Great Basin Scientific (NASDAQ:GBSN)
Business Update Call
April 14, 2016 4:30 PM ET
David Clair – ICR Investor Relations
Ryan Ashton – Chief Executive Officer and President
Jeff Rona – Chief Financial Officer
Jaret Vogel – Newbridge Securities
Greetings and welcome to the Great Basin Scientific Business Updated Call. 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 Mr. David Clair. Thank you. You may begin.
Good afternoon and welcome to Great Basin Scientific’s business update call. This is David Clair of ICR Investor Relations. Before we begin, I will start with some cautionary statement. The following discussion regarding Great Basin Scientific contains forward-looking statements for purpose of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Which forward-looking statements involve significant risk and uncertainties including those discussed in this presentation and others that can be found in the risk factors section of Great Basin’s most recent quarterly report on Form 10-Q and other SEC filings.
All statements other than statements of historical facts included in this presentation regarding our strategy, future operations, future financial position, future net sales, projected expenses, product placement, performance and acceptance, prospects and plans, and management objective as well as the growth of the overall markets for our products in general and certain products in particular and the relative performance of other market participants are forward-looking statements.
These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievement to be materially different from those expressed or implied by the forward-looking statements. We should not rely upon forward-looking statements as predictions of future events. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date hereof or to confirm these statements to actual results or the changes in our expectations.
After the brief prepared remarks, we will be opening the call to the question-and-answer session.
At this time, it is my pleasure to turn the conference over to Ryan Ashton, Great Basin’s Chief Executive Officer and President. Ryan?
Thank you and good afternoon. Welcome to the call. This call today won’t be long, but we felt that important that we review our recent successes and outline some of our plans and operational targets for 2016 and 2017.
Earlier this afternoon, we released our preliminary first quarter revenues and customer numbers. It was our strongest quarter to date by a significant margin with – where revenue increased 59.4% year-over-year to approximately $731,000. This also represented a sequential increase of 19.5% over the prior quarter, the fourth quarter of 2015.
And this growth came with only two FDA cleared products. I’ll talk more about the launch plans for our Shiga toxin direct test and our Staph ID/R blood culture panel in a moment. But with those tests now FDA cleared we expect to see even greater acceleration of our revenue growth in the second half of 2016 and into 2017. We also announced that we ended the first quarter with 222 revenue generating customers, an increase of 36 customers from 186 at the end of the fourth quarter.
This is more than double our customer acquisition rate in the first quarter of 2015 when we added 17 new customers. Our sales rep efficiency and our sales days in the first quarter also dramatically improved. Our rep efficiency increased from a little over three new customers added per rep in the first quarter of 2015 to just over seven new customers per rep added in the most recent quarter. And the sales cycle declined from 44 days in the first quarter of last year to a stunning 13 days in Q1 of 2016. In other words, in the first quarter of this year, the average time from the start of an evaluation to the receipt of first purchase order was 13 days. This is unheard of in molecular diagnostics where most sales cycles run between 90 and 180 days.
And our close rate in the quarter was 85% of all the eval started. All of these sales indicators point to the fact that we have both an outstanding sales team and the best molecular platform on the market. We remain convinced that our combination of ease-of-use, affordability and versatile menu sets Great Basin apart in the molecular space and gives us the opportunity to become the dominant and preferred platform for small to medium hospitals and labs in the United States.
And with 4,900 hospitals under 400 beds in the U.S. alone, 80% of which are either still not using molecular testing or using labor-intensive molecular systems inferior to the Great Basin platform, we see enormous opportunity in the months and years ahead.
Before I discuss our 2016 and 2017 operating guidance, let me briefly restate our strategy for exploiting our powerful platform to become the dominant molecular diagnostic provider in our target market of small to medium hospitals, and ultimately therefore how we believe we create shareholder value.
First, let me start by saying that our peer companies in molecular diagnostics are valued in the public and private markets on the basis of their growth prospects and revenues in that order. With only one exception none of our peers are profitable or consistently profitable. And our only profitable peer stock trades at one of the lowest multiples to revenue in the space because they are slow growth company. Molecular is an emerging market and the companies in this space are classic early market land grabs where growth is paramount and profitability is not used as a value creator.
Therefore, we believe that to compete effectively in the commercial marketplace and to build maximum shareholder value, we must move aggressively to build a great menu, add customers then add more menus and add more customers and repeat this sequence again and again in a virtuous cycle where more menu makes it easier to attract more customers and more customers allows us to expand our menu into lower prevalence diseases and still see excellent return on investment on our R&D investment.
And then, of course, there is the multiplying effect of adding more customers with a larger menu resulting in higher revenues per customer. This is what Great Basin has done in 2014 and 2015. In that period, we made significant investment in our sales and R&D teams to increase the pace of menu and customer growth, investments that are now paying off in the form of accelerated revenue growth and that is what we intend to do in 2016 and 2017.
We believe that if we continue to execute on this plan for customer growth and menu expansion that significant increases in revenues and profitability will follow. And we believe that the significant acceleration in our revenue growth in the first quarter of this year is a key indicator that this strategy is working exactly as we intend. Building and investing in a molecular diagnostics company is a capital intensive, long horizon project, the product development and regulatory process is long the infrastructure both human and capital needed to succeed is significant.
Success for a company like Great Basin requires patience on the part of the Board of Directors, management and shareholders. As a Board and a management team, we think not in days or even quarters, but in 12 to 18 month increments. Right now, we are in the midst of our product planning process for 2018, for example. This isn’t to say that shareholders can’t and shouldn’t expect to see value creation in the near-term, they can and should. We believe the company is presently undervalued and our goal as a team is to make certain that the financial markets understand how well we have executed and how much our growth is accelerated.
And in so doing, we hope that soon the company’s stock trades more in line with its fundamental indicators, which as I said earlier are our prospects for growth and our growing revenues. We absolutely believe that our molecular platform with its crushing combination of low cost, ease of use and menu versatility is uniquely suited to this market. And that if we continue to execute on our growth strategy, and menu and customers, we will prevail in this marketplace. And ultimately, we believe that shareholders will therefore realize significant value.
We understand, however, that Great Basin’s risks are not just commercial. There is also our NASDAQ de-listing risk and our capital structure risk. As we’ve outlined in two recent press releases, we are preparing our plan for returning to compliance, continuing compliance with NASDAQ rules on the market value of listed securities. And we are very optimistic that we will be granted the extension we need to regain compliance. The plan for returning to compliance is also the same as the plan for simplifying our capital structure. And over the past four months, we have made significant progress in reducing those risks as well.
We eliminated the highly dilutive series C warrants. We have also eliminated the series E warrants at a significantly reduced level of dilution than we would have faced at a later date. And our finance team, led by our CFO, Jeff Rona and our new banker, ROTH Capital Partners, has worked to assure that our two recent financings have each been progressively less dilutive than the financings that preceded them. And we are committed to do all we can to continue that trend as we look to return to the capital markets in the second half of 2016.
We hope our aggressive growth-oriented plan will be consistent with our shareholders’ goals for their investment portfolios and believe that Great Basin’s significant growth opportunities represent a real opportunity for outstanding shareholder returns over the long-term.
Last week, the company held a meeting of its board of directors. And at that meeting, we discussed at length, our expansion strategy and our plans for 2016 to 2017. The board also reviewed our 2015 performance relative to our goals and remains exceptionally supportive of Great Basin’s leadership team and our plans for 2016 and 2017. So, the plans for 2016 and 2017 versed a little history. In 2014, Great Basin began the year with one FDA cleared test in 62 customers. Over the course of that year, we added 22 customers, ending the year with 84. We completed one clinical trial and made one submission to the FDA, but did not add any new FDA cleared test to our menu.
In 2015 we added 102 customers, ending the year at 186. So the assay that we had submitted to the FDA the year before, FDA cleared and we completed two clinical trials and submitted those tests to the FDA for clearance, a substantial acceleration in the pace of both our menu growth and our customer growth over 2014. And we plan to continue to accelerate that growth in menu and customers in 2016. As you know, we have already added two FDA – additional FDA clearances, doubling our total menu to four cleared products. And as we have previously disclosed, we expect to start five clinical trials this year: two in the first half of the year and three in the second half.
And today, we are providing guidance on our customer acquisition. We expect to add between 115 and 140 new customers in 2016 and end the year with between 300 and 325 customers, a quick word about that customer growth. Since the announcement of our two new FDA cleared tests, we have seen the demand for our system explode. Our scheduled evaluation pool, meaning the schedule of installation in eval in the coming weeks, tripled in the space of about 10 to 15 days and we are scrambling right now to build instruments as fast as we can to meet this increased demand.
In 2016, we will be limited in our customer acquisition only by the number of instruments we can produce. And, of course, the number of instruments we can produce is limited by the amount of capital we can devote to building instruments. For 2016, we are also preparing the launches of our Shiga toxin direct test and our Staph ID/R assay, and reaching out to customers, as we speak, to scheduled evaluations as well as ramping up our production capability for both tests.
As a management team, we have made the decision to launch these tests separately to assure crisp execution with the Shiga toxin test launching in May and Staph ID/R launching in June. We recently completed a survey of our existing customers and the results of that survey were very pleasing to us. We had modeled for about 40% of our customers to take on these two additional tests. But instead found that in the case of each essay about 50% of our customers are interested in adding the assay to their Great Basin system.
We're conservatively anticipating that it will take five to seven months for us to reach 50% penetration on our Shiga toxin direct test. And then we are also estimating that we’ll take considerably longer for Staph ID/R because of its complexity we expect our customers to go through a much longer evaluation and analysis before bringing the product into their labs report results. And therefore, the sales cycle for Staph ID/R will be considerably longer than our other tests. And we're planning on it taking us between 9 and 12 months or perhaps more to reach 50% penetration of our customer base for that product. We’ll have more news on our product launches over the coming weeks as we approach the time when those products will be launched.
I'm sorry. We’re experiencing technical difficulties, please stand by. Again, we’re experiencing technical difficulties, please stand by.
Am I live?
You are now live.
Thank you. I apologize for that. We obviously had a communication disruption. I'll start at the beginning of the – in 2017, we expect the five products that we are bringing to trial in 2016 to be FDA cleared, bringing our cleared menus and nine assays by early in the second half of that year. We also expect to bring an additional five to six products a trial during 2017 and anticipate they will all be FDA cleared by early in the second half of 2018 when we would then have a total of 15 to 16 FDA cleared products.
And with our menu growing, we are planning to significantly accelerate our customer acquisition as we get into the late part of 2016 and into 2017. And therefore we are forecasting that in 2017 we will add between 200 and 250 customers ending 2017 with 500 to 550 customers. To put it more succinctly, the guidance for 2016 and 2017 are that in 2016 we expect to end the year with 300 to 325 customers and four FDA cleared tests, another five tests either in trial or already submitted to the FDA. And in 2017, we expect to end the year with 500 to 550 customers, nine FDA cleared tests, and another five to six tests either in trial or already submitted to the FDA.
And while we're not providing customer guidance for 2018, we do expect to end that year with at least 15 to 16 FDA cleared tests. That represents our guidance for 2016 and 2017. Before we open the line for questions, I must ask you to limit your questions to our 2015 operating performance, our 2016 and 2017 operating guidance and then so far as we have publicly disclosed them our most recent financings and other regulatory filings.
Operator, we’re ready for questions.
Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes [indiscernible]. Please go ahead.
Yes, thanks. I was wondering if you could tell us, how many clinical customers you have and what the customer concentration among those customers might be for your current revenue generation?
So, I’m not certain I understand your question completely, Kay. We have 222 customers. The revenues that we generated – were generated primarily by customers that that came on board in 2015, in other words the customers added in the first quarter typically it takes them a moment to ramp up and begin ordering consistently. Does that answers your question?
Yes, yes, what I was looking for is number one the level of penetration and maybe longer standing customers and then maybe the breadth of revenue coming from the entire customer days.
So our longer standing customers, we actually saw a small uptick in revenues during the first quarter although the first quarter for us has a mild seasonality to it because of flu season, flu season then creates increased number of hospital days and that then increases the rate of C. diff infections, but for the most part revenues were as expected across our customer base.
Okay, well, that’s all I had for now. Thanks.
Our next question comes from Jaret Vogel from Newbridge Securities. Please go ahead.
Hi, good afternoon and thank you for the update. I have a number of clients on the IPO and I’m impressed by your progress to-date and your forecast, but I’d like to know how – what are you doing to retain the visibility on the NASDAQ, because if you follow-up the Board, then we still only can recommend your shares to be company policy. So what are you doing to keep you visible? Thank you.
So, we’re not disclosing the specifics of our plan that we will be presenting to the NASDAQ in mid-to-late May. But I can tell you that we have a multi-pronged plan for regaining our continued listing compliance, we're working closely with one of the top NASDAQ consultants in the United States, who was once responsible for this very process at the NASDAQ. And we're also working closely with Roth Capital Partners to assure that we have absolutely a bulletproof plan in place that we will present to the panel as I said in mid-to-late May.
Okay. And then you would have did I read like mid-to-late June for their answer.
Their answer would come in mid-to-late June and we would be given – what we hope for is an extension on our time to regain compliance of up to 180 days from the date of the letter we received. So that would mean that we would have until roughly September the 13.
Okay. Well thank you and continued success.
Our next question comes from [indiscernible] who is a Private Investor. Please go ahead.
Yes, hello gentlemen. My question is similar to the gentleman from Newbridge. It involves the continued listing standards. I was just wondering if you could give a little color on which of the continued listing requirements you guys will be shooting for, you have to either be the equity standard, the market value of listed security standard or the net income standard? And based on the guidance given it looks like 55 50(NYSE:D)2 would be the only option. And if that is the case, how much dilution can we expect in order to get to a minimum market value of listed securities with at least $35 million.
As I said Chris, we are not going to be disclosing the specifics of our plan. In our press release, we did disclose that we intend to pursue a plan that would actually accommodate both requirements and book the stockholder equity requirement and the market value of listed securities requirement. Those two things are really quite intertwined in our market cap, because of the convertible notes and some of the provisions in the Series D Warrants. Eliminating some of those things will in fact also reduce our derivative liability and increase the likelihood we could achieve both the stockholder equity and the market value of listed securities requirement.
But on the minimum market value of listed securities at the stock price to say even at $6 with the current outstanding of under $4 million, that gets it to $24, there's going to have to at least be a couple of million if not a lot more than that shares printed in order to reach that $35 million market cap. Is that right?
This is Jeff.
Do you want to go take that Jeff?
Yes. So again I think of warrants, we’re not going to talk about specific. But obviously it’s highly dependent on where the stock price is. And what we're expecting to do is continue to provide the market with update and continue to provide the market with a view they were progressing this business nicely. As Ryan said, we expect but that’s going to be well received. And then we will put together a plan, we’ll execute a plan that we put together to try and achieve both market cap and the network requirement. And I think that's all we can really say on this at this point.
Okay. We’ll have to look forward to May and June in. Just one other question, could you guys address the cost of goods sold as they relate to revenue and give an idea as to how much revenue you think you’ll need to generate in order to overcome the operating income because there's a negative operating income which tends to run 800% to 1000% of revenue.
So let me address that. Again, we're not going to – we're not putting out financial guidance at this point. But I think the way you can think about the cost of goods sold is there's two components cost of goods sold. One is the cards themselves and a greater proportion and a significant component of the negative gross margins is the depreciation associated with the analyzers that our customers use. And this again is one of the reasons why those analyzers are – they have a lot of capacity at site. And as we add new products, we’re not going to be adding new analyzers to those sites for quite a while. So by adding new product, by driving the prices down, by increasing revenue per customer, we expect to improve our margin significantly.
But no kind of breakeven figures do you guys have any kind of breakeven figures?
We are not putting our financial guidance at this time. So we do a lot of work on this. But again it’s highly been on number of factors and we're not putting our financing guidance at this time.
Okay. Thank you.
Our next question comes from [indiscernible] who is a Private Investor. Please go ahead.
Hi, good afternoon. Pretty much you answer a couple of questions to other fellows investors had. But one of my question is, are you diluting more shares to increase market cap this year or next year? That's my question.
Yes, as Ryan mentioned I mean there's two components to those, okay. One is that we’re working with our consultants and eventually with NASDAQ to solidify the plan. And we're not going to talk about the details of the plan at this point. And also as Ryan mentioned earlier the business is going to grow by utilizing capital wisely. And we're going to continue to look to raise capital in the market to drive the growth of the business.
Thank you. No more questions. Appreciate it, thanks.
[Operator Instructions] And if there are no further questions I’d like to turn the floor back over to management for any closing remarks.
Thank you. We really don't have any further closing remarks we appreciate your listening today and we look forward to updating you frequently over the course of the next few months on our progress with product launches, with our products that are in development and with our customer numbers. We hope you have a good evening. Thank you very much.
Thank you, this concludes today's conference. Thank you. You may disconnect your lines. Have a nice evening.
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