VirtualScopics, Inc. (NASDAQ:VSCP)
Q2 2014 Earnings Conference Call
August 14, 2014 08:30 AM ET
Jim Groff - Acting CFO
Eric Converse - President and CEO
Doug Russell - Brown Harris Stevens
Keith Gil - JHS Capital Advisors
Greetings and welcome to the VirtualScopics Second Quarter 2014 Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Acting Chief Financial Officer Mr. Jim Groff. Thank you, sir. Your may begin.
Thank you, operator. Good morning and thank you for joining us for VirtualScopics second quarter 2014 conference call. First I would like to remind everyone that during today’s conference call and webcast, we’ll be making forward-looking statements they are referred to future events, which involve some risks and uncertainties. Please refer today’s press release in the slide that included discussion of forward-looking statements and related risk factors which are customary discloser.
With me today is Eric Converse, our President and Chief Executive Officer. I am going to begin this morning with a discussion around the results for the three and six months ended June 30, 2014.
First I would like to focus on Slide number 3, our awards outstanding bookings increased to 17.6 million as of June 30, 2014 as compared to the 7.7 million as June 30, 2013, representing a 2.3 times increase. We believe improved bookings are a direct result of our companywide focus on enhancing and building existing and new customer relations and meeting and exceeding our customer expectations. We are continued focusing on a segmented and targeted approach relative to account site, sales channel, therapeutic area, and study phase which provides a clear understanding strategy for core imaging services.
Basically we have demonstrated to our customer our scientific and operational flexibility which has resulted in the improved booking movements. To continue on this top, the award outstanding in booking as of June 30, 2014, half year, were approximately 86% of the full year award outstanding and bookings as of December 31, 2013. This moment we have continued with the award outstanding and booking of approximately 23.5 million as of today August 14, 2014, which represents 150% of the full year awards outstanding and bookings as of December 31, 2013, with 4.5 months left in a year.
Let’s now turn to Slide number 4, which shows the stockholder concentration as recorded in the proxy filing dated April 30, 2014. These numbers include options, warrants, convertible stocks, and similar rights to purchase shares of VirtualScopics kind of stock. As indicated by the graph Loeb Investors own 15.1% of the outstanding shares and is represented on the Board by Bruce Lev. Merck Global Health owns 10.2% of the outstanding share and is represented on the Board by David Rubin. The University of Rochester owns 7.1% and the Board Members and Executive 5.1% of the Company’s share, in total this represents over 37.5% of the Company. We believe that there has been limited activity in the market over the past four months and these ownership numbers are still an accurate reflection of the beneficial ownership of the Company.
Please turn to Slide number 5, covering our statement of operations. Revenues for the quarter on June 30, 2014, were 2.6 million compared to 3.7 million in second quarter of 2013. Revenues for the six months ended June 30, 2014 were 5 million compared to 6.2 million for the six months ended June 30, 2013. The decrease in revenue was affected by a six-week Phase III breast cancer study which generated slight approximately $1 million in revenue during the second quarter of 2013, that did not reoccur in 2014. Revenue has followed the same trend as the awards of bookings due to the timing of the start up of new projects. The timing on the recognition of revenue and a number of studies added during 2013 and in the first six months of 2014.
As a result, we believe 2014 revenues will be relatively flat as compared to the previous year. It is important to note that a typical projects contract life can stand over multiple years, so there could be a gradual impact on revenue. A project’s revenue cycle is depending on number of factors including the time it takes for a drug trial to begin, which varies to the time required to set up trial sites and to recruit participants. There are also situations when the sponsor does not recruit the number of subjects or sites as originally budgeted or a drug fails and the study therefore comes to a premature end. In those cases the remaining budget dollars at the end of the study that will not be recognized as revenue. There are also situations where study will increase in scope and reflect a subsequent increase in budget value.
The Company is continuing to focus on strategies that we believe will lead to increased revenue and profitability. First the Company has finalized an alliance with IXICO plc located in London, which provides clinical trial solutions focusing on neurology. The alliance enables the company to access fiscal expertise on neurology and provides the European presence.
In addition we believe the integration of the company’s complementary technologies will help provide a more comprehensive and scalable capability. Secondly, the company has finalized the recruitment of Scientific Advisory Board, which we believe will enhance and deepen our knowledge base in our core competencies and allow an exchange of ideas and knowledge in each therapeutic area.
Thirdly we continued on our investments in our sales functions by the recent opening of a satellite office in New Hope, Pennsylvania. This office is primarily for sales and project management, allowing our representatives to be closer to our customers in the Pharma corridor.
Now turning to gross profit. For the second quarter of 2014, gross profit was approximately 941,000 as compared to $1.8 million for the second quarter of 2013, representing a 47% decrease. Gross profit for the six months ended June 30, 2014 was approximately 1.7 million as compared to 2.6 million for the six months ended June 30, 2013 representing a 34% decrease.
For the second quarter of 2014, our gross margin was approximately 36% as compared to 48% for the second quarter of 2013. Gross margin for the six months ended June 30, 2014 was approximately 34% as compared to 41% for the six months ended June 30, 2013. Our margins decreased year-over-year due to the volume of business. We achieved higher gross margins in 2013 due to a large Phase III study that we delivered in six weeks, aided by our 2013 software release that enables quick, efficient and reliable analysis of traditional Phase III imaging endpoints.
Analyzing large amounts of data from same study in a short time frame created an apparent operational efficiencies causing an increase in the gross margin during the second quarter 2013. Our gross margins will fluctuate based on therapeutic area mix and phase of study and specifically as it relates to volume of revenue. There are certain amount of fixed costs required as part of the business that we have got our gross margin fluctuating with our revenues as this comps are predominantly incurred expenses and support servicing our customer in this industry. Additionally, we are continuing to make investments in our infrastructure and technologies to further enhance our operational efficiencies which we believe will help return company’s profitability.
Next our research and development costs for the second quarter of 2014 were approximately 306,000 as compared to 350,000 for the second quarter of 2013. Research and development costs for the six months ended June 30, 2014 were approximately 592,000 as compared to 820,000 for the six months ended June 30, 2013. The decrease was a result of no additional dollars being spent on the personalized medicine initiative during the first half of 2014. We have delayed any additional work on this application as we focus on our core clinical trials.
Sales and marketing cost for the second quarter of 2014 were approximately (423,000) [ph] as compared to 430,000 for the second quarter of 2013. Sales and marketing cost for the six months ended June 30, 2014 were approximately 828,000 as compared to 788,000 for the six months ended June 30, 2013.
The increase is related to the timing of trade shows and conferences and higher commissions during the first half of 2014 as compared to the previous year. This is a direct result of significant improvement in the awards outstanding and bookings achieved thus far during 2014, which are 150% over full year total awards outstanding [indiscernible] for the 12 months ended 2013.
General and administrative costs for the quarter-ended June 30, 2014 were 808,000, up 4% from 777,000 in the prior year’s quarter. General and administrative costs for the six months ended June 30, 2014 were approximately 1.5 million as compared to 1.8 million for the six months ended June 30, 2013. The decrease for the six months ended June 30, 2014 was largely attributed to no additional dollars we have spent on the professional fees to support our personalized medicine initiative. Additionally, there salary savings and reductions and stock compensation that resulted from the resonation of the former executive officer during 2013 offset by increased legal and investor relation cost incurred partly negotiating the [indiscernible] lease in Pennsylvania and finalizing the scientific advisory board and IXICO alliance agreements.
Let’s now turn to slide number 6 in the balance sheet. As of June 30, 2014, we had a cash balance of 5.6 million compared to 7.3 million at the close of 2013. Our cash position remains strong and this coupled with the company having no debt positions us well to invest wisely in both the short and long-term to further develop our internal capabilities in order to further enhance operational quality, productivity and profitability.
However as a result of these investments, we anticipate the cash burn to continue throughout 2014 as we strengthen our core business and work towards returning to profitability. We will continue to monitor our cash and evaluate any financing needs if necessary as we proceed throughout the year.
As a recap turn into Slide number 7, we believe 2014 revenues will be relatively flat as compared to 2013 due to the timing of project starting and a number of projects that closed out during 2013 and the first six months of 2014. We anticipate operating expenses to trend higher for the remainder of the year as we dissolve all investments in personnel, operations, and systems plus the new office in Pennsylvania. We anticipate the cash burn to continue throughout the 2014 as we strengthen our core business and work towards returning to profitability.
We will continue to monitor our cash and evaluate any financing need if necessary as we proceed throughout the year. Overall the first half of 2014 demonstrated a considerable increase in new project awards and bookings as compared to the previous year. As a result of this momentum, we believe we are on our way to return to a solid growth rate and future profitability.
I will now turn the call over to Eric.
Thanks, Jim. Good morning. Today, it is my pleasure to speak to all of you in my capacity as President and Chief Executive Officer of VirtualScopics. My permanent appointment last month was followed by a series of congratulatory messages from employees, customers, and partners all of which I was very pleased to receive; however, I was most pleasantly surprised to be contacted by some of our shareholders and to receive the same enthusiasm and the messages of congratulations.
As I told everyone, we have a lot of work to do but I believe we are at the beginning of a positive journey to success and ultimately greater shareholder value. Jim has shared with you our results from the first half of 2013 and I want to acknowledge that we are not yet out of the woods and at this period which is expected to be our lowest point before things begin to show of various constraints. Together with our colleagues on the management team and our fellow employees, we appreciate your patience and support through this period and look forward to renewing your enthusiasm and your investment in the coming months.
If you please turn to Slide 8, I want to review some of the accomplishments from the year so far. As you have heard, we have spoken about planned alliance with IXICO since January. We signed the agreement at the end of June. I was just in Copenhagen with our business development and the IXICO team for an Alzheimer’s conference. It was great meeting customers jointly and is planning our newly signed alliance. We also discussed the opening of an office in the Pennsylvania, New Jersey pharma corridor. We opened the office in New Hope, Pennsylvania. We also celebrated that opening last month with our IXICO colleagues from London, some of our Board Members some of our Scientific Advisory Board Members and our customers in the New office space.
I have also been discussing a scientific advisory board since joining VirtualScopics last October. We completed the initial seven member team in June. More so since day one, I have been focused on investing in our colleagues and sending personnel out for training in appropriate areas for them to increase their proficiencies. I am happy to report this process has started and we plan to keep this continuous improvement model ongoing. The same will apply to our promise to make investments in our infrastructure. These investments have started and will be an ongoing process as we pride ourselves on exploding technology to gain efficiencies and maximizing profitability.
And while all of these completed tasks on this slide are important, the most important is the focus we have made on our core business competencies. As some of you may recall, I announced in November last year that I was suspending our personalized medicine until we have a profitable and sustainable core business. I know that was not something many of you were happy to hear; however, this renewed focus on our core therapeutics have led to awards and bookings so far this year exceeding $23 million with over one-third of the year still left, simply put to prove them in numbers.
Now if you'll turn to Slide 9, I would like to discuss why I am so enthusiastic about taking this permanent leadership role with VirtualScopics. Most importantly it’s the team, not just the talent but the focus and the renewed determination for success. Then our ability to understand more of the drivers of our business having systems to track them for projected applications, one example I mentioned on our last call, we are currently focusing on projecting our revenue more precisely from management purposes and for our shareholders in order to give a better picture of how we see things. This will also help lessen your frustration, increase your understanding of the business, and manage you expectations of our performance as we return to profitability. We are not there yet but expect to be there very soon.
I just want to explain this point a bit longer to stress my understanding of its importance to you our shareholders. A common frustration we have heard from many of you is when will bookings turn into revenue, during our last call I explained averages about when a booking will become revenue over a period of years. This initial understanding while helpful is no longer enough. We are currently working on our revenue projections line by line and making sure we're able to predict with a fair degree of accuracy when we can expect revenue for each project we win. Of course there is always the possibility of the project being cancelled but as most are not, we owe it to ourselves as a management team, as a Board and ultimately you as shareholders to deliver clear information on the revenue forecast for VirtualScopics.
The key components of the reporting should be bookings, backlog, revenue and profitability. Just a quick review, the bookings are signed business contracts we win from our sponsors either pharma companies other contract research organizations, CROs. Backlog is the collection of these bookings we accumulate over the years which have not yet into revenue. This number lets our shareholders know how much business we have waiting to be invoiced to our customers in the future. This number is very key and I want to be sure it is fully challenged internally for sharing it publically.
Revenue is simply the money we are invoicing and collecting from our customers and profit is what is left to reinvest or distribute to our shareholders after all costs have been recognized. Bookings, revenue and profit are easy to communicate. The difficulty lies in the backlog in predicting if and when it will turn into revenue, thus the delay in predicting revenue.
So please be advised this will be coming shortly and hopefully gives each of you a better understanding from what to expect about future. Now getting back to my enthusiasm, I’ll mention the alliance with IXICO. Less than two months from signing our strategic alliance, we already have our first joint award win.
The best part is that it expanded our ability to win better pieces of business with one of our existing customers. This win is exactly what we were hoping to achieve while initially discussing the potential alliance with IXICO. It’s a huge win. Though we cannot disclose the detail, I can share with you that together we gained the trust of a customer to work with us and prove our joint capabilities which makes us stronger together than when working independently with one another.
Having an alliance already with PPD gave us a framework from which to work when we outlined our alliance with IXICO. Integration with IXICO in on schedule and will leverage our joint capabilities to be highly visible to our customers which will further support and validate the strength of the (alliance) [ph]. PPD is another reason for my enthusiasm. The profits we’re going through with IXICO has also helped springboard an enhancement of our model with PPD and work to better exploit our partnership.
Though PPD is a $1 billion company and many times greater than VirtualScopics and IXICO combined, we see our imaging capabilities helping PPD to expand its strategic value to customers. I have now turned my focus to this relationship to drive more results out of it.
I am encouraged by PPD’s reception of this declaration and look forward to working not only with senior management at PPD but also with the business development teams. I strongly believe there is more mining to do in this relationship and I’ve dedicated my personal efforts to get more from it, both the VirtualScopics and PPD.
I am also excited about the increase in Phase III trials we have won this year. These wins really demonstrate recognition of our ability to handle large Phase III trials and help to drive revenues and profitability higher. Most interesting is that all are in our core area. We are not at many means listening our efforts in earlier phase trials but we now have increased chances to demonstrate our abilities to take a Phase I trial through with Phase 3 trial simply by continuing to deliver quality data on time and within budget on a consistent basis. Also, I believe our messaging and communication efforts have greatly improved and will get stronger and more clearly focused as the year continues to progress. Fortunately we have been communicating more clearly to our immediate contact -- we have been working to better communicate with our shareholders.
And now we are turning our focus to a wider market communication to specifically communicate clear messaging about our focus and our core capabilities. The initial reactions to this messaging have been favorable. We look forward to getting more of these reactions in the very near future as we are working with an outside firm to help guide us to better overall market communications.
If you'll now turn to slide 10. Continuing with my enthusiasm, I really like to move it with this industry there has been and will most likely continue to be consolidation in this industry. This leaves your competitors a higher probabilities of winning business. I also like that pharma companies, our customers are continuing to increase their outsourcing to contract research organizations, CROs. And believe this trend will continue in the future. I believe the investments being made in our people and infrastructure with the handsome dividends in the not too distance future.
I am greatly encouraged by the bookings and awards we have received this year and have strong confidence this will continue in the future. As previously stated, we are ahead of last year’s total awards and bookings with still another one third of the year left. Most importantly I believe in the team. I may sound like a broken record to some of you, but this is truly the most important piece for success inside VirtualScopics. I have been constantly preaching the team, the team, the team. I have shared a thing that has always followed me in each company I have worked during my professional carrier. It’s a very simple sentence. It reads, it’s the people stupid. I now have this sentence in frame on the wall of my office with a date of press release announcing my permanent CEO role. It was the gift from some of the employees. This says everything about this team. They know it is up to them and no one or nothing else. They need to drive our success and I believe they can do it.
Lastly, I believe in myself. I believe I have made a difference in the culture of this company in the direction it is now going. While I share this credit with my management colleagues and the employees, I want to be very clear from this point. I believe under my leadership and with the dedication and commitment of the VirtualScopics team, this company will strive.
Now for the balance of 2014, the strategy is to continue to focus on what have been developing. We need to continue to invest our cash in training and infrastructure. We believe this effort will set us up nicely to manage the business we are winning this year and not only increase our revenue but also return to profitability in 2015. As some of you may recall I said in my first communication back on the Q3 2013 conference call that I wanted to focus on our customers and employees as I believe that focus would ultimately lead to happy shareholders. I stand by that focus and in our next communication meeting, I look forward to speaking to you as fellow shareholder in this company.
With that, Jim and I would be happy to answer any of the questions you may have. Operator, may we have the first question please.
Thank you. At this time, we will be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Doug Russell from Brown Harris Stevens. Please proceed with your question.
Doug Russell - Brown Harris Stevens
Yes, good morning, Eric. I am wondering -- I am a shareholder I have been a shareholder actually since the Company went public and shareholders have not fared very well, I know that there are very few institutions that own the stock and I appreciate that you say, hey if a company does well the shareholders will be happy, but I don’t think they’re going to be happy if you don’t have a professional PR firm that is trying to take the shares and the Company to their investors and (they need to buy) [ph] large shares, so what are you doing to get a high level PR firm, IR firm that can do this for us?
Dough, I think that’s a fair question from your vantage point and as I shared I too will become a shareholder, so I will have that same focus. What we are doing though is showing that we have the results that are going to show that this is a good investment. I think that we are preparing to communicate more and more clearly with our investors to see in the Q3 call when we go through those results.
There will be a lot more transparency in what we’re doing and we are setting ourselves up to go in that direction as far as attracting greater shareholders or more professional shareholders. But I will tell you what our focus is right now, it’s on our current shareholders the ones who stayed with us to make sure that they see that we’re going in the right direction and I think when you get our current shareholders happy that will also attract new shareholders.
Thank you, ladies and gentlemen. (Operator Instructions) Our next question comes from the line of Keith Gil from JHS Capital Advisors. Please proceed with your question.
Keith Gil - JHS Capital Advisors
Please note what you said about hopefully next year returning to profitability, at that point would the Board consider pursuing the personalized medicine market?
Keith, I don’t think that that is completely off the table. It’s just been suspended because we need to make sure that we do have a sustainable business model and so I don’t want to say that it’s going still in that direction but it’s definitely something that is still on the table for consideration. There was quite a bit of effort into it but it was also a distraction and we needed to make sure that the core business is working because I also think as we do that, we will be producing more cash which will help invest in whatever that strategic initiative is going to be.
Keith Gil - JHS Capital Advisors
Okay. So like I said would be under the consideration next year when you are profitable?
Thank you. (Operator Instructions). Our next question comes from the line of Doug Russell from Brown Harris Stevens. Please proceed with your question.
Doug Russell - Brown Harris Stevens
Hi, Eric. I just want to point that there basically is nobody on this call and that’s why I think you should get some professional PR. I mean I am on it, a couple of brokers around it and god knows who will. I’ve been on calls before when we’ve had 30 minutes of questions back when people actually cared about the company. So I am just a little surprised that you say, hey we’re going to make current shareholders happy, nobody cares about your company and just very frustrating. That’s my comment. Thank you.
Yes, again I understand where your frustration and probably you are where this is coming from. I can tell you that under my leadership you’ve seen that there has been a reversing trend as far as our bookings, as far as our communication and the goal is to make sure that our current shareholders are engaged with this and watching their value go up. And I completely understand your position there but it’s our goal to make sure that we’re increasing the value of this company and having more people participate.
(Operator Instructions). There are no further questions at this time. Now I would like to turn the conference back over to management and your host for closing remarks.
Thank you all for your time this morning. Doug I hope we hear from you again on the next quarter. Have a great day everyone.
This concludes our conference for today. Thank you for your participation. You may now disconnect your lines.
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