CRYOPORT INC (NASDAQ:CYRX) Q4 2016 Earnings Conference Call June 27, 2016 4:30 PM ET
Garth Russell - KCSA Strategic Communications
Jerrell Shelton - President and Chief Executive Officer
Robert Stefanovich - Chief Financial Officer, Treasurer and Corporate Secretary
Mark Sawicki - Chief Commercial Officer
Brian Marckx - Zacks Investment Research
David Halperin - Stifel
Good day and welcome to the Cryoport Incorporated Fourth Quarter and Fiscal Year 2016 Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Garth Russell with KCSA Strategic Communications. Please go ahead, sir.
Thank you. Good afternoon everyone and thank you for joining Cryoport's fourth quarter and fiscal year 2016 conference call.
Before we begin today, I would like to remind everyone that this conference call contains certain forward-looking statements. All statements that address operating performance, events or developments that we expect or anticipate to occur in the future are forward-looking statements. These forward-looking statements are based on management's beliefs and assumptions and not on information currently available to our management team.
Our management believes that these forward-looking statements are reasonable as and when made. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We do not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.
In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially from our historical experiences and our present expectations or projections. These risks and uncertainties include but are not limited to those described in Item 1A risk factors and elsewhere in our annual report on Form 10-K and those described from time to time in other reports which we file with the SEC.
Now, I'd like to turn the call over to Jerry Shelton, Chief Executive Officer of Cryoport. Jerry, the floor is yours.
Thank you, Garth, and good afternoon, ladies and gentlemen. Thank you for joining us today. With me this afternoon is our Chief Commercial Officer, Dr. Mark Sawicki, who later during this call will comment on our growing position in the biopharma market and our Chief Financial Officer, Robert Stefanovich, who will present our financial results for the fourth quarter and fiscal year 2016.
Over these past few quarters, we've seen a significant ramp in new business opportunities with a dynamic mix of new and existing clients in our biopharma and reproductive medicine segments. This market traction is being driven by the work of our capable sales and marketing teams supported internally by innovative engineering, operations, logistics, and client care staff. In addition, we implemented new management initiatives including the launch of our consulting and advisory services for biopharma clients.
Revenue recognition from our pipeline of new clients is in its early stages and reflected in our reported results today. However, it is important to note that the revenue we have recognized so far is just the tip of the iceberg as we work with clients moving through clinical trials to commercialization.
In the past few quarters, we have experienced some shorter-term pain to put us in a strategic position for longer term gains. This short term pain was mainly due to the long sales lead time in the ramp periods for many of our current opportunities. These lead times were strategic accounts that can be upwards to nine to twelve months before initial revenue is recognized due to the validation, audit, and approval processes we will serve through specifically with each new client.
It is noteworthy that those biopharma accounts in our revenue pipeline, several have advance through initial clinical trial stages and are now while in Phase 3 planning commercialization. As you are aware, patient enrollment grows with each phase of clinical trials which results in increased requirements for Cryoport's services. With clinical trials and improved commercialization as is happening today with several of our clients, those patient populations increased which generally leads to stepping up our revenue over time and then comes the commercialization.
Today, I am pleased to report that Cryoport now supports 78 clinical trials with 13 of them in Phase 3, the last phase before commercialization. Of course these trials on a risk adjusted basis represent a good portion of what we see as our embedded growth opportunity. In a few moments, Dr. Sawicki, will share with you in more depth the good news that two weeks ago in this first quarter of fiscal year 2017, we signed our first biopharma support agreement for commercially launch product the new signed [ph] major pharmaceutical company.
From an overall company perspective, these policy trends and growth in our biopharma segment continued to be partially offset during the reported period by market shift in reproductive health combined with the slowdown of one of our animal health clients and that impacted our fiscal year 2016 financial results.
Anticipating what might be on your mind while we will not be able to provide revenue guidance for fiscal year 2017, I will say that our first quarter of fiscal year 2017 ending June 30, will reflect our growing traction. You may remember that in April of this year we entered into a strategic arrangement with Worthington's CryoScience by Taylor Wharton Division which provides us with abilities to rapidly scale to support our clients’ commercialization activities and broaden the range of our services that include or relate to packaging and hardware.
Our agreement enables us to join our engineering efforts, provides Cryoport access to innovative validated cryogenic shipping and storage vessels and equipment. We are excited by these added capabilities as they will allow us to meet the demands of a more diverse clientele through broader offerings.
Remember, we currently work from three buckets of tools to craft our solutions; packaging, information technology, and logistics expertise. We anticipate that our agreement with Worthington will allow us to further distinguish our company in the marketplace as the undisputed leader in this exciting and developing market for temperature control logistics for life sciences industry.
Regarding revenue, our revenue for fiscal year 2016 was $5.9 million, an increase of 50% or $2 million as compared to $3.9 million reported for fiscal year 2015. Mr. Stefanovich will provide more detail later during the call, but I would like to briefly comment on our revenue distribution by market segments.
First, reproductive medicine. This segment has been subject to recent governmental restrictions relating to medical tourism by some historically important countries. Having to accommodate these restrictions and adjusting our sales effort significantly impacted the international component of our reproductive medicine business. As we have reported, India, Nepal and Thailand took actions that effectively shut down medical tourism as it related to reproductive medicine for non-nationals.
On the other hand, we recognized substantial growth in our domestic business topping 72% growth year-over-year. However, this growth was not enough to offset the decline in the international market where we recognize higher revenue per shipment.
Secondly, animal health. Historically the animal health segment has been a consistent and growing business for Cryoport. However for the fourth quarter, it fell short of expectations. Our revenue from animal health actually decreased 6.1% year-over-year primarily due to a slowdown from one of our larger clients. I would emphasize that we continue to see a significant opportunity for growth in the animal health segment of our business.
Thirdly, biopharma, which is our largest and fastest growing market segment. Throughout fiscal year 2016, we were confident that this segment of our business would be the major driver for our growth based on a substantial increase in new clients and their clinical forecasts. As we had disclosed during the last half of fiscal year 2016, some of these programs were pushed out a few months in order to allow our clients to accumulate the data they required for advancement, and this temporarily affected our growth rate in this segment.
You might wonder why programs are pushed out and typically the reasons have to do with our clients timing of patient enrollments, their respective profile, and subsequently the collection of sufficient data for their respective clinical progressions. Our sales team has identified additional needs and requirements of our clients in the biopharma stage. These are new services and opportunities will allow us to strengthen our client relationships and generate new revenue streams.
For example, clients have asked Cryoport to support cryo storage our fulfillment systems integration, scheduling and other logistic support activities. By responding, we are adding to our services and capitalizing our new and additional fee for services.
For example, we began to address the demand for bio storage bio-storage we launched a new offering Cryoport bio-storage with a strategic partnership with Pacific Bio-Material Management, a long time partner with whom we have formalized our relationship and extended our offerings.
The focus of these new services is to provide advanced storage and fulfillment capabilities as well as transport valuable and often irreplaceable temperature sensitive biologic materials including clinical trial samples, vaccines, stem cells, regenerative therapies, critical biomarkers and immunotherapies.
Our new offerings in this area have advanced capabilities such as storage solutions that include cGMP complaint biorepositories at controlled temperatures and climatized systems with effective redundancies such as backup, reserves and power. Cryoport bio-storage services will feature extensive management and monitoring included controlled access to commodities, periodic temperature and activity reports, as well as 21 CFR, Part 11 compliant monitoring and 24/7/365 alarm response.
Secondly, we have launched a formal laboratory relocation service which further expands our offerings and includes the sale and secure transport of complete biologic laboratories. Through this service we can now manage the safe, secure and proper transportation of commodities and the equipment that is used for storage in the laboratory.
And we are advancing our software advantage as it is important to many of our clients that we ingrate these new capabilities with our Cryportal logistics operating platform. If you think about it, this provides us with the ability to fully integrate storage fulfillment distribution scheduling and logistics support creating a centralized senior data stream. This is yet another key differentiator for Cryoport and allows us to provide world class support to our client base.
In summary, these results and new initiatives signify undeniable momentum in our business which continues to accelerate. Despite some short term unanticipated headwinds for fiscal year 2016 we are proud to report another year-over-year growth of 50%. As the fiscal year 2017 I think we're off to a sound start as our current first quarter revenue has already exceeded fiscal year 2016's first quarter.
As a result of our working relationships with our clients, we believe the growth that is beginning to unfold is indicative of the advancements we expect in our biopharma business. But I do want to remind investors that we support a data driven industry and a clinical progression in cellular therapy is based on the collection of sufficient data to support progression.
With that said, biopharma is our largest, fastest growing opportunity. So for the next few minutes I would like to read directly from Dr. Mark Sawicki, who with the help of his global sales and marketing team has laid the groundwork for our growth and long term success. Please hold your questions for Mark until the question-and-answer period.
Mark, the floor is yours.
Thank you, Jerry. It is a pleasure to have the opportunity to speak with you today. My objective for this call is to provide you a synopsis of the current biopharmaceutical market, how it has evolved over the last 12 months and give you an understanding of its business impact related to Cryoport's recent announcements and how they fit into our strategy to engage the market and drive revenue in the current fiscal year.
As mentioned previously, biopharma and more specifically regenerative medicine represents the future of healthcare. There are now more than 685 companies involved in gene and cell therapies worldwide supporting more than 669 clinical trials including 68 Phase 3 programs and the number of new entrants continues to accelerate. This activity is being reinforced by significant financing activity to the tune of more than $10 billion in 2015 alone according to the Alliance for Regenerative Medicine.
In addition, many of the industry leaders are investing significant resources into the development of scalable regenerative therapy platforms, an example of the recent GE investment of $40 million into the Center for Commercialization of Regenerative Medicine in conjunction with the Canadian Government. In addition, Lanza [indiscernible] have all announced significant investments in the expansion of manufacturing capacity to support the anticipated demand.
Cryoport has been very active in client engagement in this space. We have expanded the number of clinical trials we support to 78 including 13 Phase 3 trials which is nearly 12% of the total clinical market in this space and 19% of the Phase 3 pipeline. This is in addition of 29 new clinical programs over the last six months. Some of the programs recently announced include Perseus PCI, International Stem Cell and ImmunoCellular Therapeutics, all of which have engaged Cryoport to support their cryogenic logistics needs for product distribution to patients.
Of the 13 Phase 3 programs we are heavily engaged in commercialization discussions with six companies under commercial launch needs, the earliest of which is set to launch in late fiscal year 2017 or early fiscal year 2018. In addition, we have just signed our first commercial program with one of the largest pharmaceutical companies in America supporting a $4 billion blockbuster biologic product that is already on the market.
This is a very important milestone for Cryoport as it validates our commercial capabilities with more than 78 clinical trials customers we currently support and gives us a world renown customer in the biologics therapeutic market which is estimated to represent 20% of the worldwide pharmaceutical market in 2017 and as an expansion out of our core regenerative medicine space expanding our reach.
We expect this program as well as the maturation of the clinical programs in our portfolio to accelerate our revenues in the biopharma space in the coming quarters. In fact, as Jerry stated, we have already started to see an acceleration of revenues in this segment which will be recognized in our upcoming physical 2017 Q1 financial report.
As mentioned earlier on the call, our existing client base has asked Cryoport to be able to support sample storage, fulfillment and distribution leading to our announcement of a formal strategic partnership with Pacific Bio-Material Management. We are already heavily engaged in multiple late-stage contraction negotiations next step partnerships that demonstrate notable economic value for Cryoport in the coming quarters.
Thank you. I will be happy to take questions during the question-and-answer period. Now I’ll turn the floor back to Jerry.
Thank you, Mark. For a more detailed discussion of our financial results for the fourth quarter and fiscal year 2016, I’d like to introduce our Chief Financial Officer, Robert Stefanovich. Robert?
Thank you, Jerry. Good afternoon everyone. I will now review our fiscal year financial results, provide some additional comments, and then turn the call back over to Jerry.
As a reminder, our fourth quarter and fiscal year ended March 31, 2016. Now to our fourth quarter results, our net revenues for the fourth quarter ended March 31, 2016 were $1.6 million an increase of 29.7% or 357,000 as compared to $1.2 million reported for the same quarter last year. This growth was driven by our biopharma segment which increased by 46.8%, $4.3 million to $1.0 million compared to 690,000 for the prior year fourth quarter.
Revenue in the reproductive medicine market increased by 12.3% from 294,000 to 331,000 for the three months ended March 31, 2016. Our reproductive medicine revenue was impacted by third quarter events that I will discuss during the review of our annual results.
Our revenue in animal health remained flat at approximately $200,000 for the three months ended March 31, 2016 compared to the same period of the prior year as a result of temporary reduction in production volume from one of our larger clients. Gross margin for the three months ended March 31, 2016 was 37.4% as compared to 30.9% for the three months ended March 31, 2015. This is an improvement of over 7 percentage points and reflects several management initiatives to drive margin growth towards our target of 60%.
Operating expenses increased $1.1 million for the three months ended March 31, 2016 or 55.4% as compared to the three months ended March 31, 015. This increase is primarily due to non-cash equity based compensation charges, recruiting charges and salaries incurred as a result of expanding our sales force and increased marketing activities.
Net loss attributable to common stockholders for the three months period ended March 31, 2016 was $2.8 million or $0.26 per share compared to $4 million or $0.79 per share in the last year’s quarter. The prior year fourth quarter included a non-cash preferred stock beneficial conversion charge of $1.9 million.
Now to our annual results, our net revenue for the fiscal year were $5.9 million an increase of 49.5% or $2 million as compared to $3.9 million reported for fiscal year 2015. This increase was primarily driven by a 76.7% growth in our biopharma market contributing $1.6 million in additional revenue, with a significant increase in the number of clients utilizing our services compared to the prior year. We added 127 additional new clients in this market and are supporting 78 clinical trials of which 13 trials are in Phase 3.
This increased activity in biopharma and the clinical trial space in particular is expected to drive future revenue growth for Cryoport as these clinical trials advance and resulting therapies are commercialized. Mark provided information on the exciting trends in the regenerative medicine space. It is important to understand that we are considered the pick and shovel play in this industry.
We provide the necessary tools or in our case logistics solutions to life science companies developing cellular therapies. Our overall commercial success in the biopharma market is therefore not tied to the success of one particular drug or therapy.
Now to the reproduction medicine market, our targeted sales in marketing campaigns continued to drive growth in this market which increased by 43.6% or 0.4 million from $0.9 million to $1.3 million year-over-year. This increase was primarily driven by revenue growth in the U.S. market of 72.7% partially offset by a lower revenue ramp internationally of 23% year-over-year.
During our Q3 earnings call in February, we discussed how regulatory changes in certain countries caused the shutdown of medical tourism related to reproductive medicine and the actions we took to expand our service into other countries to compensate for these changes. Our outlook remains strong.
Revenues from the animal health market decreased by 6.1% or $57,000 to $870,000 for the fiscal year ended March 31, 2016 which were impacted by temporary reduction in production volume from one of our clients during the second half of our fiscal year.
Overall, we’ve seen increase in awareness of our cryogenic logistics solutions in the life science space in general and we continue that for significant number of clients in the biopharma market in particular. Equally important is that we are establishing long-term credibility with our customer base, have excellent customer retention expect significant revenue growth from our current customer base over the next years.
With the increase in customers, customer concentration was further reduced and only one of our customers in animal health accounted for approximately 14% of total revenues during the fiscal year ended March 31, 2016 compared to 25.5% for the same period last year.
Now to our gross margins, gross margin for the fiscal year 2016 was 32.1% or $1.9 million as compared to 29.7% or $1.2 million last year. Note that our cost of revenues are primarily comprised of freight charges, payroll and related expenses for our operations center in California, third party charges for our European and Asian depots in Netherlands and Singapore, depreciation expense in the Lock Cryoport Express Shippers and supplies and consumables used for our solutions, the increase in gross margin by over two percentage points is primarily due to the increase in net revenue combined with the reduction in freight charges and a decrease of fixed operating costs as a percentage of revenue.
The increase in margin was driven by our fourth quarter results where we as previously mentioned achieved a gross margin of 37.4%. We started implementing a number of initiatives geared to grow our margin towards our 60% target. These initiatives address both revenue capture and a reduction in related costs.
As I have mentioned on previous calls, our model is a technology centric and scalable business model with the cloud based Cryoportal as our central nervous system providing a platform for the efficient delivery of our solutions. As revenues ramp, we expect to take advantage of greater efficiencies and process improvements that are currently underway and are expected to drive margin growth as we scale.
Now to our operating expenses, general and administrative expenses increased by $2.4 million or 69.4% for the year ended March 31, 2016 as compared to the prior year. This increase was primarily due to non-cash stock compensation expense of $1.3 million, salaries and associated employee costs of $0.4 million and public company related expenses in the amount of $0.4 million including legal fees and cost to list and maintain listing of the company’s common stock on the NASDAQ Capital Market Exchange.
In addition, we disposed of components and equipment used to manufacture our shippers in the amount of $121,000 due to our decision to co-develop and outsource our manufacturing to Taylor Wharton Division of Worthington industries, a partnership we announced in April of this year.
Sales and marketing expense increased by $1.2 million or 42.7% for the year ended March 31, 2016 as compared to the prior year. This increase was primarily due to the increases in salaries and associated employee costs including relocation costs, recruiting fees and the aggregate month of $0.5 million incurred to expand our sales and logistics force, stock based compensation expense of $0.4 million and the engagement of a new marketing firm to support our sales efforts in the amount of $0.4 million as well as increased travel expense and trade shows in the amount of $0.1 million.
Research and development expenses increased by $0.2 million or 56.1% for the year ended March 31, 2016 as compared to the prior year. Our research and development efforts are focused on continually improving the features of the Cryoport Express Solutions including the company’s cloud based logistics management platform, the Cryoportal, the Cryoport Express Shippers and development of additional packaging solutions and accessories to facilitate the efficient shipment of life science commodities.
In addition, research and development efforts have been directed towards developing an advanced conditioned monitoring system, the Smart Pak II Condition Monitoring System which is currently in beta testing and is scheduled to be fully launched in August of 2016.
Net loss attributable to common stockholders for the fiscal year ended March 31, 2016 was $15.1 million or $2.05 per share compared to a net loss of $12.2 million or $2.44 per share. The net loss for fiscal years 2016 and 2015 included non-cash preferred stock beneficial conversion charges of 4.5 and 4.9 respectively.
Cash and cash equivalents as of March 31, 2016 were $2.8 million compared to $1.4 million at fiscal year end March 31, 2015. In addition to the cash in hand, we completed two equity raises subsequent to fiscal year end. In April 2016, we completed the warrant tender offer raising $2.5 million in gross proceeds and last week we completed the rights-off into gross proceeds of $1.3 million.
The funds raised will be used for working capital purposes and to continue to drive customer acquisition and revenue growth. We currently have 15.1 million shares of common stock outstanding which included common stock issue in the recent tender offer and the rights offering. We have no preferred stock outstanding.
Lastly, we will file our Form 10-K with the Securities and Exchange Commission tomorrow Tuesday, June 28. With that, I will now turn back the call to Jerry. Jerry?
Thank you, Robert for your very comprehensive report. In closing, I would like to call the attention of our shareholders as well as other interested parties that are on this call to the special nature of Cryoport and its solution of supporting the life sciences industry.
We are pioneers in this fast moving and growing and evolving life sciences industry. In this age of biology development, we are distinguished by being advanced and to our knowledge and for the time being unique in our capabilities. We support research, development and coming commercial products that are slated to change the course of healthcare and impact almost every aspect of humanity. It is a special place and we have a special mission to fulfill.
The interaction with our clients and the life sciences industry at large, we know that the market, with its evolving precision logistics requirements is beginning to recognize Cryoport with these advanced technologies and growing reputation for reliability as the preferred solution.
One of the key things that is useful for shareholders to understand in practical terms about our increasing pipeline of clients is exactly how our increasing number of trials impact Cryoport over time. Clinical trials as they relate to progression generally in for revenue ramp moving through the clinical stages of development through commercialization.
For example, revenue to Cryoport for Phase 1 trials might typically range from $15,000 to $75,000 annually. For Phase 2 $50,000 to $150,000 and for Phase 3 $200,000 to $1 million and for commercialization $3 million to $20 million plus. So you can readily see why I say we’re just at the tip of the iceberg. These next 12 to 18 months, there is a number of these late-stage clinical trials moved to commercialization will be very exciting for Cryoport and its shareholders.
Mind you, all trials will not progress, a percentage will fail at every stage. When we are factoring those statistics into our forecast, it is the percent that succeeds that is our future. We have enormous growth potential in the bio-pharma space and we’re enjoying rapidly growing brand recognition. We have built and are continuing to build a solid company. I have never been more excited about our future.
For investors and for management, there are also a couple of other factors to consider. As a publicly traded company, we are the only pure play temperature control logistics providers in the life sciences industry. Currently, we are the leading provider of Cryogenic Logistics Solutions. We have the most advanced enabling technologies available to support this rapidly growing global life sciences industry.
Secondly, our business model has reasonably high barriers to entry primarily distinguished by our engineered systems and software. Thirdly, for the time being, we have limited organized competition and no direct competitor that can offer the superior and advanced solutions we offer.
Most importantly, we have a clear vision. We have a capable team of people and partners. We are executing even when faced with changing environments we are agile and pivot to successfully respond and continue on launched profitability and value creation.
And of course spending some time on our people, our company has never been in better shape. And it is my goal to always be able to say that to you. Relatively recently assembled I have never worked with more dedicated group of people. Every individual at Cryoport is your fellow shareholder and every individual is committed to success. From our Board of Directors to our warehousing discharge each day assembling to determine how they can provide improved processes and client satisfaction.
Through administrative staff, pointing to revenue and cost reduction opportunities, to our sales team who confidently cultivate clients as they depend on our confidence innovative and responsive engineering and operations staff to our client care logistics specialists who intensely interface with our clients to assured satisfaction with every experience.
Cryoport personnel stand tall and deliver on all fronts. I’m immensely proud of the company. We are building and the people who are building it. Our plan is to become the dominant company and temperature control logistics for the global life sciences industry and we make progress on that plan daily.
While reporting quarterly results it is very important for transparency. It is over the longer term that the greater value will be created. We are grateful for our long term shareholders and their focus on gauging our progress based on our execution of our strategic plan as it totals to the short term.
In my opinion, our highly impressed stock price today with the likes of company that is severely undervalued as a result of influences that has absolutely nothing to do with building a sound company. This makes the recognition of our efforts by our long term shareholder is even more dear. I’m looking forward to fiscal years 2017 and 2018 as I am confident of our outlook for sustaining our business as our clients commercialize their respective products.
I want to thank you for your interest and for setting aside time to be on this call today. And at this time, I would like to turn the call back over to Garth, who will open the floor for questions.
Thank you, Jerry. Operator, if you could instruct the callers how to ask questions that will be great.
Thank you. [Operator Instructions] And we’ll take our first question from Brian Marckx with Zacks Investment Research.
Hi, good afternoon guys. Jerry, you had mentioned on the Q3 call that, that much of the difference in the revenue, what you expected in fiscal 2016 at that time versus what you had expected and guided to earlier in the year and was essentially delayed versus lost for lack of a better term, is that your expectation currently?
Yes Brian, and that's what I meant to infer by my comments earlier, that’s exactly right. We did have in that mix of things at that time; one, we did have a failure or two in terms of progression, but in terms of the population, nothing changed in terms of our long term forecast, because we had risk adjusted all of our forecasting. But the supposition that you just made, the quote from our earlier reference to my earlier call is absolutely correct.
Okay, great. And then gross margin, which was particularly strong in the quarter, congratulations on that, Robert you talked a little bit about kind of what was behind that, but if there is any more specifics that you can offer and is that a level that you would expect to, that you can build from in 2017 with higher revenue numbers?
Brian, let me address that, but before Robert talks there and then just a moment. You have to understand and certainly many of our shareholders understand we are a developing business, and we are a fee-for-service business, and we have taken actions to close some gaps, to reduce costs. As I said, every morning our warehouse people huddle [ph] to figure out how they can improve process and reduce cost.
So, we are working on both sides of the equation, but this is just the beginning. It's - there is nothing - this is not a business that has been in existence for a long period of time or a product line that has been around for a long period of time. It is a process and it is a march forward as we achieve our revenue goals to broaden the - and accelerate our gross margin to our gross margin goal. Robert, I'll let you add anything if you’d like, I just wanted to make those comments.
Yes, you already covered it, I mean, our target is still 60%, we’re working towards that. Like Jerry said, we’re in the growth phase. There is a number of initiatives, some of them we could implement very quickly, others will still take time to see them reflected in our gross margin, but our target is still the 60%. As we get different revenue streams, that will play a role as well and then you should expect to see management's effort to continue to work on that.
Yes, so – I certainly understand that you guys are putting together the formula to grow the business for the long term. Obviously shareholders are okaying may be possibly which shorter term, and so operating expenses are also -- and I understand you have to invest to grow. So, your operating expenses continue to grow relative to revenue. You are bringing on a few different new service-oriented products I guess, and so may be if you could just kind of talk about what we should expect in terms of operating expenses with the current business and then any incremental expense related to the new businesses?
As we grow Brian, you can expect operating expenses to grow, that is the bottom line. Everyone would like to hear that operating expenses are going to truncate or they are not going to advance or they are not – this is just not true.
Well, relative to revenue, relative to revenue.
Well, it is cash flow breakeven, they will start to receive, but you have to look at that too on a set of [indiscernible] situation that is, where as if nothing changed versus growth. So in the future, I think what we’ll try to do is separate operating expenses related to existing business versus growth, but we will be investing in growth for some period of time.
We have a big footprint to cover. We are a logistics company and so that’s broad and the demands, the customer demand is broad, and so we’ll be fulfilling that and we will be growing and what we probably should try to do and I don’t know, Robert can comment on this, but he is trying to figure out how we can kind of give an indication of the operating expenses related to growth versus operating expenses related to the stabilized business.
Yes, and may be, let me just add to that. I mean, if you look at our organization, we’re actually trying to keep the organization very lean, but if you look at the programs that we are currently supporting and being in discussions with commercial stage companies that are getting ready to commercialize their therapies, we need to have the right resources in place to handle those requests for information and proposals.
If you look at fiscal 2017, we don’t expect a large increase in headcount, but you will certainly see, as an example, increased need for additional Cryoport Express Shippers of different sizes as well as secondary packaging, increase of temperature monitoring systems based on the expected demand from our client base.
And software expenditures Robert, as well as personnel gaps that we have to fill in various countries.
Yes, okay that actually leads me into my next question, it has to do with your Phase 3 trials and kind of segue into commercialized products. So the infrastructure that you have now, the infrastructure and products, particularly the size of your shippers are those sufficient to support a commercialized product, say the commercialized vaccine versus that vaccine in its Phase 3 trial?
Well Brian, I am going to turn this over to Mark to answer that in more and from his point of view, but you implied in your assumption is that we are a one trick pony. We have a constant development effort going on to meet client demands, we are customer driven. This is not a business that you take it or leave it. We answer customer demand. So, as we move forward, we have packaging and development right now and in testing for some of the applications that you were inferring, but Mark, you may have something to add to that.
Yes, so when you look at a commercialized product or product that moves towards commercialization, you have to look at the evolution of the packaging itself. So, as they go through early clinical phases, they are very risk averse and they go with a very conservative packaging configuration that is the lowest risk from a failure standpoint as many bells and whistles as possible on monitoring and other aspects.
As they move to commercialization, they want typically a customized piece of equipment that obviously takes into account commercial launch costs, cost to goods, cost to delivery very significant consideration. Henceforth, one of the primary reasons we initiated this consulting division that you heard and had Jerry talk about a bit was that in most of these commercialization conversations that we have, they want customized equipment for that commercial launch and the relationship with Taylor Wharton as well the combination with our consulting division is in direct response to that request.
The good thing is that, the relationship with Taylor Wharton provides us the ability to very, very rapidly scale our equipment base to support an increasing volume from tens or hundreds to tens of thousands.
Okay, great. And Jerry, my question wasn’t kind of geared towards one portfolio, it was actually more geared towards were these new relationships and these new businesses somewhat related to a potential commercialized product, particularly the Worthington partnership that you entered into. So that’s...
It’s a good question.
Yes, let me just respond to that very quickly. One of the things you have to keep in mind here is, having a company the size of Cryoport actually gets requests from very large pharmas to actively compete for a formal request for proposal. This isn’t a trivial exercise. This is an exercise that they do a tremendous amount of due diligence on their side to even ascertain who is going to be included in that active bidding process itself.
So, for us to be, to actually have a commercial product now through our large biopharma and be heavily engaged in multiple others through that formal RP process is a testament to the way that they perceive Cryoport in the marketplace.
Okay. Great, one last one, is there anything more you can talk about in terms of what exactly your role is with the big pharma $4 billion product that you referenced?
We will have to wait on that until we are a little bit further along and we try to make everything public that we can, but we have to have approval from our client base. So that’s a new relationship. As I said it’s only two weeks old. We just signed it two weeks ago, so we have to let that mature little more before we can say anything else about it.
Okay, great thank you and congrats on the progress.
Thank you, thank you.
[Operator Instructions] We’ll take our next question from David Halperin with Stifel.
Hello everybody. I’ll go through these very quick. I’ve got some easy questions. First of all Robert, could you just quickly give me what the share count was, I missed that when you were going through it?
Yes comp stock outstanding is $15.1 million.
$15.1 million, thank you. And Jerry, you talked about increased sales force, how many are we at now?
We have eight in total.
Eight total, thank you.
Yes, we have one in the EU. We have five territories in south sales IVO and of course Dr. Sawicki.
Okay. Got it and Mark, a question for you, you said that the animal health science there was a loss of large customer, is that permanent or is that customer likely to come back or even increase their business in the foreseeable future?
No we didn’t lose the customer, we had - that customer, one of our largest customers in that space had a production issue with one of their facilities that impacted their volumes going out to third parties. That has subsequently resolved itself and we’re actively engaged with other parties and we believe that we’ll be able to have additional relationships of that nature during this fiscal year.
I mean in the coming quarter or later in the year?
I mean I can’t get into specifics around timing yet.
Sure, fair enough.
It’s obviously dependent on when they sign on the dotted line.
Okay and back to Jerry, well actually I wanted to pick up real quickly where Brian left off, you said we have - we’re only two weeks into this relationship and you can’t really talk about the big pharma company yet, but is that likely to start showing up in the next quarter or again is this something for much further down the calendar year of fiscal 2017?
No, as Mark said, it is a commercial product and so it will begin to show up soon.
Okay and can you give a quick snapshot of - we only have three more days left in the quarter, what is our estimated cash position as we’re coming into the end of the quarter? We’ve picked up 2.5 million gross in the April warrants, 1.3 million gross in the rights offering, 2.8 million at the end of March, roughly where are we at?
Yes, so we are following the option that we completed, our cash position is about $4.5 million.
Okay. Thank you. So we’re not likely to see anything about a growing concern and the current 10-Q is going to be coming out right, or 10-K?
Robert, take that one too.
Yes, we will still have growing concern in the language. We had discussions with our auditors about that, so that will still be part of our audit report and the 10-K that we will file tomorrow.
Okay, it will show up in the 10-K. Got it.
And last question I guess Jerry for you, you said you won’t give us forward guidance for fiscal 2017, but again given that we’re only three days away, are you willing to give it? You did say that in your prepared statement that Q1 2017 is already ahead of Q1 2016. Can you give us some percentage 30% ahead, 50% ahead, 100% ahead, can you give us any color?
No, not right now. I’m not going to be in the guidance business again. I got my nose bloodied last year and probably should not have given, well I shouldn’t have given guidance. So I only want to stay with that policy of not providing guidance.
Okay, fair enough. I think I hit all my questions, so thank you everybody.
Thank you, David. Thank you.
We will take our next question from [Anthony Gulof], Private Investor.
Yes hi, good morning gentlemen. My concern essentially is, I appreciate the business. I have been following the company for at least eight years. I’ve been studying it and I’m just wondering at what point in time are we going to actually be profitable?
Robert, would you like to take that?
Yes, I mean, we expect in terms of getting to profitability and cash flow breakeven, it has to be a quarter that’s in the $14 million to $16 million annualized revenues, so that is really, it is a little higher than we thought in the past, but that is about $14 million to $16 million in annualized revenues at which point we should reach cash flow breakeven.
If this is the situation, why don’t we try to balance general and administrative expense more in line and more proportionate with the revenues? I mean, when does it actually…
Anthony, you would kill the company and you will kill its future. I mean, sure if you want to make this absolutely totally efficient, shut it down. I mean you would kill the company if you balanced it right now. What Robert was referring to Anthony is what the steps that it takes to build a company and the only reason we're up from 12 to 14 to Robert's estimate of 14 to 16 has to do with overhead that we had to put on in order to accommodate the new therapies that are coming. And the new therapies that are coming are, well they are huge, they are huge, I mean that's all I can say.
This is about building a company and it is not a zero sum game. It is not a mathematical game. It is about building a company. Mathematics has to do with it and I do appreciate what you are saying, but we cannot do it that way.
Well, it just seems, it seems with the equity in the company of $3 million I'm just wondering how many quarters like this can we take before we're in deficit again?
Well, we have to worry about that constantly and but this is not a distribution business like a nut and bolt type business, it is a different kind of business and it is a very exciting business and there is a lot of value to be created here as…
I take this forward to be fantastic, but if we continue at this rate, you take another 2.7 million next quarter and then the quarter after, I mean you are into negative territory here. I am just wondering, I mean you've got to balance it a little bit.
Yes, yes and I appreciate your comments and your thoughts.
Okay, thank you.
That does conclude our question-and-answer session for today. At this time, I'll turn the conference back to management for any additional or closing remarks.
Well, thank you very much everyone, thank you for all your questions and especially thank you for taking the end of your day to hear what we had to say and for the dialogue and for the questions. I really appreciate your interest and we all are working hard for you the shareholders and we look forward to reporting to your at the end of the next quarter. Thank you very much.
This does conclude today's conference. Thank you for your participation. You may now disconnect.
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