Champions Oncology, Inc. (CSBR) Q2 2019 Earnings Report, Transcript and Summary

Greetings. And welcome to Champions Oncology Second Quarter Fiscal Year 2019 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ronnie Morris, CEO. Please go ahead.

Good afternoon. I’m Ronnie Morris, CEO of Champions Oncology. Joining me today is David Miller, our Chief Financial Officer. Thank you for joining us for our quarterly earnings call. Before we begin, I will remind you that we will be making 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. I'll start by pointing out we will continue up the call format started last quarter where we minimize some of the repetitive messaging information easily obtained by reading our earnings release and financial statements. Instead we will provide a more general overview with quarterly highlights and other strategic initiatives when applicable. With regards to the quarter, we extended our string of successful quarters continuing, our trend of record revenue and recording profitable results on both an operating and GAAP basis. In addition, we have a robust pipeline of new opportunities that should sustain revenue growth and profitability in the coming quarters. Our strategy and financial guidance remain unchanged as we continue to execute and deliver on our commitments. As discussed on previous calls, we are moving forward with plans to roll out two new services our Ex Vivo platform and pre approved Clinical Flow Cytometry to expand and enhance our growth beyond our core products. The EX VIVO platform and services will leverage our large tumor bank to support large screening studies and assist our customers with their early preclinical work. We had an early launch of Ex Vivo services which yielded promising results, and we've just recently officially launched our Ex Vivo platform. While we are not altering our financial projections based on this product launch, we look forward to sharing some preliminary results over the next quarter or two. We continue to gear up to offer human Clinical Flow Cytometry Services, expanding our capabilities beyond preclinical studies. We have put in place experienced flow teams in both sales and lab operations to hit the ground running, and we expect to officially launch these services next quarter. We expect a very modest increase in bookings from Clinical and Cytometry Services that will begin toward the end of this fiscal year and a slow but steady increase in the first half of next year. We expect revenue contribution from Cytometry Services to start only toward the end of our next fiscal year. As you all know, we completed the movement to our own state-of-the-art lab facility in June of 2017. The results have been as expected creating operational efficiencies, lowering our costs and providing capacity for additional revenue growth. The lab still provides us the runway to more than double our current revenue run rate with our core PDX services. However, with the launch of our new offerings, we have expanded into additional lab space in a nearby facility where we will house our EX VIVO platform and Flow Cytometry Services. We feel this will maximize the capabilities of both locations, both operationally and financially. In summation, it was a good quarter for the company, and we continue to be encouraged by the large market opportunity for our new products along with the growing demand for our core PDX services. Now let me turn the call over to David Miller for the highlights of our financial results.

Thanks Ronnie. Our full results on Form 10-Q we filed with the SEC later today. As mentioned, we have altered the format about quarterly calls to highlight noteworthy financial results. Additional details, comparison to prior period and the primary drivers of any variances can be found in our press release and 10-Q. I will move to some of the highlights of the financial results quickly, so we can get to your questions. Most notably, our total revenue for the second quarter of fiscal 2019 was $6.7 million, another quarterly record high and an increase of 28% compared to $5.2 million in the same period last year. Along with the increase in our revenue, our expenses have picked up at a higher rate than prior periods. Our total operating expenses were $6.4 million for the quarter ended October 31st compared to $5.3 million in the year ago period, an increase of $1.1 million or 22%. Excluding stock-based compensation and depreciation expenses, our total operating expenses were $6.2 million for the quarter ended October 31st, 2018 compared with $5 million in a year ago period, an increase of $1.2 million or 24%. The increase in total expenses is mostly due to the $800,000 increase in cost of sales. Our cost of sales increased due to a combination of factors. While we don't disclose our booking numbers, the demand for our services continues to grow. As we've mentioned repeatedly, we incur costs in advance of revenue and rising costs of our sales is often a precursor to growing revenues. Our second quarter bookings were particularly strong and the increase in cost of sales is partially a direct result of that strength. The other buckets for increased cost of sales as a result of our new products that Ronnie had previously mentioned. We have been gearing up to offer these new services which include hiring staff and performing study work to test our operational capabilities. We believe that the cost associated with new offerings will come down with time as we decrease the need for testing and become operationally efficient with our new offerings. We'll continue to monitor these costs and we'll do our utmost to ensure that increases will primarily be the direct result of sales growth. For a second quarter of fiscal 2019, we recorded our second consecutive profitable quarter on both an operating and GAAP basis. On a GAAP basis, we reported second quarter income from operations of $275,000 compared with a loss of $70,000 in the same period last year. Excluding stock-based compensation of depreciation, we achieved net income of $514,000 versus income of $175,000 in the same period last year. We remain confident that we'll maintain profitability on a quarterly basis as we progress throughout the year. Now turning to cash. Net cash generated by operating activities was $400,000 for the six months ended October 31st, 2018 compared to net cash used in operating activities of $1.7 million for the same period last year. At the end of the second fiscal quarter, we are approximately $2 million of cash continuing the expectation of a strengthening cash position and overall balance sheet which we expect will continue. We remain confident our cash on hand is sufficient to fund our operating activities. In summary, we had another record high quarterly revenue, our sales pipeline remains strong and we're on track to deliver a revenue growth in excess of 20% for fiscal 2019. We were profitable on both a GAAP and non-GAAP basis and expect this trend to continue in the coming quarters. I would now like to open the call for your questions.

[Operator Instructions] Our first question comes from the line of Matt Hewitt with Craig-Hallum. Please proceed with your question.

Good afternoon and thank you for taking our questions. Just a few for me, first off that the $800,000 of incremental cost of goods that hitting the quarter, could you break out how much of that was related to the demand that you're seeing versus how much of that were related to the new products?

Do you want to take that David?

Sure. Actually to make it relatively simple, it's actually about half and half. So certainly there's a piece that is related to, our continuous sales growth and then another 50% is related to the new product launches.

Okay, great. And then as we look out at the next couple of quarters, you mentioned that number one, obviously the 50% it's related to the demand that you're seeing, how should we think about the impact on gross margin over the next couple quarters as you start to recognize the related revenues?

So that's always a tricky question and that's because at the same time if everything would remain steady, so then I would absolutely tell you that you can start seeing an uptick in our gross margin. However, if our bookings growth continues to grow and that's what we project, so then you are still -- so you may continuously see increased cost which may be a direct result of those increased bookings and then the margins remain relatively flat. So if we remain steady, you would absolutely see an uptick in gross margin. But to tell you today that all our Q4 gross margin is going to go up to 56%, well, that's difficult to predict because hopefully we'll be seeing a corresponding increase in our cost of sales -- in our bookings over that time as well.

So from our perspective may be a way to model this is somewhere in the high 40s range at least given the demand you're seeing for the next couple of quarters?

You can pick it up a little bit.

Okay, all right. So maybe some closer to 50.

Low 50.

Okay, fair enough. And then related to some of the new products. The launching of the EX VIVO and the pending launch a flow cytometry maybe either you or Ronnie, some description of how the conversations are going with your potential customers? Their feedback as far as any excitement that they're commenting on related to being able to stay with you post the mice studies, anything along those lines would be helpful?

Yes. So we definitely had seen a lot of excitement for the Ex Vivo platform. It allows us to work with our clients in an earlier stage, Matt. So that we can now work with them earlier in their preclinical stages before they're ready for the PDX. A lot of them want to understand the compound better. They want to do some screening studies and understand a larger bank without having to spend larger amounts of money on more expensive PDX studies. So the EX VIVO, we're seeing a lot of excitement for and we expect that to be a really interesting innovative product for us. The Clinical Flow Cytometry is on the other end of the spectrum that's when these patients are already in a clinical trial. What we found is that there's a big demand as well for quality clinical cytometry services. So that's a little bit further behind the curve than the EX VIVO which we've already started working with some of the pharma companies on. And that has already rolled out or is being rolled as we speak. The Clinical Cytometry Services, we're just getting our ducks in a row. We should be ready to launch within a couple months, but early indications are there's a lot of demand out there for the services.

That's great. And then maybe one last one for me. As that the flow cytometry gets launched and as you start to book some of these Ex Vivo contracts, how should we be thinking about those from a size perspective? Are the EX VIVO I guess in my head I'm thinking those will tend to be on the smaller side flow cytometry could be a little bit larger. But help us understand maybe a broad range of what those contracts will look like. Thank you.

Yes. So, Matt, the Clinical Flow Cytometry contracts are much larger. It could be in the million dollar range or higher. The EX VIVO screening studies are much lower. They are $50,000 to $100,000 range. So they're different sizes for both.

[Operator Instructions] Our next question comes from the line of Paul Knight with JMS. Please proceed with your question.

Hi, guys. This is actually Casey Woodring on for Paul. Just one quick question. Wanted to know what the plant capacity is for your facility in Rockville? And then what your utilization rate is there as of now? Thanks.

So the --so we actually have two labs right now in Rockville area. One is the Vivarium where we do all of the mouse work that has a capacity. So we're at about half capacity right now. Let's say we're doing to $6 million to $7 million of revenue from that lab. We are at about halfway in our capacity. We just are moving into a new lab for all the EX-VIVO and Flow Cytometry Services and some of the other wet lab stuff that we do. And that we're going to have ample capacity. I don't see that as even going to be an issue.

[Operator Instructions] Our next question is a follow-up from Matt Hewitt from Craig - Hallum. Please proceed with your question.

Hi. And just one follow-up for me. Obviously, a very strong quarter here from -- it sounds like from a bookings perspective, we're now month and a half into the next quarter. Maybe a little bit of color on what you're seeing from a bookings perspective here. And maybe talk a little bit about what you saw last quarter? I think historically that's been a slower quarter from a bookings perspective if I recall correctly and it sounds like you that you bucked that trend so maybe what was driving the increased demand or any additional color there. Thank you.

Yes. So, Matt, you're right. Usually Q2, although we don't usually disclose our bookings usually Q2 historically has been a light bookings quarter. It was a strong bookings quarter for us this past quarter. We're seeing equally a strong a quarter this quarter as well. I think what we're seeing is just a lot of demand for our products for the quality of the work that we put out for the expansion of our services, for the space oncology drug development. So I think it's just, as we've talked about in the past, I think it's just a combination of all these factors just being at the right place at the right time, building the right tumor bank over the last eight years with a differentiated tumor bank with just a lot of quality people working in the organization; the reputation of the company. I think it's just all coming together at the right time for us. So we see a lot of demand out there and we continue to see strong interest.

Okay and then maybe one last one. Given the strength that you're seeing and this is in the first quarter I mean and you've had a nice track record here. And I'm curious if there have been any changes from the competitive landscape whether or not your primary competitor has been stepping up their game or if you're hearing of others looking to potentially enter the space? Thank you.

We haven't seen any change in the competitive landscape to note. I think the competitors that we've had in the past are still our competitors. I don't know that they've changed much. So there hasn't really been change in my mind in regards to the competitive landscape.

Ladies and gentlemen, we have reached the end of the question-and-answer session. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.