeing our competitors expand as markets grow. But I think we're very well situated. We have -- we're in the unusual position of being both sort of agile enough to take on the earlier phase work and to meet the needs of that entrepreneurial side of the market in the earlier phase clinical. But of course, we also have been releasing commercial product to the marketplace for 15 years now. And we have the truly state-of-the-art Myford facility with capacity available. So we feel very well about where we're positioned within the marketplace.

Our next question is from Paul Knight from Janney Montgomery.

Roger, could you talk about the 5 master service agreements won in the quarter? Phase II, I, III clinical, could you talk to that a bit possibly?

Yes, without trying to -- obviously, one of them is in the public domain, a company called Acumen Therapeutics. But the others are not public domain, so we're not able to, unfortunately, announce the name of the companies. These all -- I would say that company wise they all would count in this sort of entrepreneurial emerging biotech category. All well-funded companies but these are not pharmaceutical multinationals. The projects themselves, and I have got to go off the top of my head, well, certainly we have -- well, actually I should start by saying, of course, we do have a master service agreement with Oncologie, Inc. So that product we know very well, bavituximab is already been through Phase III trial. So from a development perspective -- CMC developing perspective, that's a late-phase project. The others are all, I think I'm right in saying moving into Phase I clinical development. So we would have a process development and tech transfer component and then we would produce the first in-human clinical materials for those clients.

And on your -- would you -- do you have a goal for the number of MSAs you want to strike in the current fiscal -- in the upcoming fiscal year we're now in?

Yes. No, I think that's not a meaningful way of looking at it, Paul, to be honest, because it, obviously, depends. All right? There could be an MSA with a relatively small amount of work associated with it. And an MSA with a huge amount of work associated with it. We're working hard to balance our resources so that we're efficiently able to onboard these projects, and part of that is the expansion of the process development capabilities. So that labs, people, equipment across-the-board. So we have to be somewhat cognizant of -- signing an MSA is one thing, but we still got to be able to do the work behind it to convert that backlog into revenue. So I don't think that's the appropriate way of thinking about it. But certainly, if we did the same again one more time, we'd be -- we'd have a huge amount of work on our hands, to give some perspective.

And lastly, could you talk about capacity. How much is built out now? How much is available? And then I'll step back on the queue.

Yes. Well, in terms of -- so to the first question, how much is built out? Of course, we have our legacy, what we call, the Franklin facility, which has been in place for some time now. And that remains busy with both some commercial manufacturing in support of the Halozyme program, which is in the public domain and also clinical manufacturing. The Myford facility is, we've built out basically 50% of the available footprint. That takes us to volumetric scales up to 3 by 2,000 bioreactors. But that build out also includes warehouses, quality labs, the vet infrastructure, if you like, the utilities necessary to support the entire footprint. So we have the opportunity to build out the remainder of that facility, which will be an additional 40,000-plus square feet relatively efficiently based on the design we already have there. And that would roughly triple the overall capacity of that facility. We'd be going from 1 manufacturing core to 3. And then in terms of capacity utilization, our idle capacity, as we've talked about previously, is what hurts not just us but anybody in our business. So we're effectively now through these -- onboarding of these new clients starting to chip away at that idle capacity. I don't know if I have a number for you in terms of percentages.

Our next question is from Steve Schwartz from First Analysis.

If we could start off just talking about the revenue guidance. I want to just make sure I understand from your prepared remarks the clarity on what you just reported for FY '18 versus the guidance? Because the midpoint of guidance is roughly flat, but first off, you've got -- you had $4 million from Oncologie that came through, right? Or $6 million rather?

$6 million, yes.

That came through. And you are only going to get $2 million in FY '19, right? So there's -- that's a $4 million headwind, so to speak...

Yes, to be clear, Steve, that's not revenue per se. Because it goes to discontinued operations.

It does. Okay. So that's not factored in. You did also note though that ASC 606 transition cost about $9 million to $12 million in revenue. Is that correct?

Yes, that's correct on the front-end. But of course, we can't be -- if you're like disingenuous about it, we will gain some back on the back end. But as of right now, we know roughly what obviously happened on April 30 and May 1. We don't yet know exactly what things will look like at the end of the year. So we have to be a bit cautious in forecasting that. So I'd say, for the guidance, we've taken pretty conservative assumptions under the, I guess, the under-promise and over-deliver type scenario. It seem to make sense to us.

But still all that considered, there's still -- there is -- even though the numbers of what you just reported versus what you're guiding to doesn't suggest revenue growth. There -- in a way, there really is revenue growth occurring in there, is that correct? Am I understanding that correctly?

Yes, I think that's a reasonable statement.

Okay. And then, of that growth, how much is coming from existing customers expanding their work with you versus the new customers, new projects? Well, new projects could be coming from existing, but I think maybe you understand the nature of my question.

Yes, and it's a great question. It's something hopefully that Tracy's remarks helped to sort of emphasize. We have to -- I think looking from outside, we tend to look, obviously, new customers as being important, and of course they are, and we'll continue to bring on new customers. Those projects start small and grow over 6, 12, 18, 24-month period. It's -- I don't know, actually, I don't know, honestly off the top of my head by percentage, but certainly the contribution of expansion of our existing clients is considerable. And I would suggest that, that will -- I got to be careful, I'll come back to it. But that will certainly be a larger number in terms of the growth contribution than the new customers for this fiscal year. And I should stress as well, this comes 2 ways. So existing customers, we have projects that truly expand, as in they are -- the scopes grow. And then also based on the way we previously contracted, we also have existing projects that are ongoing that we sign project authorizations as we go along for. They did not -- the entire value of those contracts didn't enter backlog. So some of the growth comes from -- basically if you like doing the work and progressing the projects. So the projects both grow and they progress.

Got it. Okay. Okay. And looking at your gross margin, if I just apply 17% GM to the fourth quarter, essentially what I see is about a $3 million or $3.1 million swing from what you reported versus what might have been under recently normal circumstances, of that $3 million, can you parse out the impact of the idle capacity versus the batch failure?

Yes, the idle capacity is the greater influence. Idle capacity in this business hurts everybody. So the batch failure, as they say, it was a component issue which we'd have a little control over. It's unfortunate. But no, the -- by far the larger contribution is the idle capacity.

Okay, okay. And am I right in thinking about that $3 million or $3.1 million, is that -- or am I completely crazy on that number? What are your thoughts?

Yes, I mean probably -- idle capacity probably contributed $2.8 million roughly to give you some -- there or thereabouts.

Yes, got you. Got you. And just generally speaking with respect to gross margin. In your prepared remarks you addressed the fact that it's very difficult to forecast out kind of what the development of project revenue is going to be. And I know gross margin goes with that. But what do you think the gross margin profile across this next year looks like? And at what level do you hit a steady state? And what might that gross margin level be, is it 20%, 25%?

Yes, I mean I'll just improving. We have a complex mix but I think margins tend -- will tend to be better on the process development in the earlier-phase business. This is just experience from many years in the industry. So there's a lot that goes into it. I think our mix business -- now the projects progress will have -- could have quite a significant impact this year. I think once we achieve a bit more steady state and critical mass, if you like, I think it will be easier to sort of predict the gross margins going forward years on out. But this transition year is going to be a tough one to predict in many ways.

Yes, understood. Understood. And then my last question. Just with respect to the backlog and that figure, you made a comment that it could take, in some cases, years for some of those projects in the backlog to develop revenue. But what are your rough guidelines for including something into that backlog tally? What's behind that number, if you could?

Yes. First, I'll just actually address the comment you made there. All of them -- well, some of them roll backlog over multiple years, all of them contribute immediately. So none of them are waiting till next year to start. Does it where they are all immediately revenue generating. We take basically pretty conservative view of backlog. We have -- backlog takes into account signed and committed contractual obligations on behalf of the customer. As I mentioned before, we previously sort of contracted somewhat differently and signed up for a large scope of work. But it would only actually get converted into backlog when we signed project authorizations almost a pay-as-you-go approach under Tracy. And with the experience that both she and I have had in previous lives and we changed our contractual terms quite significantly now, so we're getting much greater commitments from the client upfront. So we're able to -- at the time we sign a contract, a much greater proportion of that total value goes into backlog because it's committed. So we have, what I call, trailing backlog which follows on, which does not get rolled into our backlog. So that's a very solid conservative number.

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

Yes. Thank you, operator. So during fiscal 2018, we've initiated a transition to a pure-play biologics contract development and manufacturing organization. And today, Avid is, I believe, a recognized, established and well-respected CDMO. We've already significantly diversified and expanded our client base and we've brought in, what I believe is an impressive new Board of Directors and established a cohesive new leadership team with expertise spanning every area of the business from business development to process development and finance.

We are responding to and winning more request for proposal than any time in our history, and we are well on our way to filling our available capacity with the product mix that will consist of both shorter-term process development and clinical programs as well as with longer-term commercial programs. Our backlog is growing and we believe that we're on track to achieve breakeven and the delivery of positive EBIDTA. While fiscal 2018 was an impressive turnaround year for Avid, it was just our first year as a focused-CDMO business.

Looking ahead to fiscal 2019, we're excited about the market opportunity and the very significant prospects for growth and market leadership that lie ahead of us.

In closing, I would like to recognize the tremendous efforts, and I really do mean tremendous efforts of the staff at Avid Bioservices. The type of transition that we have affected is not easy. I remain incredibly impressed by the dedication and talent of the Avid team and their commitment to exemplary customer service and continued industry-leading compliance.

So I'd like to very specifically thank them for their continued support. They without doubt, remained the backbone of this business and our service offering.

So with that, I would like to conclude the call. So thank you, and have a great afternoon.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.