Champions Oncology, Inc. (CSBR) Q4 2018 Earnings Report, Transcript and Summary

Greetings and welcome to Champions Oncology Fourth Quarter Fiscal Year 2018 Earnings Conference 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. It is now my pleasure to turn the conference over to your host, Ronnie Morris, CEO of Champions Oncology. Thank you. You may begin.

Good afternoon. I’m Ronnie Morris, CEO of Champions Oncology. I’m joined today by David Miller, our CFO. Thank you for joining us for our quarterly earnings call. Before I start, I will remind you that I 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 Form 10-K. A reconciliation of the non-GAAP financial measures that may be discussed on the call to GAAP financial measures is available in the earnings release. Overall, we had another year of continued substantial progress for Champions Oncology. We recorded another year of record revenue exceeding $20 million for the year and easily surpassing our guidance of 20% revenue growth. We fully transitioned into our own new lab facility and cannot be more pleased with the operational efficiencies, additional capacity [Technical Difficulty ]

Ronnie, this is the operator.

Third, PDX continues to be very important tool in preclinical drug development and our large and well characterized tumor bank is a key advantage. Fourth, our scientific expertise and collaboration with many academic medical institutions and investigators allow us to review biopharma in a more consultative way giving us the distinctive advantage in both building our bank and scientific leadership. And lastly, we have able to successfully leverage our relationship with pharma to expand our core services and we see this as a powerful catalyst for future growth. Operationally, we continue to maintain and control our cost, and once again, have achieved single-digit expense growth, while revenues have grown by double digits. As we have discussed in the past, we feel confident that this margin improvement will continue as we find new ways to increase the productivity of our labs and our people and we leverage our fixed cost infrastructure over growing revenue base. With regards to the top line, while we don’t disclose our bookings numbers, we had record bookings for the second-half of 2018, as the trend is continuing through the first quarter of 2019. This nicely set the stage to come through on our revenue projections for fiscal 2019. We continue to see positive trends within our customer base. We added over 60 new pharmaceutical and biotech customers in 2018, and now have a customer base that exceeds 200. The annual dollar volume of existing customers continues to grow as well. So to summarize, we are adding new pharma and biotech customers at a nice pace on average growing the revenue, these new customers contribute over time. We’re gearing for growing both the depth and breadth of our customer base. As we discussed on prior calls, we have been expanding our offering over the last several years, including expanding our solid tumor and hematologic PDX bank and introducing several immuno oncology offerings. Looking ahead to 2019, we expect to introduce our ex vivo platform, which we believe is much needed and sold after by the pharmaceutical companies. This ex vivo platform and services will enable us to leverage our large tumor bank to provide large screening studies and assist our customers in some of their early preclinical work. While we’re not counting on these new services to contribute meaningfully to revenue in 2019, the introduction of these new services laid the ground for further revenue expansion in future years. We look forward to providing additional information in the coming months. We’ve made monumental progress towards achieving profitability, narrowing our loss from operations on a GAAP basis from nearly $7 million in fiscal 2017 to $1.3 million in fiscal 2018. When excluding stock-based compensation and depreciation, we achieved break-even results. We’re very optimistic that our revenue growth will again exceed 20% in fiscal 2019 and combined with modest single-digit increase on cost and operating expenses. We’ll be both profitable and cash flow positive on a consistent quarterly basis during 2019. Now let me turn the call over to David Miller for a more detailed review of our financial results.

Thanks, Ronnie. Our full results on Form 10-K will be filed with the SEC on or before July 30. As you can see from our results, the consistent level of new business that we have been signing, along with efficiencies we continue to extract from our operations as we grow are driving overall higher more consistent revenue levels quarter-to-quarter. Total revenue for the fourth quarter was $4.9 million, an increase of 32.3%, compared to $3.7 million in the prior year. Revenue for fiscal year 2018 was a record $20.2 million, an increase of 31.1% of the prior fiscal year and well ahead of our guidance of 20% revenue growth. This increase was driven primarily by 37% increase in revenue in our TOS segment. We are pleased with the growth and progress we made in fiscal 2018. Looking ahead to our fiscal 2019, we once again, are comfortable predicting revenue growth of at least 20%. TOS revenue was $4.5 million for the three months ended April 30, 2018, a 35.5% increase, compared to $3.4 million in the fourth quarter of fiscal 2017. TOS revenue was $18.8 million for the fiscal year ended April 30, 2018 and $5.1 million, or 37.2% increase, compared to $13.7 million for fiscal 2017. TOS gross margin was 45% for the fourth quarter, compared to 31.3% in the year-ago period. TOS gross margin was 50.2% for fiscal year 2018, compared to 39.6% for fiscal year 2017. As we’ve discussed numerous times, our gross margins may fluctuate quarter-to-quarter, but the volatility is likely to decrease as the business grows. In addition, we expect our gross margin to continue to expand as we leverage our fixed cost structure and continue to drive productivity increases. Going forward, we will not be breaking out our POS business segment on our financials, and therefore, we’ll not be discussing on our quarterly calls. The rationale for the decision is that, POS has become a diminishable part of our financial results and its percentage contribution to the total will further diminish over time. This is mainly due to the expected growth in TOS and now it’s further declined in POS, which we expect to remain generally flat over the next year. Research and Development expenses were $1.1 million for both the three months ended April 330, 2018 and 2017. Research and development expenses were $4.4 million for the fiscal year ended April 330, 2018, compared to $4.3 million from the prior fiscal year, a modest increase of 2.5%. Sales and marketing expenses were $715,0000 for the three months ended April 30, 2018, compared to $890,000 in the same period last year. Sales and marketing expenses were $2.5 million for fiscal year 2018, compared to $3.3 million for fiscal year 2017. The 21.2% decrease was mainly the result of a reduction in total marketing salaries, along with a reduction in travel and conference expenses, as we took a more strategic approach to conference attendance. In 2019, we do expect an increase in our sales and marketing expenses, but that will be the result of expanding our sales force, which should enable us to capture additional sales opportunities. General and administrative expenses were $845,000 for the three months ended April 30, 2018, compared to $1.6 million for the same period of last year. General and administration expenses were $4 million for the 12 months ended April 30, 2018, compared to $5 million for all of last year. The full-year 18% decrease in G&A is primarily a result of a decrease in stock-based compensation expense. Combined, our cost of sales and operating expenses were $5.4 million in the fourth quarter of fiscal 2018, compared to $6.1 million in the same period last year, a decrease of 11.8%, or $720,000. For the year, total operating expenses were $21.5 million in fiscal year 2018, compared to $22.2 million in fiscal year 2017, a decrease of 3.4%, which is primarily driven by the aforementioned decrease in stock-based compensation. As discussed many times, we focus the evaluation of our financial results by excluding non-cash items, such as stock-based compensation and depreciation expenses. Accordingly, with the highlights and reduction in annual total cost was due to a reduction in stock-based comp. Our total cash-based expenses for cost of sales and operating expenses were $5.2 million for the fourth quarter of fiscal 2018, compared to $5.3 million in the same period last year, a decline of 1.3%, or approximately $70,000. On the year, excluding stock-based comp and depreciation, total costs were $20.2 million for 2018 versus $19.4 million in 2017, an increase of $800,000, or 4.1%. This represents a modest total increase against revenue growth above 30%. Additionally, the majority of this increase is attributable to a higher cost of sales in POS, resulting from the increased POS volume. Looking ahead to 2019, we anticipate our expenses will grow at a slightly higher rate at 4%, as we continue to expand our business opportunity. However, the increase in expenses will be well below the expected revenue growth rate. On a non-GAAP or cash basis, we reported in the fourth quarter a loss from operations of $312,000, compared to a loss of $1.6 million in the fourth quarter of fiscal 2017, which represents an equivalent of approximately $1.3 million. On a non-GAAP or cash basis, we reported positive income from operations of $40,000 for the full fiscal year 2018, compared to a loss from operations of $4 million for fiscal year 2017, a significant achievement for the company and one we set the stage for the solidly profitable quarters in 2019. Now let me turn to cash. Net cash used in operating activities was $1.2 million for the 12 months and April 30, 2018, compared to $2.8 million for the 12 months ended April 30, 2017, an improvement of approximately $1.6 million. The majority of our cash used in operations occurred in the first quarter as we incurred expenses related to transitioning to our new lab, along with timing differences and working capital in the ordinary cost of business. Since Q1, our cash position has remained relatively flat over the course of the year. As of the end of fiscal year 2018, we had approximately $865,000 of cash on the balance sheet. Looking a head to next year, we expect an improving cash position in all overall strengthening balance sheet. As such, we remain confident that our cash on hand is sufficient to fund our operating activities and that will continue to increase over time. To sum up our financial results, we had strong revenue growth for the full fiscal year. Our bookings were strong and have continued to grow during the first quarter of 2019, while our expenses remain on a tight control. As a result, we’re excited to look ahead to next year in anticipation of revenue growth in excess of 20% and solidly operational profitable results on a quarterly basis. We look forward to our first quarter earnings call, which will be in approximately six weeks. We would now like to open the call for your questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Matt Hewitt with Craig-Hallum. Please proceed with your question.

Good afternoon, gentleman. Congratulations on a strong finish to the year and thank you for taking our questions.

Sure.

A couple of me. First off, congratulations. It sounds like you had a really strong quarter and year on generating new business from new pharma and biotech customers. I’m curious, as you look at over 60 that you added to the roster, would you say that those are – would you characterize some more as greenfield like first time looking at my studies, or are these customers that maybe you’re converting from one of your competitors?

So I would say, it’s a combination of both. I think, we have a healthy number of customers that we are converting from our competitors. At the same time, we’re definitely working with a lot of, what we would call, Tier C companies, companies that are just starting up or have gotten some type of funding and are starting to get into the preclinical discovery work. So I think, we’re doing a lot of both. And from where we see right now, we’re pretty excited about the number of customers that we continue to add on a quarterly basis. If we look back at the year and just look quarter-after-quarter, it seems to be progressing that we’re bringing on more and more customers every quarter.

Okay, great. And then going down a little bit further down, gross margins and you’ve called this out a little bit in the prepared remarks, that there is going to be some variability. But as we look at 2019 and given some of the new lab and some of the enhancements you’ve made, how should we be thinking about gross margins as they trend over the next four quarters and maybe even a little bit longer-term?

Sure. Ronnie, do you want me to take that one?

Yes, go ahead. Go ahead, sure.

So certainly, as we’ve always stressed that we have a fixed cost infrastructure. I mean, as our revenues grow and they will continue to grow, we will certainly see an improving gross margin. Additionally, we have recognized savings from our new lab. So, for the full-year, we were at 50%. I would certainly anticipate that over the course of the year, we’ll be ranging between 50% and 60% range. I don’t know that we’ll get all the way up to 60%, but certainly, we should be increasing over time. And one of the other things I always highlighted as we grow and we recognize expenses early and revenues later. So sometimes is that pressure, so – sometimes a reduction and some of that gross margin is actually a result of growing business opportunities.

Got it. Okay. And then maybe two more. I think that the plan is to roll out some new offerings this year. How we should be thinking about cadence? Are those more front-end loaded, meaning, first-half of the year, or will be fairly balanced, just how we should be thinking about some of the new offerings?

Yes. So the new offerings that we’re rolling out, we’re actually rolling them out right now. And the way you should think about it is that, there’ll be strong of the bookings towards the middle to the end of the year and probably strong revenue beginning of next fiscal year. We’ll probably contribute to some revenue towards Q3 and Q4. But I would say, the big impact of some of the offerings that we’re bringing on probably will not be realized until the beginning of next year.

Understood. Okay. And then maybe one last one for me, and I’m not sure how to think about this. But there was some new draft guidance provided by the FDA today for pharma. Specifically, it appears to be encouraging them to utilize animal models in some cases. And I’m just curious, how frequent or how often are you seeing that the FDA is more or less encouraging them pharma companies, biotech companies to go through mice and other animal studies before they even start their clinical process? I know it’s fairly common. But I’m not sure that I’ve seen that the FDA is actually pointing to that first. How common is that and what can that mean for your business? Thank you.

Yes. So I think it is common and it’s getting more and more common for the FDA. It doesn’t go into the IND process, but certainly for the FDA to recommend more preclinical testing, especially more PDX testing. We – we’ve seen it a lot over the last couple of years in terms of getting grants from the NCI or the NIH. Oftentimes, academics come to us, because they can’t qualify for a grant unless they have PDX testing done beforehand. So it’s becoming much more important, whether you’re getting grants, whether you’re doing preclinical work to really have some animal testing, especially PDX testing behind. So it’s definitely becoming much, much more of a gold standard, much more common place. People always ask me, how many pharmas use PDX? And the answer really is, every pharmaceutical company in oncology uses PDX. The question just is how much do they use it. So it’s really becoming the gold standard of preclinical drug development.

Great. All right. Thank you very much.

You’re welcome.

[Operator Instructions] Our next question is from Paul Knight with Janney Montgomery. Please proceed with your question.

Hey, guys, this is actually Mike on the line on behalf of Paul Knight. Can you guys provide an update on the total number of studies that you’ve completed year-to-date now?

For our 2018? Yes, I mean, it was well in excess of 250 studies.

Okay. Okay, thank you. And then in the past you mentioned a backlog of about $10 million in revenue for Phase I studies. Do you still expect some of that revenue to be recognized in 2019? And then further, do you see – are you seeing any increased demand for Phase I services, maybe not to the point of signing a contract or booking backlog, but increase in interest from a customer on how you could assess them before the start of the trial? Thanks.

So we definitely see some part of the 2019 revenue coming from, what we call, the co-clinical trials attaching ourselves to the Phase I clinical trial, because we’re attached to the clinical trial. It’s hard for us to predict how much of that revenue is going to come in. It’s easier for us to predict the traditional and Translational Oncology Services. Having said that, we do some part of the revenue to be coming from the co-clinical trial work that we do with the pharmaceutical companies. In terms of your second question, there is still interest. One of the things that we’re doing with this active vivo platform that, that we’ve been discussing or that we will come out and have more of a discussion over the next couple of weeks, is combining that with some of the co-clinical trials that, that we’ve been offering. We think that there’s a need for a little more speed in the co-clinical trial, whereas the pharmaceutical companies are inherently interested in the concept. They really want some other avenue to get some answers a little quicker than anything for a PDX. So we’ve introduced some of this ex vivo work that we’re currently rolling out. And we think the combination of the ex vivo and the PDX will be a powerful enticement for them to finance, it’s a new co-clinical trials.

That’s great. Thank you for the time.

You’re welcome.

Our next question comes from Bob Wasserman with Dawson James Securities. Please proceed with your question.

?:

Yes. So it’s really twofold. One we just see a lot of activity, a lot of business or business development people are incredibly busy and there’s a lot coming down the pipeline. So in certain areas like the West Coast and the Northeast, where there’s a lot of pharmaceutical companies and a lot of biotech – emerging biotech. We certainly want to increase our sales force, because we just see a lot of opportunity. At the same time, there are other geographical regions throughout the world China, India some emerging areas that are doing a lot of preclinical discovery work that are using PDX that we feel our tumor bank and our offering would really fit well in those areas. So we’re trying to also think about expanding into those areas as well. We have a sales force in Europe. We’re looking to expand that sales force, because Europe is turning into a really good market for us as well. So we see opportunity and we think that by expanding the sales force, that’s going to help us a lot.

Okay, great. So it sounds like in some cases – the new areas in some cases are coming up, it is on supplementing, which you have already, you must have someone…

Correct.

…[say, you are an employer?] [ph]

Correct, correct.

Okay, thanks and congrats again. Thank you.

Thanks. Thank you.

Our next question is from Scott Henry with ROTH Capital. Please proceed with your question.

Thank you, and good afternoon. Just a couple of questions. First, could you talk a little bit about the deal you did with Puma? And how that impacts your business model, as well as how we should be think about that within the income statement [Multiple Speakers]?

Yes. So the deal we do with Puma was a co-clinical trial, a co-clinical trial is where we implant patients from their clinical trial. And as those patients’ tumors grow, we do preclinical work on those tumors to help the pharmaceutical company understand those patients that were going through the clinical trial. So the way we’ve always described our co-clinical trials. They’re really interesting. Their important work really helpful for the pharmaceutical companies. But from a revenue perspective, we’re tied to the trial. So therefore, it’s usually a longer cycle from the booking of the study to actually recognizing the revenue, because we have to wait for the IRB approvals, we have to wait for the enrollment, we have to wait for the tumor to grow, and then we have to wait for the actual work on the tumor. So it could take a year to year-and-a-half for us to recognize – begin to recognize revenue and a new signing of a clinical trial – signing of a co-clinical trial.

Okay. So it is more of a long-term project. But in terms of when you do recognize the revenue down the road a couple of years, what sort of magnitude can that revenue be to get a sense of that?

So in general, although our regular, what we call, TOS, which is the Translational Oncology Services. So when we use our tumor bank to do work for pharmaceutical company, the magnitude of the co-clinical trials are usually much larger anywhere between $0.5 million and $1 million is the average co-clinical trial, whereas, David, what would you say the average preclinical?

The average is going to be 100,000. There’s obviously a wide range to larger customers, obviously, sign larger studies that are kind of closer to the $200,000 range. But certainly, just quick answer is $100,000 and the average is generally increasing.

Okay, great. And then just a couple of follow-up questions. First, on the gross margins or inversely the cost of goods sold, Q4 – I understand there’s some variability quarter-to-quarter, but it kind of jumped up, still relatively small numbers. But what caused the variability in Q4?

It’s really a pick up in work. So that there’s a growing volume right now and that will translate over the next couple of quarters to an increase in revenue. But we recognize – we’re doing the work now. For revenue, that will be recognized in Q1 and Q2 and the expenses start now.

Okay. Okay, thanks. That’s helpful. And the final question is somewhat unique in that. Your revenue trajectory is somewhat a typical, meaning that the revenues are flat throughout 2018, yet you’re growing at over 20%. Typically, you would see a steady increase throughout the year, which would lead into the next year, you would have year-over-year comps over 20%. Why is that, that it’s still flat with such high growth? And when we go forward, would you expect it to be more typical, meaning that we would start to see more sequential progression from Q1 through Q4?

Yes. So I think, it’s fast for a couple of different reasons. One, I think, for whatever reason, we’ve kind of always – we’ve always kind of grown in stages, where we went from a $4 million bookings per quarter to $5 million and we kind of leaped up in stages. The second reason, I think, is partially due to the move over the summer that we didn’t fully integrate into our new lab until Q3. And so there – we were pretty much restrained in our old lab from doing a fair amount of revenue, that had a fixed amount of revenue. So I definitely see going forward that we will have a step-up in revenue from Q1 to Q2, that’s at least what we’re seeing with our projections. So I think that, that trend is going to end, and I think we will continue to increase and we won’t do what we’ve done historically, which has been pretty flat for a couple quarters in a row.

Okay, great. Thank you for taking the questions and congratulations on a strong year.

Thank you.

Ladies and gentlemen, we’ve reached the end of the question-and-answer session. At this time, I’d like to turn the call back to Ronnie Morris for closing comments.

Thank you. I appreciate, everybody, taking their time. We’re certainly very excited about where we’re at as a company. There’s a lot of exciting things going on. And as you can see, we’re continuing to grow, while keeping our expenses relatively stable. So with that, I will just thank everybody for joining the call. We look forward to speaking to everybody in approximately six weeks. Have a good evening.