Champions Oncology, Inc. (CSBR) Q3 2017 Earnings Report, Transcript and Summary

Hi. I’m Ronnie Morris, the CEO of Champions Oncology. I’m joined today by David Miller, our Vice President of Finance and Administration. Thank you for joining us for our quarterly earnings call. Before I start, I will remind you that we will make forward-looking statements during the call and actual results could differ materially from what is described in those statements. Additional information on factors that could cause results to differ is available in our Forms 10-Q and 10-K. Certain non-GAAP financial measures may be discussed on this call. Reconciliation of non-GAAP to GAAP financial measures are available in the earnings release. It has been an eventful quarter for Champions, so there’s a lot of information to discuss. We will cover an update on our business strategy, as well as the financial results. We continued our year-over-year quarterly revenue growth, while maintaining a careful watch on our operating costs, positioning us for profitability going forward as we further grow our business. In fact, with the previously discussed cost saving initiatives expected to be fully implemented by the second half of 2018, we are confident in near-term growth achieving cash flow positive results on a consistent basis. We continue to experience quarter-to-quarter volatility as a result of the timing of our customer engagements. We are laying the ground work to reduce this volatility and strengthen our financial position as we enter the final quarter of our fiscal 2017 and look towards fiscal year 2018. I am increasingly confident that we are on a clear short-term path to profitability and increasing shareholder value. Year-over-year revenue growth in the third fiscal quarter of 2016 was 40%, driven primarily by the growth in our TOS segment. David Miller will talk more about the underlying drivers later in the call, but at this point, I want to highlight several key ordinances of our results and strategic outlook. Although, we did not report our pipeline and bookings, they are certainly a strong indicator of future revenue, the level of access to our customers and the general perspective health of our business. This quarter was an extremely good bookings quarter and in fact was 30% greater than our previously recorded highest bookings quarter which occurred in fiscal Q1. Looking ahead, we anticipate strong consistent bookings in the coming quarters, which supports our view of continued revenue growth and reinforces our confidence of sustainable profitability and achievable goal in the next few quarters. A portion of our growth is being driven by our efforts to expand the scope on the clinical trial simulations we are performing for our customers and more preferred provider relationships. For example, we announced a $2 million contract with the large pharmaceutical client this past November. This is the largest pre-clinical pharmacology contract in the company’s history and it’s almost double the size of our largest previous contract. This preferred provider contract include studies utilizing Champions’ patient-derived xenografts models and a component of work with immuno-oncology drugs. While not only large in size, this contract also demonstrates our ability to expand in the existing customer relationship and grow the use of our free clinical PDX product and related products. By leveraging existing relationships that we have developed with nearly 150 customers and our reputation for high-quality results, we believe there is a significant opportunity to develop additional preferred provider relationships to drive future growth. The commitments from our sales team couple with investments in our tumor bank have been a powerful dynamic in the marketplace, driving increase in booking -- increase bookings each quarter. We usually announce the addition of new cohorts of PDX model to our tumor bank. We believe our unique ability to use our network of academic collaborations to develop fully annotative models will expand our product line and increase the Champions tumor bank greater than the current 900 clinically relevant patient-derived xenograft models. By making these unique models commercially available for translational studies, researchers and pharmaceutical companies will now have access to exclusive animal models integral to drug development research that have been generally inaccessible in the past. We expect this will be a key driver to accelerating our core revenue growth in the near-term. Over the longer term, we are continuing to concentrate on two initiatives. First, continuing to execute within our core business to drive revenue growth and managing our cost structure to expand our margins and achieve sustainable profitability. We have built a powerful platform over the last few years to support our extensive pharma customer base, with high-quality operations and robust commercial distribution. We have reached a point where we can fast track our efforts to leverage this platform for accelerated revenue growth and margin expansion. While we expect to achieve healthy growth in our core business and be able to sustain profitability with emerging and complementary urge of our business that could provide additional growth. Our second area of the focus includes the development of new innovative product and services. We see additional non-core potential growth coming in several different areas. First, immune-oncology, an exclusive area in oncology drug development that is lacking a robust platform to perform much needed animal studies. While we are currently doing studies for pharmaceutical companies using our existing ImmunoGraft offering, as well as syngeneric mouse models, we are in the midst of R&D effort to provide a more robust and complete offering. We believe success with this R&D will open up many new opportunities and potentially lead to accelerating growth. Second is broader adoption of our PDX approach by enticing these pharmaceutical companies to use PDX more broadly and different stages in their drug development pipeline. As we have discussed on earlier calls, the two areas this applies to are having pharma use the platform for larger trial simulation studies and to use the platform alongside their clinical trials. To-date, we have booked several co-clinical trials, which includes over $9 million in bookings, for which we have only recognized $250,000 in revenue. This is a really exciting use of our platform, which we are uniquely position to perform, but there is a lag between bookings and revenue as a consequence of the longtime for clinical trial to enroll. And thirdly, is our proprietary data, we believe this data could be very valuable to pharma companies, as they seek to increase efficiencies and lower their cost of research and development. In the near future, we will be exploring strategies to monetize this off balance sheet asset to increase shareholder value. Now, let me turn over to David to review the financial results.

Thanks, Ronnie. Overall revenue for the quarter was $3.6 million. Our year-over-year revenue growth for the quarter was 40%, driven primarily by 50% growth in our TOS segment. As we mentioned nearly every quarter, we experienced and continue to expect various levels of volatility in our revenue and overall results quarter-to-quarter. I will explain some of the challenges in predicting financial results shortly. Our revenues for the quarter demonstrate this volatility, with a year-over-year increase of 40% get down sequentially. The year-over-year increase in our revenue was due to the sustained strong bookings growth we’ve achieved over the last several quarters. However, our revenue recognition policy, which is in -- which is in accordance with GAAP dictates that we only recognize revenue when the study model completes. Typically study times generally run between four months and six months. The length of the study is heavily driven by the time it takes for tumor to grow in the mice and then get treated with pharmaceutical drugs. Each tumor is different and while we analyze growth curves when designing a study it is not possible to predict the exact completion date. As such, studies and associate revenues that we predict to complete at the end of the quarter can easily get pushed into subsequent quarters. While we expect this volatility to continue as our revenue and bookings continue to grow we expect these fluctuations have less of an impact on profitability. TOS segment gross margin was 35% for the quarter and 11 basis point improvement over the same period last year, but still below the true gross margin of the business if revenue and expense recognition were aligned. As such, gross margin continues to be a difficult metric to accurately understand our income statement. As our revenue continues to grow we expect our gross margin to increase as we leverage our fixed cost against a higher revenue base. However, along with the growth at times variable costs may increase as we incur expenses at the start of new studies and before revenue is recognized, putting structural pressure on operating margins. Long-term, however, we continue to expect gross margins to trend upward as we continue to operate more efficiently and implement new methods to lower our costs. TOS segment revenue was down for the third quarter to $347,000, a 17% decline over the same period last year. The decrease is primarily the result of a decline in non-core sequencing revenue. While we do not expect TOS to drive revenue growth, the business segment provides strategic value in our local pharma and academic collaborators. Although, TOS is not a revenue driver, we have focused our efforts to boost the sequencing revenue and expected to climb this quarter to be temporary. As with our overall operations, we are continuing to focus on lowering our cost in this portion of our business and have succeeded in turning negative gross margin to positive in this business segment. We’ve posted gross margins of 8% for the quarter compared to negative gross margin of 50% from the same period last year. Next, our operating expenses including R&D, sales and marketing, and G&A were $2.6 million, a decrease of $260,000 or 9% for the same -- from the same period last year. The decrease is due to a reduction of stock-based compensation. Excluding stock-based comp, operating expenses were mainly flat over the same quarter last year increasing only $60,000 or 3%, while operating revenue was over $1 million higher. Looking forward, we will continue to be laser focused on expense management along with uncovering additional opportunities for further baseline cost reductions. Combined, our cost of sales and operating expenses of $4.7 million was slightly higher than our recent $4.5 million run rate. This is largely driven by two non-recurring expenses. One, related to the continued investment in the characterization of the significant number of models in our tumor bank. The other was outsourced lab expenses for a specific study in order to meet customer commitments. We will bring the work back to our labs next quarter. As a result of our higher operating expenses and lower sequential quarterly revenue, our net operating loss for the quarter was $1.2 million. We talk a lot about the challenges of our revenue and expense volatility when explaining our financial results. The net operating loss this quarter in contrast to our net operating profit last quarter highlights the reason we give it so much attention. The combined second and third quarter results along with our internal expectations, however, we expected those result to be more evenly distributed. Instead, the timing of study completion and revenue recognition were in our favor during our second quarter and against us during the third quarter. For this reason, we encourage investors to look at our performance over a period of time and see through the quarter-to-quarter volatility. As stated, however, the combined results were in line with our internal expectations and that’s why we are confident that over the next few quarters we are on a path to sustained operating profitability, while continuing an ongoing investment in R&D of approximately $4 million per year. While there is additional opportunity to leverage economies of scale and process improvements to drive down costs, we have recently announced our plans to move into our own lab facility during the second quarter of our fiscal 2018. This is an extremely exciting opportunity for us, along with doubling our capacity the move will drive down both strict monthly costs along with per study variable costs. The full cost savings which will be significant are expected to begin in our third quarter of fiscal 2018. We will discuss this opportunity in future calls. Now let me turn to cash. As of January 31, 2017, we had approximately $3.5 million of cash and cash equivalents. We believe this level of cash coupled with our plans to achieve sustainable profitability is adequate to fund our operations and there will be no need to issue equity in the near-term. Cash used in operating activities was $680,000 for the quarter. The increase is directly related to the timing of study completions. Capital expenditures while historically not a significant number was $150,000. This was to our fixed asset purchases that will be using our lab that we just discussed. We had solid revenue growth and bookings this quarter, and continue progressing in our cost savings. As we continue down this path, along with a cost saving measures that we expect to be fully realize in the second quarter -- second half of 2018, we are confident in our goal of achieving cash flow positive result on a consistent quarterly basis. Now let me turn it back to Ronnie for some final remarks.

Thank you, David. Our results demonstrate another solid quarter with 40% revenue growth and record bookings. This is an exciting time at Champions as we are strengthening our position, emerging areas and developing sponsored research opportunities to expand our offerings. We look forward to providing you additional updates as we continue to make progress. With that, we will open it up to questions-and-answers. Carla?

Yes, sir. [Operator Instructions] And your first question comes from the line of [ph] Larry Diamond (14:40). Your line is on.

Thank you. Your report had mentioned there were some customer timing issues, which impacted revenues this quarter. Do you expect that to reverse next quarter or sooner after?

I think what we are describing is the nature of our business that it takes approximately several months for a study to be completed. So, as an example, often times a study will be six-week study or four-week study and then the sponsors, the pharmaceutical companies decide that they want to extend the study for another month or two and they want to continue the cohort of models on the drug or they want to see how the response of the drug did for an extra month or two. And so we have to extend the study. We can’t recognize revenue. That’s one example where is good for us. We actually get more revenue but often times sponsors will ask us to extend studies, which our current lab facility and our current environment is a little problematic for us, because we can’t the next study and so one of the studies starts, because we have certain issues of capacity. So I believe as we move into the new lab some of these issues will take care of themselves. We will always have a little bit of problem with this up and down volatility. I also believe that as the bookings continue to grow the volatility will always -- is always going to be there, but the difference is we believe that we’ll always have volatility, but we will always be profitable. So volatility won’t hurt us as much.

Thank you.

Your next question comes from the line of [ph] Kenny Green (16:38). Your line is live.

Hi, guys. A question actually about the cost savings you are going to see from the new office, you said in the fiscal second half 2018. I wonder your current OpEx is around, I think, $2.5 million. How much, I mean, once you’ve done the move to the new office, how much you think this will lower in the second half of 2018 or once everything is move?

So, I guess, the easiest way to answer you, Kenny, is that, on a current revenue, if we were in the new lab today, we would probably save about a $1 million a year. So about $100,000 a month, something in that range or around a $1 million a year, that’s under our current volume. As we continue to grow, we actually see more of a savings on every dollar of revenue that is incremental. But, again, that’s the easiest way to answer on our current, if we were to take our current operations or current revenue. We were in that lab today, that how much we would have saved.

All right. Another, I mean, the -- you are starting with 30% growth in bookings from your previous stake, when do we see that actually making it into revenues, is it immediate or there are still going to be four months to six months and certainly that will be use of completing itself?

Yeah. I would say it generally takes us and this is a little bit of a general comment. But it generally takes us about two quarters to see that. It depends on the type of bookings. Also, again, some of our bookings are shorter studies, some of the bookings are longer studies, but on average I would say, probably, two quarters you get to see before impact of the higher bookings.

Really the first quarter of ‘18 we should…

Correct.

… see some, okay, impact, okay.

Correct. Correct.

So one last thing actually thing is maybe building on the previous question, Larry’s question. The revenue that was sort of mix because of the unpredictability of the business. What -- is this revenue that just let between quarters or this just push everything out or sort of pushed it out maybe in a little bit will come in Q4 ’17 and then Q1 ’18 or will equal some sort of a high level revenue next quarter that you won’t expect it, I think…

Right. So, I think, it’s better to look at it is just pushing everything at little bit. I think there was a combination of some factors. I think some of the revenue we are expecting in this quarter actually got pushed forward. It got push up to Q2, and of course, Q2 to be little bit better than ordinarily would have been. And I think some of it just, just got pushed back, but that is also going to cause some of the revenue in the Q4 to be push back. Part of the problem is, as we do different -- lot of different studies, we do leukemias, we do syngeneric work, we do PDX type work in our current facility even though we aren’t at capacity in terms of our cages, we are at capacity in terms of rooms and all of these different types of work have to be done in different rooms. So even if there is capacity in one room, we can’t mix some of the leukemic work, with some of the immune-oncology work, with some the syngeneric work. So it does restrict us from just doing a lot or at once. Starting in July as we move into the new facility we are not going to have those restrictions. So we feel it’s going to help us push this through a lot more of the studies or at once and again we will be able to sustain our increase bookings and moving to higher revenues.

And July of next year or July this year coming -- July 2017?

July, August of -- I am sorry, it’s probably close to August, August of 2017.

Okay. Okay. So coming soon.

Yeah.

All right. Final question, I think, I remember you have revenue guidance of around plus $16 million to $18 million. Is that still possible or we’re going to get some funding more?

Yeah. I would say that we are looking at the lower range of that as a -- what we say, I would say, a close to probable and if we miss a little range it’s not going to be very large, so we are probably looking in that area.

Okay. You are still expecting it a fairly good fourth quarter then will be stronger than this quarter.

Yeah. Yeah.

Okay. All right. That’s it from me. Thanks a lot.

And at this time, there are no further questions in queue.

Thank you.

Thank you.

Bye everyone.