Vyant Bio, Inc. (VYNT) Q3 2016 Earnings Call Transcript
Published at 2016-11-10 13:52:05
Edward Sitar - Chief Financial Officer and Treasurer Panna Sharma - President and Chief Executive Officer Jay Roberts - Chief Operating Officer & Executive Vice President of Finance
Ben Haynor - Feltl and Company Ram Selvaraju - Rodman & Renshaw Thomas Pfister - RedChip Company Sherry Grisewood - Dawson James Securities Mitch Fitter - Aegis Capital Corp.
Good day and welcome to the Cancer Genetics Incorporated Third Quarter 2016 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Edward J. Sitar, Chief Financial Officer. Please go ahead sir.
Thank you, operator and thank you for joining us this morning for Cancer Genetics’ third quarter 2016 earnings conference call. On the call today are company President and Chief Executive Officer, Panna Sharma; Chief Operating Officer, Jay Roberts and myself, Chief Financial Officer, Ed Sitar. The company issued a news release along with the presentation of slides this morning highlighting the company's financial results and progress on operations, which is available under the Investor Relations' section of the company’s website. Following the Safe Harbor statement, Panna will provide an overview of the third quarter, including recent events and company activity. I will then provide a summary and highlights for the third quarter financial results, and then Jay Roberts and Panna Sharma will provide updates on our operations, business activities and portfolio. We will then open up the call up to questions from analysts and investors. We’d like to remind everyone that various remarks about future expectations, plans, and prospects constitute forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Cancer Genetics cautions that these forward-looking statements are subject to risks and uncertainties that may cause our actual results to differ materially from those indicated, including risks described in the company’s filings with the SEC. Any forward-looking statements made on this conference call speak only as of today’s date, Thursday, November 10, 2016, and Cancer Genetics does not intend to update any of these forward-looking statements to reflect events or circumstances that occur after today’s date. This conference call is also being recorded for audio rebroadcast on Cancer Genetics’ website in the Investor Relations section at www.cancergenetics.com. All participants on this call will be in a listen-only mode. The call will be followed by a question-and-answer session. With that, I’d like to turn the call over to President and CEO, Panna Sharma for his opening comments.
Ed, thank you for the introduction. And thank you to all of those who are listening into the call this morning and to those of you who are listening through the internet. Cancer Genetics is at the forefront of delivering molecular information that is leaded to make precision oncology a reality for both therapeutic companies as well as for clinicians and their patients. The third quarter for CGI was another very strong quarter, one in which we made good progress with our Biopharma customers and with our clinical customers. Our revenues for the quarter were $6.1 million, a 68% increase over the prior year and our revenues now for the first nine months of this year 2016 have been about $19.9 million, which is a 58% increase over the first nine months of 2015 and already more revenue than we did for the full year of last year. We’ve accomplished this growth in an environment in which we have been able to continually lower our operating expenses, continue double-digit organic growth, most recent quarter was at 19% and show a significant advancement in our portfolio and partnerships, most recently with the accelerated development of multi-gene liquid biopsy panels for renal and lung cancer. For those of you that are near to CGI and would like some additional background, the focus of our company, let me tell you we are an emerging leader in precision medicine for oncology. We provide critical genomic and biomarker information for the personalization of cancer treatment. We help to diagnose, manage patient treatment plans and help select among therapy choices. Today, CGI is supporting the work for over a 100 clinical trials and studies for leading pharmaceutical and biotech companies, and we have delivered personalized genomic and biomarker data that is influencing and informing treatment decisions on over 7,334 tests just in this past third quarter. Our proprietary and disease focused genomic panels support the work at many clinical centers, hospitals as well as the precision medicine initiatives of biotech and pharmaceutical companies around the globe. We have a unique and unparallel global infrastructure for the development and delivery of oncology diagnostics from bench-to-bedside through our state-of-the-art facilities here in the US as well as in India and China. We currently have research collaborations with over 18 leading academic and research centers including Mayo Clinic, Memorial Sloan-Kettering, The National Cancer Institute, Columbia University, Moffitt Cancer Center, the Keck School of Medicine at USC, we were sitting across from this morning, and the Huntsman Institute at the University of Utah to name just a few. These collaborations are critical since they allow us to leverage the vast and rapid innovations going on in oncology today. Biomarkers and genomics content as well as the immune marketers are more important and help us translate and rapidly validate the insights we’re generating with actual real patient data in the powerful new tests and services. This unique access and ability to leverage translational oncology programs, generates a significant long-term differentiator for our shareholders and also for our business partners. Our vision is to be the oncology diagnostics and precision oncology partner from bench-to-bedside by combining innovation and execution. This is especially critical today in our industry as the fundamental business of laboratory based genomics and molecular diagnostics is rapidly changing. We feel that our proprietary technology, the scope of our business model and the developments of our deep knowledge basis in specific cancers will make us an enduring and clear leader in this fragmented industry as it continues to have a wider and deeper impact on both patient care and therapy development. As part of our vision to be the oncology diagnostics partner from bench-to-bedside, we continue to look for breakthrough test and technologies that we can bring into our business platform and leverage our reach into the pharma and clinical marketplace. We believe that there is significant more content out there that can take advantage of our global lab infrastructure today. Driving our growth this quarter was a strong increase from both sides of our business, revenue from Biopharma contracts that we’ve been closing over the last few years, where we provide critical information for molecular profile on the patients before, during and often times after the trial and revenue from our clinical services, where we provide clinicians and hospitals crucial data to determine the diagnosis, therapy selection and management plans for cancer patients. Revenue from biopharma services was $3.8 million and revenue from clinical services was $2.7 million and discovery services added another 300,000. We’re now providing crucial data in testing results to support over 27 immuno-oncology trials in the studies. This is up sharply from the 20 that we’ve talked about during our last call and 3 that we had started at the beginning of the year. The traction our business is receiving in the marketplace is also driven by our clinical services, which contributed $2.7 million in revenue and that’s a 200% increase over the same quarter last year, and a 6% increase over the prior second quarter. During our last call, we’ve reported CGI has delivered genomics and biomarker information for over 7,100 clinical tests. That number during Q3 was up to now over 7,334 clinical tests. To give you some rough dimension of where those tests are coming from, roughly a third of our clinical test volumes were used to support decision making and patient therapy selection for lung cancer. these are largely delivered from our West Coast Center of Excellence in Solid Tumor and roughly another third were delivered from our East Coast Center of Excellence for Hematologic or blood cancers that mostly work for leukemias, lymphomas, and multiple myelomas we’ve done. Today, again CGI is supporting work for over 100 clinical trials slightly less than 20% of those are on Phase 3 studies and these were the top biotech and pharma companies. 30 of these trials roughly today are in immuno-oncology studies and we expect these immuno-oncology studies to continue growing over the next several quarters as they’ve improved patients, study combinations, trials and also extend to other related cancer categories. Our work of biotech and pharma is also continuing into new and exciting areas such as studies that are looking to extend the proven therapeutics into new areas or new cancer indications, and also to rescue or recover compounds using potential genomic and biomarker signatures. This is a very important category and it's one that we expect, we will continue to have significant impact on our revenue over the next year. Beyond the growth of our business and leveraging our technology into new areas, we are very focused on continuing to streamline our business and driving towards a clear path to profitability at CGI. We expect that over the next few quarters, we will reach this critical mark. Jay and Ed will walk you through the numbers and operational improvements that we have taken to ensure that we get there as a company. Providing the most comprehensive capabilities in the development of precision oncology is what CGI is uniquely and ideally positioned for. It is what we are executing on today. It's what’s driving our growth, margin expansion and more importantly it's what we are focused on to stay relevant in the fast moving industry. I am particularly excited that we have multiple growth drivers in front of us that we’ve taken steps to optimize our company and achieve a clear path toward profitability, where we have significant quarter-over-quarter reduction in operating expenses while improving top-line performance. With that I’ll ask Ed, our CFO to review the financial performance and then Jay Roberts to provide critical operational updates. Ed?
Thank you, Panna. Before I start, I want to remind everybody more information is available on our Investor Relations website including our September 30, 2016 Form 10-Q and a slide presentation on the quarterly results. Revenues were $6.8 million; a 68% increase over the third quarter of 2015. 19% of our year-over-year growth was organic, driven primarily by our biopharma business. Revenue from biopharma services totaled $3.8 million and increased 46% year-over-year. As we’ve discussed previously, we are seeing a strong increase in biopharma activity, especially in the immuno-oncology area and from historically contracted revenue turning into recorded revenue for a number of larger clinical trials. Revenue from clinical services totaled $2.7 million in the third quarter, an increase of 134% over the third quarter of 2015. In the third quarter of 2016, we had the activities of our Solid Tumor Center of Excellence CGI West for the full quarter, which is the primary driver for the increase. Discovery services generated $258,000 revenue, compared to $243,000 in revenue in the second quarter of 2016. Our discovery operations are now heavily concentrated in the NGS profiling and bioinformatics, and we expect growth in this category to return in a near-term. Gross margins were 34% or $2.3 million as compared to 22% or $900,000 in the third quarter of 2015, an increase of 12 percentage points. The increase in gross margin percentage is attributable to our cost reduction efforts, and better utilization of infrastructure and equipments and reductions in headcount. Total expenses including COGs were $10.8 million in the third quarter, compared to $11 million in the second quarter of 2016, a reduction of 1.8%. Sequential expenses were down $300,000 due to our cost reduction initiatives, which will continue in the future quarters. Including the operating expenses or non-cash items are about $1.1 million including stock-based compensation of $500,000, and depreciation and amortization of about $600,000. Cost of revenue has increased from Q2 to Q3 of this year largely due to supply to support the increased item going from $4.3 million during Q2 to $4.4 million in Q3. This increase includes the cost of revenues from the acquired businesses of CGI West and is offset by cost reductions across our facilities primarily in compensation. Research and development expenses in the third quarter were $1.6 million, a decrease of $200,000 compared to the same quarter last year and lowered by 5% as compared to Q2 of 2016. General and administrative expenses were flat when compared to Q2 of 2016 and increased 200,000 from the same period of last year. Sales and marketing expenses in the third quarter of 2016, decreased by 15% or 189,000 to $1.1 million, compared to Q2, sales and marketing expense decreased 23%. In our recent calls, we’ve emphasized the amount of work that we have done to rationalize our clinical sales efforts, we’ve made great progress in this area and continued to evaluate clinical sales and investments in a prudent manner. Our shares outstanding at September 30, 2016 were 18,870,000; we raised an additional $5.5 million in equity on September 14, which added additional 2,750,000 million shares to our outstanding total. Our basic and diluted shares for Q3 EPS calculations were 16,519,000. Our loss in the second quarter was $3.7 million or $0.23 per diluted share compared to a loss of $0.54 per diluted share in the corresponding period of 2015; and down from $4 million or $0.28 per diluted share during the second quarter of this year. Turning to the nine months ended September 30, 2016, revenues were $19.8 million, a 58% increase over the corresponding period of 2015. Biopharma services were $11.4 million, clinical revenues were $7.7 million and discovery services were $750,000. Total operating expenses were $33 million in the nine months ended September 2016, compared to $26.8 million in the same period last year. Our loss for the nine months ended September 30, 2016 was $13 million, or $0.88 per diluted share compared to a loss of $1.49 per diluted share in the corresponding period in 2015. We had total cash at September 30, 2016 of $10.7 million. In our last call, we spoke about a number of initiatives underway to bring use of cash from accounts receivable growth down to lower levels. I’m happy to report that we’ve made significant progress in this area, and all the claims that were delayed due to system integrations from our West Cast lab have been input and billed. These efforts are improving our cash collections. in the month of October, we collected almost three times the amount we collected for clinical claims in September. This trend is continuing in November is off to a good start. We have work to the biopharma partners and have speeded up collection in that area and we saw a significant evidence of this in October. For additional information, please refer to our SEC filings including our Form 10-Q for the quarter ended, September 30, 2016. Now, Jay Roberts will provide some operational updates. Jay?
Thank you Ed, thank you Panna. We are making continued progress with operational improvements as evidenced by the ongoing reduction in our overall operating costs, and by our continual improvements in operating expenses since the acquisition of our West Coast operations. Our operating expenses for the third quarter was sequentially lower than the second quarter and also lower than the first quarter and significantly lower than the fourth quarter of 2015, when we closed the acquisition of our Solid Tumor Center of Excellence, formally response. Our total operating expenses have gone down from $7.2 million in Q1 to $6.3 million during the current third quarter. To put that in perspective, our total operating expenses today are lower than they were prior to the acquisition and integration of response. We focused heavily in the third quarter on large scale initiative to improve our cost structure, modify the terms and service levels from supplies, reagents and service providers. As a result, we have been able to secure between 5% and as much as a 20% reduction from key suppliers, improved payment terms in certain cases and have begun to consolidate our resources at the enterprise level to obtain volume discounts thereby improving our purchasing power. As Ed previously stated, we have been focusing heavily on our billing and collection function to improve the velocity of cash from both our clinical and bio-pharma customers. Within our clinical services business, our overall cash collections in Q3 increased by 76% quarter-over-quarter by over a 112% as compared to Q1 2016 and as that is continuing to accelerate in the current quarter. Our collections for the one-month period ended October 31, 2016 is already at 55% of the amounts we’ve collected during all of Q3. And we expect this collection trend to continue through the remainder of Q4 2016. We are working diligently to use our clinical billing platform to automate key functions within our revenue cycle including a focus on increasing our throughput of claims per FTE and also improving our denial management functions through system automation and staff training. We have also focused to key success metric and the velocity of cash collections as a percentage of our net revenues. Our Hyderabad India operation continues to mature with both NGS and bioinformatics, and are now approximately 75,000 per quarter away from being breakeven and providing us with a positive cash contribution. Additionally, our cost associated with transitioning certain G&A resources such as finance, analytics, billing to our India facility will help to continue decreasing our operating costs and improve both our turnaround times and ability to be a 24-hour responsive business. So, as we take actions to leverage our India operation to increase certain activities at our financial, billing collections and IT functions, we will allow us to gain improved efficiencies and lower our cost structures. We anticipate adding dedicated personal in Hyderabad to augment our U.S.-based operations, which we believe will allow us to continue to lower our G&A spend overall and help us maintain more margin as we grow our top-line. These changes are being implemented now and we anticipate the impact of these actions will yield positive results by Q1 2017. These actions will culminate the strategy for creating a shared services center in Hyderabad to allow for a 24-hour responsive organization to include billing, analytics, finance support and additional bioinformatics capabilities to support our biopharma and clinical work. As we described in our Q2 conference call, we will work on being a more nimble, more responsive and more digitally-enabled company. Our clients and customers are increasingly demanding that will respond faster, and that response will enable faster and more differentiated growth, so that we can adapt to changes and technology, market demand and clinical emerging trends such as data sharing for outcomes and on-demand NGS analysis and reporting. These critical capabilities will require a disciplined focus on selection and integration while maintaining our cost structure to get to breakeven and profitability as quickly as possible. Our goal is not only to march towards breakeven, but also to do so in a manner where we can provide shareholders with significant benefits of contribution margin and net income at those levels. In the next few quarters, you can expect our contribution margins for our business units to climb as a result of optimizing our staff initiatives in obtaining better financial terms from our suppliers as previously mentioned. And our cash collections from third-party payer in the clinical services business will continue to improve as well as our G&A cost as a percentage of revenue will go down, both resulting from further automation of our systems and leveraging our India operations. With that, Panna will now talk about a lot of our strategic initiatives and update on our portfolio and partnerships. Panna?
Thank you, Jay. And thank you Ed for the overview on the financials. Deciding among cancer subtypes helping determine the potential outcome for the patient, gaining insight about metastatic potential of the cancer, deciding among immuno-oncology regimens, personalizing treatment plans are all central to the CGI value proposition. It’s what we do and deliver each day. our business model is one that is routed in an innovation, but focused on execution. At AMP this week, which is in North Carolina, the Association for Molecular Pathology will be presenting three-key presentation in the areas of lymphoma, renal cancer and early cancer development. We expect this work to help differentiate our technology and our value to customers and partners in the oncology ecosystem and continue to help us drive high double-digit year-over-year growth. Today, we are extremely undervalued, but are determined to continue building significant enduring value to our company for the alternate benefit not only just the cancer community, but also for our shareholders. In terms of our portfolio, we plan to say several new launches this quarter; we’ll be launching a unique panel for immuno-oncology that will allow us for a significant T-cell and other immune marker profiling. We’ve just launched our renal panel, which is a unique panel that cannot only get information on the subtype of kidney cancer, but also information on its potential to go metastatic and help select among therapy choices. We also will be launching our Hereditary Cancer Program, which we think will provide a significant clinical revenue growth opportunity. But also, hereditary cancer profiling is now becoming more common place in certain clinical trials with both derm-line and somatic information is needed to manage the patient. And finally, our M3P which is today our Multiple Myeloma Mutation Profiler, co-developed with Mayo Clinic is now in several clinical trials with biotech and pharma companies, and that also is a very unique panel that provides not only comprehensive mutational information, but also copy number information, translocation information and we expect that to become the goal standard we will have multiple myeloma patients are initially diagnosed and then profiled overtime to help manage the disease. We think we’re building significant value both in our portfolio and in how our business model is reaching out into the oncology ecosystem. And we think today with ongoing efforts for cost containment and improving our operating expense profile that we are in a clear and prudent path to profitability. With that, I’d like to open up the line for any questions.
Thank you. [Operator Instructions] We will first go to Ben Haynor from Feltl and Company.
Good morning, gentlemen. Thanks for taking the questions.
Good morning, Ben. How are you?
A little early in the West Coast that we’re doing well.
That’s good. You have mentioned that about 20% of the studies that you’re involved in are Phase 3 studies, what…
I think it’s just a little under 20% and that began despite counting up by revenue volume, I believe the number we’ll look at it at the end of Q3 was about 16%, 17% I believe.
Yes. Something like that. Yes.
Okay. And then what proportion of those would you expect to result in CGI potentially providing a companion diagnostic once the drug certainly approved?
The Phase 3 works that we’re doing today are more for complementary diagnostics than companion, but both are important, because they can drive outsides margin going forward. We are doing a lot of companion diagnostics for immuno-oncology agents, but those are markers such as PDL-1 or PD-1, where those are not proprietary to CGI and we’re doing, I would say a good handful of those, but we are doing about two today that our panels are being used, and they could be potentially used as a CDx or as a complementary diagnostic.
So, much of the planning for CDx we begin, we believe earlier in Phase 2.
Okay. That’s very helpful. And then I’m sorry if I missed this, but did you give the biopharma backlog number?
It’s about $49 million, it’s not backlog, it’s really revenue contracts, where we expect future revenue from, not really backlog.
Okay. And I guess I already broke the rules, but I’ll play by the rules now and get back in the queue.
Ram Selvaraju from Rodman & Renshaw has our next question.
Hi, guys. Thanks very much for taking my questions and congratulations on the progress you’ve made so far. I just have a couple of things…
…very quickly. With respect to the biopharma backlog revenue of $49 million, can you give us a sense of what timeframe you expect that revenue to accrue to CGI please?
Sure. So, again, that number is really contracted biotech and pharma, where we have expectations of future revenue. these are signed contracts that are going to contribute revenue as they go from what we called bookings to billings that timeframe on average across the portfolio is about two and a half years. There are some that are some of these projects are probably a few months, and some of these projects are Phase 3 trials that will take several years to unfold. So, I expect on average as we grow that number, and we get more and more Phase 3 or more successful Phase 2, go to Phase 3, that number will index from about 2.5, where it is today to potentially two and three quarters. But what is also offsetting that, and we’re seeing a lot of this today is that there are more and more pharma is doing earlier validation work and looking at retrospect studies, where they already have banked samples from existing trials either trying to fare it out new signatures or look at potential new extensions for powerful drugs as I mentioned earlier. So, drug repurposing of existing compounds, looking for new signatures, looking for new cancer indication, we’re seeing a flurry of activity there. So, I think on average, we expect that contracted revenue number to be realized kind of over a two and a half year period on average, but again, some projects are we can do in one quarter and some projects fold out as long-term trials, which would be one and a half years to two and a half years.
Okay. That’s very helpful. And just a very quick follow up to that. Do you expect that going forward, you will have more collaborations in place on the pharma side that are like the collaboration you have with the A5 division, where you really then go to one-stop shop for the development of personalized medicine and tools for their future therapeutics development on oncology?
That’s a great question, Ram. I think, given the range of our portfolio, we actually have several relationships similar to our relationship with the H3 Bio, which is one of the innovation engines for Eisai, and they have won the first ever genes placing therapies for myeloid cancers, MDS versus AMLs, and we are doing a lot of both development as well as clinical trial work. I would say we’re not the only one or two, I mean I think pharmas are like, characterizing it like that. But given the scope and reach of our both our labs and our portfolio, we are very, very compelling attractive value proposition. And we have several relationships like that today that are growing and we expect several more over the next few months. So, I think that’s one of the more enduring business characteristics of CGI.
[Operator Instructions] And again, we do ask that you limit yourself to one question. We will now go to Thomas Pfister from RedChip Company.
Hi guys. How is everyone doing today?
I’m doing great. Again, congratulations on the continued progress with the business this quarter. So, just a question I wanted to touch on here is really just some of your progress with the biopsies, just looking at some of the stats you’ve given, it looks like you’re alarming a renal test with the very highest specitivity rates. So, I was just hoping maybe in general, can you discuss what kind of questions are you looking to answer if you look at biopsies and kind of how does this fit into a whole testing paradigm along with tissue biopsies?
It's a great question, Tom. I’m going to probably - we did talk a little bit in our last earnings call about our launch into this area. So, we first take this as one of our pillars of growth in innovation, so I’m going to talk a little about the liquid biopsy space, what our strategy is, and then about each of the assay that we’re currently working on. So, liquid biopsy is a very attractive market from a patient’s value perspective, from an economic perspective and obviously, the promise it holds for helping transform the paradigm of care. Liquid biopsy, we are really trying to look at multiple things in the blood, not just DNA or RNA, but also looking at intact cells such as certainly in tumor cells, macro patients, T-cells, natural pillar cells all of which has an impact on how you are responding to a drug or how the cancer is progressing and also a very exciting area of exosome capture and exosome analysis. So perhaps, liquid biopsy isn’t just capturing cell-free DNA or RNA, but also being able to in a very high performance way capturing profile, many of the other cell types that I talked about as well as exosomes. So we are really focused on really being able to do what I call that triple thread, nucleic acids, intact cells of various types and exosomes. We announced a partnership with ApoCell, which we think will be very accordingly and being able to give us a very differentiated platform for a high performing cell capture as well as high performing cell-free DNA capture. Second, beyond just the cell types, it's very important to understand that the use of the liquid biopsy today in over the next two years to three years, will grow quite heavily in monitoring the patients that are already diagnosed and potentially put on a treatment or therapy plan. In the case renal and lung which are the first two categories, it’s very expensive to monitor kidney cancer patients by taking continual core needle biopsies or needle aspirates or imaging. So, the ability to take blood and quickly look at the change and the signature of the biomarker profile or the accountant CTC or potentially cell-free DNA that’s indicative of a recurring mutation is very attractive, less expensive, less invasive for the patient and because the kidney is such a vascular system, less side effects, and less long-term bleeding. This is critical, because you can put kidney cancer patients onto new drugs faster as opposed to waiting for them to relapse or no longer respond. So, you’re creating information profile of the patient. It’s one of the reasons that we’re involved in the collaboration with Huntsman and Pfizer to look at extending our multigene panel in kidney cancer into a liquid biopsy format. So, there we’re taking our existing kidney panel that was developed by our scientists that not only gives you a subtype of kidney cancer, but it’s potential to be metastatic at various sites and its potential to respond to certain drugs like sunitinib and we think significant amount of those features will be able to be done directly from blood. And we’re involved in the early phase validation for that. Second, in lung, also the same challenge presents itself. Again, we don’t think that the early application is going to be an initial diagnosis, but it will be for monitoring and therapy selection and looking at potential to stop responding to therapies. So again, after initial diagnosis again since from our Center of Excellence for lung, a third of our clinical volume is in lung, we think there is a huge opportunity for us to grow with our liquid lung offering, which will be a multi-gene assay that will provide a lot of the traditional out alp EGFR, KRAS, MET, RET information, but able to do so in a highly sensitive manner and also offer information potentially on PDR-1 to PD-1 status. And now with Keytruda becoming a frontline for patients that have greater than 50% tumor progression, and don’t harbor any alk or EGFR mutations that can be looked at, that’s a very compelling proposition we’ll be able to do that either from blood or from core blood and biopsy. So, it’s kind of our hallmark in a liquid biopsy space as we do it for both new plaque assets, intact cells, and exosomes, we want to do it in a multi-gene format, which is critical, because clinicians and the world is now moved beyond just one single gene or a single gene that is really looking at multi-genes and oftentimes measuring those genes overtime. And then third providing it for cancer categories, where there is a very clear compelling the economic case to do it to reduce economic burden and improve care by removing unwanted invasive procedures. So, those are two categories that we’re focused on today. And kind of that’s a hallmark of what we expect in 2017 will be a major growth area for us.
Great, Tom. Thanks for all that and that’s really helpful. I will go ahead and jump back in the queue now.
We’ll now go to Sherry Grisewood from Dawson James Securities.
Hi, good morning guys. Great quarter.
Thanks for taking my call.
Thank you. How are you doing?
Good. Thanks. I wanted to follow up on a point that made earlier about your contracted revenue to billing revenue. Could you give us please a little bit of color, you’ve mentioned that this is also occurring through going to larger clinical trials, is that going to be fairly lumpy over the two years or can we expect to see sort of a steady progression of transparence to billing revenue? I’m just trying to get a handle of how those - what are you going to have the lumpiness in the revenues as a result of that?
That’s a good question, Sherry. We do expect and I think we talk a lot about as we get to our mark towards breakeven, which is about $10 million for us. We do expect that quarter-to-quarter for biopharma to have more variability, it won’t be a smooth line up for example, we had $7 million last quarter, $6.8 million this quarter. We still felt this performance is very strong, but the delta was in biopharma delivery basically, it doesn’t mean our biopharma business is softer this quarter; in fact probably not it’s much stronger. But the delivery of projects and then therefore our ability to recognize that revenue has delivered can shift, because you can have several projects that either start or finish, and there can be several hundred thousand dollars. So that’s a function really of our revenue run rate, I think as we get to the double digit every quarter and higher that lumpiness with few hundred thousand here that begins to go away in a math itself that you have more projects. But I expect annual growth and that’s critical, annual growth, because I think this projects typically then do get delivered over a six-month or nine-month period, because they need the data, they need the delivery et cetera. So, kind of if you look at a six-month period, you will see that lumpiness quarter-over-quarter kind of dissipates altogether. So on an annual basis, I don’t think it will be - you won’t really see any lumpiness, but on a quarter-to-quarter basis, you may because the delivery of certain projects and that also will disappear as our top-line grows though.
Great. and just real quickly, are you also interested in some certain seasonalities?
Yes. In the clinical business, not the biopharma business, we do see seasonality related to hospital and doctor visits during holiday season, so sometimes that gets offset from biopharma, sometimes not. We do see late summer seasonality both in patient visits from the clinical side as well as Biopharma contracts being signed typically in the late summer, it's very hard to I think typically look at August-September, you kind of have a real low in terms of people signing contracts and starting new work, and then you typically see October-November, a big rise in Biopharma again. So it is a little seasonality. Again, the two pieces on the clinical side, you see it from directly correlated to the visits and then on the biopharma, you see it mostly correlated to the summer time activity.
And we will go to Ben Haynor from Feltl and Company.
How are you doing guys? Just had a quick one on the numbers you mentioned, the collections that you’ve seen so far in the current quarter and with the streamlining that have taken place in the business just overall. Would it be conceivable that we could see a Q4 where operating cash flow winds up positive for the quarter?
Ben, I would say it is possible, I mean we need to keep the trend up on the collections. We know that we have our annual sale of our net operating losses in New Jersey and into the state program that will take place this quarter. So, it’s possible, but I want to caution everybody about that. But collections were good and we think again, over a longer period over two quarters to three quarters, we’ll get the receivables down to what I would consider a normalized level of receivables. This is a mechanical problem we had out here in the West, will be impacting our balance sheet anymore.
Okay. That’s helpful. Thank you very much.
And we’ll go to Tom Pfister from RedChip Company.
Hi, guys. I just had two quick follow-up questions here. So, the first thing I just kind of wanted to clarify kind of relates again to some potential near-term lumpiness. So just looking at gross margin, can you just kind of reiterate again, what the long-term target for the gross margin is? And just on a quarter-to-quarter basis in the near-team. How does that kind of change depending on the revenue recognition from the biopharma services?
A couple of different questions.
Yeah. So, in terms of long-term margin when we get to that $10 million quarter, we are in the high-50s, low-60s in margin. And of course, the mix of projects will affect that in the particular quarter. Right now with all the streamlining we’ve done the cost side, as revenue improves, you’ll see the margin can improve rather quickly. And I think actually if you look at Q2 to Q3, you see a very good example of that, where we had a couple of $100,000 more revenue in Q2, and really almost all of it dropped through to the margin line, because that we weren’t adding fix cost. we really didn’t have to add staff or run overtime or anything like that in a dramatic fashion that you saw all that dropped through. So, a couple of $100,000 of additional revenue in the quarter can really impact the margin percentage.
Good plan. I’d arrogate Tom to look at our summary statement of operations on slide 13 of the Q3 earnings call debt that we put out this morning, we kind of see as that pointed out the delta on top-line by $200,000 almost translates almost directly to the gross profit, which is about $300,000. Yes. The other thing we think it’s important to look out it or as you look at Slide number 9 on our key trends slide again in the earnings call debt that we put out this morning. And one of the things that we think can accelerate our path for a higher margin is our ability to control not only our operating expenses, but our total operating expenses. So again, we brought that down from last year that tide about $7.9 down to $6.3, and that we’ve drop in a period in which we increased our revenue from $5.5 to about $7. So again, we are converging on some very good trends that we think for a long-term, but allowed to drop not only control more margins, but importantly also bring that marginal all the way through to real operating income.
Great. thanks. Next, we’ll offset.
And we will now go to Mitch Fitter from Aegis Capital.
Hi, guys. Could you talk a little bit about future non-dilutive and dilutive financing?
Sorry, Mitch. How are you? Hello?
Yes, would you get my question?
I did. So, I think we’re very focused today on developing strategic partnerships and with biotech, pharma or IVD companies. So a lot of our content we’re seeking partnerships to help fund the content and more importantly, potentially be a strategic partner for our growth. As Ed mentioned, we do expect additional non-dilutive financing later this quarter as well in the form of net operating losses that we’re selling for state tax credit that will give no form of cash. So, I think we’re looking at all plans to look at non-dilutive sources such as partnerships at big biotech or pharma. We’re looking at partnering some of our programs in specific disease areas; we have several conversations going on. And so we expect many of those to come to provision over the next few months and quarters.
That’s great. Fantastic color, very impressive.
And there are no further questions. I’ll turn the conference back over to our presenters for any additional and closing remarks.
Thank you everyone for joining our call this morning. I appreciate the interest in our company. We think we are a key player in the oncology ecosystem. We’re driving significant improvements both in care as well as acceleration of therapy development. We believe we’re doing in a highly differentiated manner and have continued to execute on both top-line increase as well as improving our expense structure. I think today, we’re very undervalued and we have a very unique business model, one that we think is essential for enabling precision medicine in oncology. So again, thank you for taking time to listen to our updates. And we look forward to meeting many of you face-to-face and or in person. Thank you.
This concludes today's presentation. Thank you for your participation.