Tim Brons - IR, Vida Strategic Partner Steve King - President and CEO Paul Lytle - CFO Rob Garnick - Head of Regulatory Affairs Joe Shan - VP, Clinical and Regulatory Affairs Jeff Hutchins - VP, Preclinical Research

Joe Pantginis - Roth Capital Partners Kumar Raja - Noble Financial Thomas Yip - FBR George Zavoico - Jones Trading

Good day, ladies and gentlemen and welcome to the Peregrine Pharmaceuticals' Fourth Quarter Year End Fiscal Year 2016 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. [Operator Instructions] I would now like to hand the call over to Mr. Tim Brons of Peregrine's Investor Relations Group. Please go ahead, sir.

Thank you. Good afternoon and thank you for joining us. On today's call, we have Steve King, President and Chief Executive Officer; Paul Lytle, Chief Financial Officer; Rob Garnick, Head of Quality and Regulatory; Joe Shan, Vice President of Clinical and Regulatory Affairs; and Jeff Hutchins, Vice President of Preclinical Research. Today, our team will be providing an overview of the Company's operations and progress, spanning Avid Bioservices' contract manufacturing business, as well as our clinical, pre-clinical and corporate activities. 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 14, 2016 will contain 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 Steve King. [1:50]

Thanks, Tim, and thanks to all of you who have dialed in, and to all of you who are participating via webcast today. Today with the filing of the 10-K there's a good opportunity to take a look back over the past year. A year at Peregrine that was marked by surprising highs and unfortunate lows. Leading the highs was the continued remarkable growth for biomanufacturing business, Avid Bioservices, which is truly growing at a faster rate than even we expected. And of course, the low coming with the early discontinuation of our Phase III SUNRISE study based on passing the futility threshold at its first interim data analysis. That development was a particularly bitter pill to swallow for everyone that had put in such a phenomenal effort to advance the program up to that point. So, following the setback we took the opportunity to take full stock of the company including evaluating our key assets, identifying opportunities for development and strategic approaches for financing the company going forward with the same ultimate goal of helping patients with devastating diseases while growing shareholder value. Out of this careful analysis we have settled on a strategy to focus the company's resources primarily on continuing to grow our biomanufacturing business Avid Bioservices while continuing to advance R&D efforts through smaller clinical trials and the development of new technologies that can be partnered in an early stage. With the goal of becoming cash flow positive over the next couple of years, this strategy will allow us to increase shareholder value in several ways. First, grow the value of our base, namely our manufacturing business. Manufacturing companies are currently in high demand with values ranging from two to five time sales depending on the revenue growth potential. We believe Avid should be highly valued from a shareholder perspective based on the current consistent year-over-year growth almost the 40% compounded annual growth rate over the past five years with the remarkable 66% growth this past year, all coming from one facility. With the second facility now in full operation already booked into next year adding to the revenue growth potential for this fiscal year. With planning already underway for a third facility that will be commissioned and ready for production in the first half of next year setting the stage for nice potential growth going into the following fiscal year. Taken together these three facilities have the potential to generate in access of $110 million in revenue, with even more potential upside coming from the possibility of expanding our service offerings and of course the success of our commercial clients. So by focusing our resources on growing the Avid revenues, we simultaneously add shareholder value in two ways. We increase the value of the base business and increasing revenues decreases our need to raise funds through the equity markets. With the goal being to become cash flow positive potentially eliminating the need for future dilution. We are in a unique position as a contract development and manufacturing organization or CDMO because we have both drug development and manufacturing expertise. We already work with clients ranging from small startups to some of the biggest pharma companies. And we look forward to helping more clients to bring their important products to the patients that need them. Concurrent with growing our manufacturing business, we will also continue to leverage our PS Targeting platform in two ways. First the company will continue to extract clinical data from the SUNRISE Phase III trial. While trial enrollment was discontinued, the trial is still ongoing with some patients still receiving bavituximab maintenance therapy. In addition we have collected thousands of samples that are or will be analyzed in order to identify those patients that received benefit from including bavituximab into their treatment regimen. We expect this data will be instrumental in guiding the advancement of bavituximab in combination with immune stimulating therapies. In fact it is very prudent to understand as much as we can from the SUNRISE trial before pushing into future company sponsored studies whether alone or with our collaborators. Joe will discuss these efforts during his prepared remarks. In addition to bavituximab program which continues to have tremendous potential value, the company announced earlier today that it has licensed in a Novel PS Exosome Technology with the potential to detect and monitor cancer at an early stage through a simple blood test. I recognize that some of you might think this theme is contrary to controlling spending as we move toward profitability but in fact we believe that given our already existing knowledge base in Targeting PS and our already available infrastructure for developing and validating test that so a very modest capital investment we can quickly reach proof-of-concept with a goal of partnering this technology which could then bring in additional revenue. With another potential upside of the technology being that it can possibly be useful in the continued development of bavituximab. Jeff will talk more about this during his prepared remarks. Given the strategy of R&D targeted toward early partnering, will allow the company to continue its research and development activities with significant upside coming from partnering as we move to our profitability. With that I will turn the call over to Rob, our Head of Quality and Regulatory for a few thoughts on his perspective of the potential for growing our base CDMO business. Rob?

Thanks, Steve. I believe that Avid Bioservices is uniquely positioned in the CDMO industry and offers many clients a perfect opportunity to bring significant development expertise to bear on early development to the late stage biomanufacturing projects. In my experience many biotech companies suffer from the inability to find CDMOs who fully understand their needs are flexible, and can really deliver products in a timely and high quality manner. Avid is designed and it is now capable of delivering on all of this fronts. This also opens the possibility of bringing Avid's manufacturing expertise to bear on potential drug development partnering opportunities as they may arise. This concludes my remarks and I would now like to turn it over to Jeff Hutchins. Jeff?

Thanks, Rob. I'm very happy to be able to discuss a number of exciting developments in our preclinical group. First as Steve discussed, we have executed the licensing agreement with UT Southwestern Medical Center, our novel exosome technology. While many of you are familiar with exosome, I’ll provide a brief overview for those who are not. Exosomes are cell secreted vesicles or mini cells if you will that are present in nearly all bodily fluids including blood. Likewise tumor derived exosomes represent small pieces of tumor cells that are released into the blood as tumors grow. As well these tumor derived exosomes have Phosphatidylserine or PS on their surface as a marker and can also contain DNA, RNA and proteins as markers of malignant diseases. It is believed that even small tumors begin to release PS-positive exosomes and thus the ability to detect these exosomes in the blood may be an indicator of presence or progression of a tumor. The license technology is designed to detect and monitor PS-positive exosomes in a patient blood sample providing clinicians with detection and monitoring information regarding the presence and prevalence of cancer. These exosomes have PS flipped to the outside of the surface and demonstrate immunosuppressive activity just as we find with tumor cells. Preliminary studies have demonstrated that the levels of PS-positive exosomes present in the blood of cancer patients are higher than levels found in the blood of healthy volunteers. Furthermore study findings also suggest that there is a correlation between the level of PS-positive exosomes that are detected in the blood of cancer patients and the severity or extent of their disease burden. Given our in-house expertise in PS targeting, we believe that we are uniquely qualified to advance this technology. As Steve stated, there are significant opportunities to use this technology as both a complimentary tool in bavituximab's ongoing development which Joe will address later, as well as more broadly as the basis for a novel cancer detection and monitoring test kit that will be the focus of our partnering efforts. It is our goal to develop, optimize and validate a functional detection and monitoring assay capable of detecting PS-positive exosomes from a simple blood sample and given the company's extensive experience in developing assays of this type, we do not anticipate the need for added personnel or any specialized equipment for this project. Once we have successfully validated this assay, we plan to establish proof-of-concept through an efficient preclinical and clinical testing program. We have no intention of conducting further development work beyond the proof-of-concept stage, rather we expect to initiate partnering discussions for commercialization of this program in 2017. We're very excited to begin this work on this new program and we will have more details to offer in the coming months. I would now like to provide an update on Peregrine's preclinical IO focus collaboration with Memorial Sloan Kettering Cancer Center. Our goal of this collaboration is to evaluate combinations of bavituximab with other checkpoint inhibitors and immune stimulatory agents for the purpose of developing new and increasingly effective anticancer treatments. This program is advancing well and to-date we have seen initial signs of activity with new combinations with bavituximab and other treatment modalities such as checkpoint blockers, T-Cell agonists and radiation. Our plan is to spend this next year investigating these potential combinations and we understand that initial results from this collaboration will be presented at scientific conferences later in the year. This concludes my comments and I will turn the call over to Joe Shan, Vice President, Clinical and Regulatory Affairs who will further discuss our new exosome program, as well as the company's other clinical activities. Joe?

Thanks Jeff. I'd first like to comment on our new exosome program, one of the most exciting aspects of this technology is the potential synergy that it offers with our bavituximab clinical development program. Through our ongoing work with bavituximab, we have gained significant understanding of PS-mediated immunosuppression in cancer. The availability of the PS specific biomarker which can be implemented in our planned future bavituximab clinical trials aligns nicely with our refocused bavituximab development strategy aimed at generating the most meaningful data possible from small, early stage clinical trials to support partnering efforts. We are very anxious to bring this new technology to Peregrine and we look forward to the value it brings to our bavituximab program. Let me now provide a brief update on the Phase III SUNRISE trial. At present, we are continuing to conduct a thorough evaluation of the available clinical data and are testing the numerous biomarker samples collected in order to determine if certain subgroups or patients with other characteristics benefited more from bavituximab treatment. We believe such information could be critical in helping guide the bavituximab clinical program including our collaborations with NCCN, AstraZeneca and other clinical collaborators, meanwhile we continue to collect additional data even as the trial winds down over the coming months. It is important to remember that at the time of patient unblinding those who are still receiving steady treatment were given the option of completing the chemotherapy and those patients assigned to the bavituximab arm were given the option to continue receiving bavituximab if the investigator believed it is in the patients best interest because IO agents can illicit delayed responses and prolonged survival, we are continuing to follow these patients to evaluate the outcomes. Such information may inform future decisions for the company and it is our plan to present our findings from the SUNRISE trial when the evaluation is complete. Looking ahead our priority is to generate clinical evidence of bavituximab's ability to improve patient outcomes when combined with immune stimulating therapies. We believe our collaborations with the NCCN will play an important role in achieving this goal. The purpose of this collaboration is to expand the company's ongoing clinical research and development of bavituximab for the treatment of range of tumors. I'm pleased to report that the NCCN research collaboration is advancing according to plan and selected trials are expected to be initiated by the end of calendar 2016 or early 2017. That concludes my comments today. Let me turn the call now over to all Paul Lytle, Chief Financial Officer who will discuss the Company's financial performance, including additional details regarding our Avid Bioservices business. Paul?

Thanks Joe. We're pleased to report that our manufacturing operations continues to experience substantial revenue growth for the five year compounded annual growth rate of 39% and year-over-year growth of 66%. And it's also important to note that this revenue was entirely derived from our Franklin facility, which is our first manufacturing facility. Looking ahead we have positioned the company for continued revenue growth with a launch of our second manufacturing facility that was commissioned in March of 2016. With these two operational facilities we are projecting manufacturing revenue of $50 million to $55 million for fiscal year 2017. And this projection is supported by current revenue backlog of $68 million under committed contracts, covering services to be completed during this fiscal year 2017 and into fiscal year 2018. Now turning to the fourth quarter of fiscal year 2016, we generated contract manufacturing revenue of $18.8 million representing a 102% increase in revenue compared to the same prior year quarter. And for the fiscal year 2016, we generated manufacturing revenue of $44.4 million. Our corporate goal of reaching profitability in 24 months it is critical that we continue to grow our contract manufacturing business. For this reason and coupled with the high demand for manufacturing services, we are planning to construct a third manufacturing facility focused on product and clinical development. We believe the third manufacturing facility will again significantly increase our manufacturing capacity and all three facilities will have the potential to generate in total approximately $110 million in annual revenue. As we execute on our plans we execute a 25,000 square foot building in close proximity to our current campus and we expect a new clinical suite to be complete and ready for clinical manufacturing activities by mid 2017. Nor turning to expenses, cost of contract manufacturing increased during the current quarter and fiscal year in relation to the increase in revenue. In addition, we saw our R&D expenses for fiscal year 2016 increased to $59.5 million or 38% compared to fiscal year 2015. This expected increase was primarily due to increased manufacturing costs associated with preparing bavituximab for commercial production, combined with the increased cost associated with the Phase III SUNRISE trial and the two previously planned Phase III trials in breast and lung cancers. As we look ahead our R&D strategy has changed. We are focusing our internal drug development efforts on small, cost effective, early phase clinical trial designed to attract potential partners to further advance our products. We believe this strategy will not only help us achieve probability sooner, but it will also create significant potential upside for our shareholders. As we execute on the strategy our goal is to reduce spending by approximately 50% this year in R&D. With that being said it's important to highlight that we will continue to incur significant cost this fiscal year to wrap up the Phase III SUNRISE trial and to analyze the underlying data. This is an extremely important endeavor that potentially helps us drive both each of partnering interest and our future development plans. Now turning to G&A expenses, we saw a slight decline in G&A quarter-over-quarter while G&A remains relatively flat year-over-year decreasing 1%. In more detail analysis of our state of operations is included in our Form 10K that will be filed later today. This concludes my financial overview. And I will now turn the call back over to Steve for his closing comments. Steve?

Thanks Paul. It is our goal today to convey the progress that we're making in each area of our business. Our contract manufacturing business is thriving and growing and we are projecting record revenues between $50 million and $55 million for next year. We also plan to open a new clinical bio processing facility in 2017 that we expect will further extend our revenue potential for the Avid business. Our collaborations are advancing, setting the stage to generate considerable amounts of biomarker, translational and clinical data. The goal of these studies is to demonstrate the bavituximab mechanism of actions in combination treatment settings and attract partnering opportunities. And lastly we have in-licensed a new exosome technology for a minimal cost that leverages our existing in-house expertise and provides us with another opportunity for us to create values to product development. Together we believe the strategy will provide success as it will allow us to focus majority of our resources on achieving our primary corporate goal, future sustainable profitability within 24 months. At same time we will focus our R&D efforts on small early stage trials and development of the exosome technology in an effort to attract partners. We believe this strategy will allow us to build near term revenues through Avid, while maintaining the potential for significant additional value creation associated with our R&D efforts. This concludes our prepared remarks. And we would now like to open the line for questions. Operator?

[Operator Instructions] And our first question comes from the line of Joe Pantginis from Roth Capital Partners. Your line is now open.

Hi guys, good afternoon. Thanks for taking the questions. Like to start on the Exosome program if you don’t mind. First I guess a more general question is, can you go into little more of the utility and depth of the program with regard to how it might be differentiated from other cancer diagnostics. And then secondly a little more specific to Jeff’s comment. If I heard you correctly there are some exosomes that are PS expressing in normal individuals. So can you talk to work that might be needed to identify relevant threshold or has that been done already. Thanks.

Sure Joe. So really may be your second question first. We have looked at in normal individuals, it’s fairly of low incidence and certainly we know from our other R&D work that there is PS-positive exosomes in viral infections whether that has to be in acute infection that is blood borne is another issue. So, I think the answer to your question, we're looking at that possibility understanding that they are going to be interferences and false positive but I think what we’re really impressed around is really the false negative rate at this point. And so that’s where we want to make sure we don’t deliver the wrong message to the patient with an assay like this.

Yes, I think just to extend on that, so I think what made this attractive is of course that PS is the target for our lead clinical compound bavituximab, so we had really a large amount of knowledge in targeting this molecule and agents that bind to it and so it really fit into our wheel house. And obviously the fact that it goes after the same target as we're targeting with bavituximab gives it that potential of really adding to the clinical program as a potential sort of like a liquid biopsy that would allow you to test blood samples or potentially the presence of your target and then correlate that with patient outcome. And so, that's going to take some work to do in upcoming studies and we’re evaluating what we can do with samples that have already been collected but that makes it attractive in and of itself. I think just from standalone developments what drew us to this technology was just really how clean it has been and the ability to differentiate between healthy individuals and those with various stages of cancer. And as Jeff said, as that the - so far the false negative and positive rates have been pretty outstanding. So it’s work in progress, again fits right in with - we’re not having to hire additional people, we’re not having to bring in additional equipments, this really fits in with everything we are doing on both the studying PS, as well as on the assay development side of the business. And we think it’s actually going to be complementary. There are other technologies out there looking at exosomes, they are all taking a very different approach to what we’re doing and we actually think they could be very complementary to each other and so we also see a need even as interest in exosomes begins to pick up to actually utilize this in conjunction with other things that are in development.

No, thank you, that’s helpful. And if I could just switch quickly to Avid, with regard to your third facility, how will the size of this facility relate to the other ones and that are currently in place obviously and what kind of cost you’re looking at to bring it up to speed?

Yes, so it will be a smaller facility, it’s really geared towards clinical stage products. And so we don’t need as many, if you will, bells and whistles, that go along with it that helps save a lot of space. So the construction costs we expect to be much less than the - for instance the Myford facility which was the commercial facility we recently commissioned. And again I think the good news here is that we’ve already, already have a backlog of business to go into that facility. And it’s kind of really allow us we think to capture even more business over the coming months as we finish up the facility and can bring - then customers into what will be a - if you will kind of almost like a miniature version of our commercial facility we just commissioned so that they can come in, they can be in the same equipment and as they advance through clinical development toward commercialization we could then transition them over actually to one of our commercial facilities. And so it creates a lot of continuity for the customers coming in. And it’s really I think it’s already received a lot of interest. And so we’re excited about it getting it up and running.

Okay. And maybe one last quick question, if you don’t mind, just on SUNRISE maybe for Joe. Joe, obviously and you guys mentioned that patients are still able to receive bavituximab and I don’t want to belabor the study at this moment because you have to compile all this information. But since patients are still on drug, are you getting anecdotes from physicians that you are seeing some longer term survival based on the potential immunotherapy tail?

Yes, I think the data is continuing to come in and I think that’s a reasonable conclusion that there is obviously patients that are on therapy a long time. So I think - we might not focus on really trying to identify characteristics of those patients that are benefitting the most from bavi. And I think the biomarker analysis is really going to help provide a lot more clarity and information. So yes, I think we anticipate some results [indiscernible].

Sure. Thanks a lot guys.

And our next question comes from the line of Kumar Raja from Noble Financial. Your line is now open.

Hi, thanks for taking my questions. So I just wanted to ask about are there any differences in PS expression in various cancer especially the magnitude like are there some cancers that you have higher expression compared to others? And also this licensing what IP does this cover like is there already existing IP on this or you guys need to file patent from this technology?

Sure. Yes, I think it’s always been a bit of an open question what you asked. It's a good question because you can’t just take tumor out and sort of slice it and then a look at what’s inside the tumor because there’s PS inside of every cell. So it – since it gives you a lot of background when you try to do histological analysis and what have you. So I think that we are hopeful that we can actually utilizing this new test be able to monitor through blood samples actually how much overall PS positive micro particles and tumor cells are there throughout the patient. And that could really be a big benefit in understanding maybe which - correlating that with which patients do well and which patients don’t do well. So at this point I think it remains an open question but we think this could be actually very nice tool to use in conjunction with that. So, that's really one of our key goals is to be able now implement this in our own clinical studies and get firsthand knowledge of the overall magnitude of PS exposure and how that relates to actually not just bavituximab treatment but also other IL agents because one important thing to keep in mind is that PS positive micro particles are immunosuppressive. And so there actually could be a nice correlation between this particular blood marker and outcome on other treatments as well because they may really portend to a more immunosuppressive environment and those may be the patients that don’t do as well for instance. So we see a lot of utility for this and we think it’s just can really be used in conjunction with a lot of different types of tumors as well as different treatment modalities.

And filed IP is included in the [UT] [ph] license that we [recently] [ph] put together.

Okay. Just one more question like you guys touched upon the Memorial Sloan combination trials. So are there any specific combinations that you’re seeing increase [indiscernible] versus the others?

I think we’re seeing good activity in combination with the multiple different types of reagents. So obviously we are very interested in IL agents but it does extend beyond that as well to combinations with not just in PD-1 PD-L1s but also agonist, as well as the antagonist. In addition a lot of interest in combinations with things like radiation, radiation almost acts like an adjuvant and so that’s an attractive combination. So I mean, I think across the board they haven’t really zeroed in on one particular area that outshining the others at this point but I think as we go on and certainly the hope is we will see those combinations they are really just pop and give us the best result. Jeff, don’t know if you want to…?

Yes, I think just to extend that what we are seeing is that - early our contention was is that PS targeting agents really operate outside of these downstream kind of checkpoint inhibitors. And so I think the evidence that we’re seeing with such varied and breadth of combination responses reinforces that idea that we are really affecting an immune suppressive element and reversing that really helps out benefits these other type of approaches whether it’s T-Cell agonist or checkpoint inhibitor or antigen - presenting antigen with radiation therapy.

Okay, great. Thanks for taking my questions.

And our next question comes from the line of Thomas Yip from FBR. Your line is now open.

Hi, guys. Congratulations on a very impressive quarter from Avid and also on your newly acquired Exosome Technology as well. First, just wondering regarding your Exosome technology you’ve set a timeline from now to - within 18 months to January, the most amount of value from this program and I'm assuming that means the end game is to out-license a finished [indiscernible]. Can you just outline for us what are some key steps that you would make to achieve within 18 months to reach that goal?

Yes, I think short term goals - and actually we’ve been working on this - I mean one thing to keep in mind is we do have a research collaboration with UT Southwestern. So we didn’t just start looking at this technology this morning. We've been working on for quite some time. And again it was such a nice fit with what we do already because we already in-house have a lot of PS finding agents that we’ve evaluated. And so we already had a lot of the base raw materials to work with. So right now the primary goal is to really optimize the assay to achieve the best sensitivity that we can as we go into testing patient samples. So a lot of work on just designing the format of the assay. So again that we can have a lowest noise and really be able to detect levels of PS Exosomes in patients. The next step will be to really validate that through patient samples. The beauty of this is that while you do need IRB approval of course, you’re not running really clinical trials. So this can be done in conjunction with either our own ongoing trials, our partners’ trials or there’s many other sources of just receiving these types of blood samples. This gives us the ability to really quickly go through and test even hundreds or thousands of patient samples as part of the validation process. And then we really feel like at that point we can zero in on what are the potential applications of the technology of course, outside of what we might do with our own PS Targeting programs. But really we see potentially utility of this for patients and then really our goal is not to become a diagnostics company. But to put this in the hands of a good organization that's already established in the diagnostics area and then have them finish up to commercialization and expansion of the utility of the actual assay itself. And our benefit at that point would become hopefully some residual royalties, milestones and what have you, so that it actually again then feeds back into our revenue goals of becoming profitable. So we thought that as a very attractive technology that just fit right in with what we’re already doing and requires almost no additional resources whatsoever.

That sounds good and thanks for the details. So regarding the preliminary data that you already have for exosome, will there be a formal presentation sometime this year or when should we expect to see more pre-clinical data on this front?

Yes, I think our goal is probably toward the end of this year to be able to start be in a position to have data that we can present and again I see that was kind of larger format, so it will be in conjunction with other ongoing studies that maybe taking place already to be standalone just on the diagnostic itself. So yes, I think you will be hearing a lot about this since one of the reasons we wanted to get this news out there is because we think sooner than later we will be able to talk about this technology.

Okay. That sounds good. Final question regarding finance just want to confirm that we should expect R&D in fiscal year '17 to be lower by a little bit and if so does that account for the new facility manufacture - that the new facility ramp up?

Right now for R&D our goal is to basically take R&D spending from fiscal year '16 and reduce that by 50%. All the activities that are related to our manufacturing operations goes into cost of goods or G&A type expenses, but our goal really to take this new approach running smaller earlier stage proof-of-concept type trial to build value in the program and we think we can do that including -- and by reducing our R&D spending by 50% this year.

Yes and I think it's important that in that reduction, wrapping up SUNRISE still has been a significant portion of the R&D budget. So obviously as that wraps up and we close out the database and get final data from the study, then I think you would probably get a little bit more true view of what we expect the R&D spend to be. But as just Paul said, I think the goal here is really different types of studies. They can still answer very critical questions, run those in conjunction with our partners, generate data that will then bring on that marketing partner that can then really help bear the burden going through into finishing up and into commercialization. So, yes, I think as we wrap up SUNRISE you should see the R&D expenditures really significantly go down and then again we think it will be a little bit more of a steady state after that.

Okay. Thanks for the clarification and thanks for taking my questions. Looking forward to more details on Exosome.

And your next question comes from the line of George Zavoico from Jones Trading. Your line is now open.

Thank you, and hi everyone. Good quarter on the Avid that’s in terms of growth. So I want to start with that first. I noticed that you’re calling it CDMO rather than a CMO, which is distinctive, and I guess Rob certainly alluded to that and there is the previous experience, so do you see this as adding additional value to clients, is it add on that you would then put a premium -- additional premium cost to it rather than just providing API, how you’re going to leverage that CDMO?

Yes, I think CDMO is a relatively recent term that's been used by a number of organizations that offer more than manufacturing services I think that’s really what’s supposed to indicate. I think our case it is really quite broad because we do have drug development experience. We have the ability to do regulatory filings, regulatory document preparation. Really top to bottom we from the CMC side especially, we have the ability to basically almost be their entire manufacturing arm. And so I think that's really where the customers are seeing the value is that we are not just offering a service and they tell us whether to do it, but we actually add a lot of value along the way through our knowledge of what the regulatory body expect both in the U.S. and abroad. And again I think over the long run this is going to end up being opportunities for not just services but actually for partnering because this is a service and these are capabilities that almost no small companies have that we again have a lot of experience with. So actually there’s phenomenal opportunity to continue to expand the business well beyond just bulk drug substance into a lot of different areas of development. Rob, I don’t know if you want to add to that?

Good point Steve. We have a lot of expertise, for example, in our [indiscernible] which are very complicated and something that most small development companies who might enjoy such an opportunity would have very little experience with. And so by bringing and leveraging our analytical, our manufacturing, our regulatory capabilities, this is really kind of unique. And I think most companies would really like to take advantage of that because it allows them to re-prong their competition and bring their drugs to market much earlier. So again I really think we’re in a fantastic position with respect to that and as Steve said, some of these companies who are plush with money and yet don’t have this expertise might well want to consider partnering opportunities as a way of speeding up in financing the drugs development.

Yes and I think in conjunction with that and we see -- when we think about expanding our offering, its more than just new drug assessment facilities, but also could extend into small fill/finished to help out our particularly clinical stage customers with their needs. It could extend eventually even into things like antibody drug conjugates, which is again something we have a lot of in-house expertise working on. So I think there’s a lot of opportunity here where we see market need from our existing clients and they’re actually having trouble finding the services that they so desperately need. So, we see a lot of opportunity and it’s all based on demand from customers who [indiscernible] can you do this and I think that’s where the exciting part. We're not building things. We're helping people come to but they are really -- think that people are already asking us for.

So actually you alluded to my next question which was -- the only thing you didn’t provide yet will be is fill-and-finish. So are you making room in your third facility to perhaps provide that service?

Yes, we’re looking at that as part of the new facility, expect particularly for clinical stage products because we see it as such a big burden on the clients to -- they got to arrange runs with us and we’ve got to release this and they got to have a slot open if there is any sort of movement of the timelines, that’s a real hassle for them. So we think that will be a major drop for actually bringing in new business. And again our goal of the new facility is it’s almost like the funnel that leads into our commercial facilities, which is where we can make a lot of revenue progress and basically feed as many people in the clinical so we get those coming through that are successful in the commercial facilities and that really we think is the key to growing a long-term successful business. So yes, fill/finish is definitely high on the list and again this is just because our clients are just clamoring for something that would be much easier for them to manage.

But -- that’s right but also now you’re doing development consulting services basically and some of the expertise lies -- doesn’t really lie in Avid; it lies in Peregrine. So that means that Rob, Jeff, Joe will be going back and forth across the two divisions of the company as needed. Is that correct?

Absolutely, and in fact that’s already happening. It’s already -- we’re finding the -- we have so much expertise across the Board and again the customers have just really stacked in very positively to having that additional expertise available because again either they have it in-house and a lot of just don’t have that particular expertise in-house. So they have to go out and hire a consultant and it’s easier for them as they can work with a one-stop-shop that provides them with everything they need and then they have to limit the number of different groups they have to work with.

Sometimes it’s always better just to get another opinion on a question that needs answer in the manufacturing process.

Yes, that’s true. And I think the biggest thing is successful part there is really our knowledge of the regulatory bodies and what their expectations are because in particular that’s a huge benefit for the clients as they are making process changes or filings overseas. It’s really an area where we can help to model that.

Okay. Thanks for that. And then a couple of questions about Exosome, two questions, first can you say maybe you can’t, but what you are budgeting for that. And the second part of the question is that you're -- will this -- actually I have two questions. The second one is that you’ve already done imaging of PS for many years now with florescent or otherwise tagged bavituximab antibodies. And the first part of that question is, is there actually some technology antibody base? And the last question is that you’re entering rather our competitive and very interesting space for liquid biopsies, do you see this competing or being supplementary to measuring circulating T-cells or circulating tumor DNA?

Yes, we see this as being very complementary to other technologies that are being developed, that's one thing that made it very attractive. I think the ease of collecting samples would put it way ahead of an imaging agent, because those by their very nature you've got to put something in, take scans; it’s long days for the patients where this is a simple blood draw from a patient perspective and then the results come in. But I think the -- we see this as a very interesting space just because again we know that the PS exosomes are going to be immunosuppressive. And so just the ability to correlate this with overall immune status of patients there is a lot of utility of the technology we think that can be brought to bear, not just for bavituximab but for a lot of other IO type technologies, and so we think it could be very nice to pair that up with the other types of analysis that are being done with looking at putting T-cells or other emulator cells or even T-regs and how do they correlate with the simple test.

And then is it antibody based or comment about the budget if you can.

Yes I can’t really capture base.

Yes, we can't really -- I can't really say at this point, because we want to make sure we get perfect amount of protection around it, but as you know we have all kinds of agents to bind the P.S. We’ve got beta bodies. We’ve got antibodies. We’ve got all kind of things to bind the P.S. So that was the beauty of this technology is we really understand it really well, because you've already studied it, we've already made all the reagents. And so I think we're in a great position to really quickly move this forward to proof of concept.

Okay. Terrific. Thank you very much.

And we have a follow-up from Joe Pantginis from Roth Capital Partners. Your line is now open.

Thanks for taking the follow-up. Since just the focus on Avid for a second, since that's the refocus of the company for the moment, maybe a question for Paul, with regard to COGS. Is this something that you think you can improve upon or is the standard operating types of cost of goods because of the individual runs because of your clients or how should we view it as your facilities expand?

Yes, just to put a little history here, our cost of goods last fiscal year was about 42%. This past fiscal year we improved that to 48% and it really depends on the mix of services and the mix of activities that are currently ongoing. I can’t say that our new micro facility does have a slightly higher cost of goods because we've got an asset there that needs to be depreciated every month. So that contributes to the cost of goods of that facility or as our pre-existing Franklin facility has been fully depreciated for some time. So I can’t say that. Our goal is to -- overall is to maximize basically our gross margins from this business. And we're really geared towards doing that. But other than that we really can't predict what the COGS are, because really based on the mix of services their within that facility.

No absolutely, no that's very helpful Paul. Thanks a lot and thanks for taking the follow-up.

And I'm not showing any further questions. I would now like to turn the call back to Mr. Steve King for any closing remarks.

Okay. I’d like to thank you all once again for participating in today's phone call. As always I want to thank our stockholders for their continued support and I would like to especially thank our patients, their families and their investigators that are precipitating in bavituximab clinical trials. With that, we will now conclude the call. Thank you.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes today’s program. You may all disconnect. Everyone have a wonderful day.[Audit End]