Champions Oncology, Inc. (CSBR) Q2 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen. And welcome to Champions Oncology Second Quarter Fiscal Year 2018 Earnings Call. All lines have been placed on a listen-only mode and the floor will be opened for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Ronnie Morris. Sir the floor is yours.

Good afternoon. I’m Ronnie Morris, the CEO of Champions Oncology. Joining me today is David Miller, our CFO. Thank you for joining us for our quarterly earnings call. Before I begin, I will remind you that we will make forward-looking statements during today’s call and that 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 Form 10-K. A reconciliation of non-GAAP financial measures that may be discussed during the call to GAAP financial measures is available in the earnings release. The second fiscal quarter of 2018 exhibited the significant progress we have made over the past year expanding our addressable markets and streamlining our cost structure to position the Company for sustained profitability. For several quarters, we have been discussing the elevated bookings, which we expected would drive increased revenues in future quarters. I am pleased to report that during the second quarter, we generated record quarterly revenue. The record revenue spearheaded our drive to achieve operational profitability. This profitability defined as our operating income excluding stock-based compensation is expected an important milestone for us. Our results at the midpoint of the fiscal year and our visibility into the second half reinforce our confidence in reiterating our outlook for strong annual revenue growth of at least 20% over last year and achieving net profitability and positive cash flow for the full year. We have also completed the movement to our own new state-of-the-art lab facility at Rockville, Maryland, doubling our capacity, enabling us to run studies more efficiently and creating capacity for additional growth. As a result, we expect to realize material lab cost savings of approximately $1 million annually at our current revenue levels. During the quarter, we signed a competitive contract through the government Small Business Innovation Research program, SBIR in response to Cell and Animal-Based Models to Advance Cancer Ethnic Health Disparity Research. The contract is a two-year $2 million project to build and study an ethnically diverse cohort of metastatic prostate patient-derived xenograft models. Fully characterized, ethnically diverse prostate PDX models are under-represented among PDX banks, limiting opportunities for preclinical and translational oncology studies. Not only is the incidence of prostate cancer higher in African American men than other ethnic groups, the mortality rates from prostate cancer for African American men are higher. A primary goal of this project is to create new tools to better understand the ethnic health disparity in prostate cancer. The project will leverage our quality management strategies for industrial scale PDX development and incorporate novel approaches and techniques to efficiently build and study new prostate PDX models. As part of this project, Champions has partnered with InnoGenomics to perform high-sensitivity liquid biopsy techniques to PDX models. This award highlights the significant opportunities we are creating in the market and the benefits of focused investment in key R&D activities. This SBIR project along with other recently announced collaborations has the multiyear strategic collaboration with AstraZeneca to develop new PDX models for their oncology R&D programs are prime examples of our combining a strong clinical expertise and strong scientific support to enhance drug development. These new models reflect the current standard of care, are not widely available and will expand Champions’ unique TumorGraft. These partnerships are expected to be pivotal to the development of the next generation of drugs. These partnerships also represent another dimension in our capabilities to deliver a specific cohort of PDX models to clients to support their drug development portfolios in key areas. We are energized by where we are as a company, both in terms of our strategic direction and day-to-day operations. We are operating within business a framework that enables us to deliver for our clients and create new business opportunities while improving financial results for our shareholders. We are consistently delivering strong revenue growth from a relatively fixed base of costs that places us on a trajectory for accelerating profitability and positive cash flow. With that I’ll turn it over to David Miller, our CFO, to talk about our financial results.

Thanks, Ronnie. Our full results on Form 10-Q will be filed with the SEC on or before December 15th. Revenue for the second quarter was $5.2 million, another quarterly record high and an increase of 16.8% over the prior year, driven primarily by a 21.8% increase in revenue in our TOS segment. The year-over-year increase in revenue in the second quarter is the result of our sustained growth in our sales pipeline. By business segment, TOS revenue was $4.8 million for the three months ended October 31, 2017, a 21.8% increase compared to $4 million in the second quarter of last fiscal year. I want to highlight the 22% quarter-over-quarter revenue growth. This percentage is lower than our 30% plus annual revenue growth rate, but result of an exceptionally strong second quarter last year. As we head into the second half of our fiscal 2018, we anticipate our quarter-over-quarter growth percentages will trend higher than the current quarter. TOS gross margin was 50.3% for the second quarter, compared to 53.9% in the year ago period. As a reminder, our gross margins may fluctuate quarter-to-quarter, given the manner in which revenue and expenses are recognized in accordance with GAAP. Expenses are generally incurred and recorded throughout the life a study, while revenue is typically recognized at the time the study is completed. Over time and as our business continues to grow, we expect to narrow the quarter-to-quarter gross margin fluctuations. In addition, we also expect our gross margins to improve over time as we leverage our fixed cost against a higher revenue base and realize some of the variable cost savings generated by operating our new lab facility. Revenue in our POS business segment was $379,000 for the second quarter of fiscal 2018, compared to $497,000 in the same period last year. The decrease is primarily due to a decrease in implants in the prior and current quarter, which also leads to a decrease in study revenue. And as I said over the last several earnings calls, this decline is expected as we shift our strategic efforts primarily to our TOS business. POS will not drive revenue growth. However, the segment provides strategic value in our group of pharma, research and academic collaborators. POS gross margin was 31.6% for the second quarter of fiscal 2018 compared to 24.7% in the same period last year. Research and development expense was $1.1 million for the three months ended October 31, 2017 compared to $1 million for the same period last year. The year-over-year increase in R&D expense was primarily the result of new model development cost. Sales and marketing expense was $551,000 for the three months ended October 31, 2017 compared to $717,000 for the same period last year. The decrease in second quarter sales and marketing is mainly a result of a reduction in resources for the POS division. General and administrative expense was $936,000 for the three months ended October 31, 2017 compared to $1,022,000 for the same period last year. The decrease in G&A is primarily the result of a reduction in stock-based compensation expense. Total operating expenses were $5.2 million in the second quarter of fiscal 2018, compared to $5 million for the same period last year. As you know, we focus on operating results excluding non-cash based stock compensation expense. As such, it is important to draw attention to those results, even if on the surface, they do not appear to work in our favor. Combined, our cost of sales, operating expenses excluding non-cash stock-based compensation and depreciation expenses were $5 million for the second quarter of 2018, compared to $4.4 million for the same period last year, representing a 13% increase. I want to reiterate the point made earlier on the call. Just as our prior second quarter revenues were exceptionally strong, our second quarter total expenses for the same period were lower than our average quarterly run rate. As such, the increase in our cash-based expenses this quarter relative to the same period last year is not indicative of a systemic rise in our cost structure. We expect our total cash-based expenses for fiscal year 2018 will increase at recent historical levels of low-single-digit percentage growth, primarily resulting from expectations of increased workflow. As Ronnie highlighted earlier, excluding non-cash stock-based compensation and depreciation expense, we are excited to report that we achieved positive income for the quarter of approximately $200,000. Now, let me turn to cash. Net cash generated by operational activities was $293,000 for the quarter, compared to cash used in operation of $115,000 for the same period last year. The increase in our cash generation is due to our revenue growth and excluding [ph] operating results. More importantly, at the end of our first quarter 2018, we had approximately $430,000 of cash on the balance sheet. As discussed on our first quarter call, the burn rate for that quarter was $2.9 million. The accelerated run rate was due to an investment of approximately $1 million of fixed assets related to our new lab along with our other balance sheet accounts negatively impacted cash flows in the normal course of business. However, as expected, our cash position stabilize this quarter as we generated positive cash flow and as of date of this call, our cash balance is well over $1 million once again. While there can be some fluctuations in our cash position due to the timing of receivables, we remain confident that we have sufficient cash to fund our operations. This quarter, we also closed on a small line of credit to support any short-term fluctuations in working capital. In summary, we are quite pleased with our second quarter financial results and the performance of our day-to-day operations. We reiterate our guidance of at least 20% revenue growth for the full fiscal year 2018 and look forward to achieving sustained quarterly profitability. We look forward to updating you about additional accomplishments as the fiscal year progresses. We’d now like to open the call for your questions.

And our first question comes from Joshua Horowitz. Please state your question.

Hi. Thank you. Good quarter. Is there some way to think about other potential competitively-bid contracts and other specialty programs that you guys are bidding on that we could look at as maybe a pipeline or some other source of additional revenues that we’re not really thinking about in terms of the base business?

Yes. So, we’re certainly, since both the SBIR, AstraZeneca and a bunch of other collaborations or partnerships that we did in the past couple of months or past couple of quarters, we’re certainly looking at that avenue where I’m currently applying for some other grants as well. So, it’s something that because of the space we’re in and because of the importance of what we’re doing, we definitely see that as another avenue for not only helping us build up our -- take away some of our R&D expense, so that we continue to grow without having to expend the dollars ourselves, but we’re also looking it as a possibility for some growth. So, it’s certainly something that we’re engaged in. We don’t really yet have a pipeline, we’re certainly applying for certain stuff and working with them other pharmaceutical partners. And it’s certainly an area that we’re looking to expand.

Thank you. How do we think about the margins on these types of projects?

Do you want to answer that, David?

Sure. I think for the most part, the margins will be similar to our normal margins in the TOS business. Most of the work is very similar. So, the expenses will be the same, the revenues for deal also in line, you just need a different type of product with different revenue stream, but the pricing and the cost should be relatively in line with our current TOS business.

Great. Thank you very much.

Thank you. [Operator Instructions] And there appear to be no further questions at this time.

Thank you very much everybody for joining us in the conference call. We look forward to continuing to update everybody on the call.

Thank you. This does conclude today’s call. We thank you for your participation. You may disconnect your lines at this time, and have a great day.