Tim Brons - Investor Relations Roger Lias - President and Chief Executive Officer Tracy Kinjerski - Vice President of Business Operations

Joe Pantginis - H.C. Wainwright Paul Knight - Janney Montgomery Steve Schwartz - First Analysis

Good day, ladies and gentlemen. And welcome to the Avid Bioservices' Fourth Quarter and Year End Fiscal 2018 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 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 you 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 new ASC 606 revenue recognition standard, Tracy will provide some detail regarding our new client on-boarding 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 am extremely pleased with the speed and efficiency with which we've 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 providing visibility for Avid Bioservices within our fast growing but competitive marketplace. I believe that the changes we’ve effected position us very well for strong growth and related efficient progression to catching 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 am 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 as CFO at [Eno Holdings], a family of companies focused on the residential real estate market and prior to that the Senior Vice President and CFO with management consultants, SM&A. I am exceptionally pleased that we’ve been able to attract a candidate with Dan’s experience and integrity to Avid Bioservices. Dan will formerly start his duties on August 1st and I look forward to introducing him more formerly 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 am 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 revenues. We’ve consistently projected revenues of between $50 million and $55 million for the fiscal year 2018, and we’re pleased to report that we’ve 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 two lead customers, which we anticipated and 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 on-boarded in revenue generation, and we are in active discussions with many additional potential customers. Importantly, we’re 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; the 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 as subject to technical progress; project timelines may also be impacted by clinical and regulatory factors outside of the control of Avid. As a result and in common with other biologic CDMOs, our manufacturing schedule has to remain flexible and has 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 component 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 fleet 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 acquired for the manufacturer of bavituximab. Even though fixed costs associated with highly regulated biologics manufacturing under current good manufacturing practices, margins will be impacted until capacity utilization is increased. To effect the required improvements, we continue an aggressive effort to both expand our customer base and to extent current client projects to increase our backlog and enhance capacity utilization. We’ll 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 had anticipated seeing improved future contribution from processed development services as we expand our capabilities in this area. Avid has formally 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 bio-processing field. In support of this is 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 biologics 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 non-recurring 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 the 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 stockholders of $1.6 million or $0.03 per share compared to 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 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 Incorporated 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 this year, the primary PS-targeting R&D assets were assigned to Oncologie Incorporated, 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 six 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 impact Avid's business and 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 standards, 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 decrease the 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 component at a 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 1st, 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 manufacturing run will now be recognized over the duration of the entire manufacturing process, which might be a four month period. And the amount of revenue that we recognize will be based on the 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 have 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 which were not completed as of April 30, 2018. As an example, if $1 million manufacturing service was 80% complete as of April 30th 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 costs related to the 80% proportion of the services that had already been completed as of April 30th and allocated to the period prior to May 1st will be reported as a one-time adjustment to retained earnings in fiscal 2019. 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 30th. 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 standard. 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 product 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 three customers. In contrast, with recent changes in our business mission to a dedicated CDMO, during fiscal 2018, our client mix altered rapidly with six 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 week, 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 region. 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 bio-therapeutics 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 have built an exceptional business development team. All of us at Avid have 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 biologics CDMO market is difficult to accurately model, and that more visibility is desired regarding our client on-boarding process and how a new client impacts our financial performance during a specified period of time. Every client program we undertake is customized. There is simply no one size fits all models that will deliver realistic and reliable forward-looking forecast. Biologic contract manufacturing is a long slow-earn business that cannot be accurately analyzed over short time cycles. Sale cycles are long and incredibly complex. Once the customer has been signed, it still takes time to transition project to the higher revenue generating manufacturing phase, regardless of whether we are developing a new process on behalf of an early stage customer or transferring in an established client process to support validation and commercial manufacturing campaigns. Not all early stage programs and not all later stage or commercial programs are created equally, nor do they advance from the standard or typical timeline. By way of illustration, we currently have early stage projects that may require single GMP manufacturing batch at 200 liters scale to serve this one 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 six 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 are profitable, but they will also deliver strong and high probability 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 early stage projects to transfer elsewhere as they progress to later stage development and manufacturing, unless driven by un-resolvable capacity limitation 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 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 the 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 development of three different products with the fourth under discussion. Similarly, one of the new clients that which signed within the past six 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 on-boarding of new projects will contribute considerably to future level 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 the transition. Today, Avid’s customer base and project mix are broader and more diverse that at any time in the past but 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 new 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 derived drug substance service offering, the opportunity to expand Avid's offering with upstream from core areas of experience and expertise leading 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 and support of clinical stage clients, manufacturer 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 in demand for services related to biosimilars manufacturer associated with gene therapy and immuno-cellular therapy such as CAR-T products. While diversion rates 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 ASC 605 revenue recognition standard, it moves 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 and on the path to achieving breakeven. Despite our confidence, we're not currently in a position to assign exact timing to when we may achieve this goal, or the current backlog potentially recognizable during this fiscal year positions us extremely well. And we believe that we will be successful in on-boarding multiple additional new customers this year as previously discussed early stage project timelines are variable. Timing of conversion of backlog to revenue cannot be predicted with certainty and maybe 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 and guidance at 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 to questions, operator?

[Operator Instructions] And our first question is Joe Pantginis from H.C. Wainwright. Your line is now open.

I'd like to focus on two 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 ex-U.S.?

I am pleased to say we -- and I'll 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 entertained a good deal of different 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 covert the more fast-paced entrepreneurial opportunities more quickly whereas the pharmaceutical multinationals are very often planning years in ahead. And they also typically have a much more involved process, involving numerous audits not just quality but the DH&S. 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, 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 enquiries somewhat more reactively based on resource availability. But we do currently have on-board, we have existing clients and both within U.S. and from Southeast Asia. So I expect that international interest to increase.

And then not to put you on the spot, but I want to do focus on Avid eventually with a 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?

The overall market is very strong. I think we can agree -- I mean just by way of some -- off of top of my head, some examples. I think, Zion Market Research has the value of the overall global biologics outsourcing market, I think in excess of $8 billion back in 2016, and they were predicting growth of $23 billion area in 2024. I think that’s a growth rate of around 17% over that period. And that’s supported I think by similar data 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 biologic license applications filed with the FDA, to-date I think has been from the types of technology that we offer to our client base. So I think, overall, the market is very strong. It is competitive with huge barriers to entry but we’re seeing our competitors expand as markets grow. But I think we’re very well situated. We’re in the unusual position of being both agile enough to take on the earlier phase work and to meet the needs of that entrepreneurial side of the market and the earlier phase clinical but of course we also being releasing commercial products to the marketplace for 15 years now. And we have truly state-of-the-art micro facility with capacity available. So we feel very well about where we’re positioned within the marketplace.

Thank you. Our next question is from Paul Knight from Janney Montgomery. Your line is now open.

Could you talk about the five master service agreements one in the quarter, Phase II/I preclinical, could you talk to that if you can 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 the company-wise, they all would count in this entrepreneurial emerging biotech category, all well-funded companies but these are not pharmaceutical multinationals. The projects themselves, and I've got to go off the top of my head, was certainly we have -- well, actually, I should start by saying of course we do have the master service agreement with Oncologie Incorporated. So that product we know very well, bavituximab was already being through Phase 3 trial. So from a development perspective, CMC development perspective, that's a late phase project. The others are all I think, I’m right in saying, moving into Phase 1 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 MSA if you want to strike in current fiscal -- in the upcoming fiscal year we’re now in?

I think that’s not a meaningful way of looking at it, Paul, to be honest, because it obviously depends, whether it could be an MSA with a relatively small work associated with it and an MSA where its 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, but that lapse 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 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 in the queue.

Well, in terms of -- so the first question how much is built out? Of course, we’ve 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 [indiscernible] 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 of up to 3 by 2,000 liter bioreactors, but that build out also includes warehouses, quality labs, the 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 one manufacturing core to three. 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, on-boarding of these new clients starting to chip away that idle capacity. I don’t know if I have a number for you in terms of percentages.

Thank you. Our next question is from Steve Schwartz from First Analysis. Your line is now open.

If we could start off just talking about the revenue guidance, I wanted 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 had $4 million from oncology that came through or $6 million rather…

$6 million, yes…

That came through and you are only going to get $2 million in FY’19. So there's -- that’s a $4 million headwind…

To be clear, Steve, that’s not revenue, per se.

It’s not revenue…

Because it goes to discontinued operations…

It does, okay. 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 and of course we can't be -- if you’d like disingenuous about it. We will gain some back on the backend. But as of right now, we know roughly what obviously happened on April 30th and May 1st, 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 that seem to make sense to us.

But still all that considered there’s still -- 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.

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 help to emphasize. We have to -- and I think looking from outside, we tend to look obviously as 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 six, 12, 18, 24 month period. So 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've 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 two 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 signed project authorizations as we go along for. They did not the entire value of those contract didn’t enter backlog, so some of the growth comes from basically, if you like, doing the work and progressing the projects. So those projects both grow and they progress.

And looking at your gross margin, if I just apply 17% GM to the fourth quarter, essentially what I see is about $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?

The idle capacity is the greater influence. Idle capacity in this business hurts everybody, so that the batch failure, as I say, it was a component issue which we really have little control over, it's unfortunate. But no, by far the larger contribution is the idle capacity.

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?

I mean, probably idle capacity has probably contributed $2.8 million…

$2.8 million…

Roughly to some there – thereabouts…

And just generally speaking with respect to gross margin and in your prepared remarks you addressed the fact that it's very difficult to forecast out what the development of projects 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 what level do you hit a steady state and what might that gross margin level be? Is it 20%, 25%?

I'll just say improving. We have a complex mix that I think margins will tend to be better on the process development than the earlier phase business. This is just experience from many years in the industry, so there is a lot that goes into it. I think that our mix of business and how 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'll be easier to predict gross margins going forward years on out. But this transition year is going to be a tough one to predict in many ways.

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 -- while some of roll backlog over multiple years, all of them contribute immediately. So none of them are waiting till next year to start, they're 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 contract these somewhat differently and we 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’d call, trailing backlog which follows on which does not get rolled into our backlog number. So that's a very solid conservative number.

Thank you. 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 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 bought, 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, process development and finance. We’re responding to and winning more request for proposal than at any time in our history, and we're well on our way to filling our available capacity with a 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 in the delivery of positive EBITDA. 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've effected 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 remain the backbone of this business and our service offerings. 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.