Champions Oncology, Inc. (CSBR) Q2 2020 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Champions Oncology Second Quarter Fiscal Year 2020 Earnings Conference Call. All lines have been placed on a listen-only mode and the floor will be open 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 for today Mr. Ronnie Morris. Sir, the floor is yours.

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'll 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. Overall, we had a strong second quarter. Revenue increased almost $1 million to $7.6 million as compared to Q2 of last year, and we recorded profitable results on both an operating and GAAP basis. Our bookings pipeline for our core services remained strong and we continue to be encouraged by the interest in the products and services that are in development. In addition, we continue to progress nicely in our R&D efforts as well as our expansion of our TumorBank and in vivo models. Turning to our relatively new offering, regulatory clinical flow cytometry, we have been discussing the anticipated launch of our GCLP flow cytometry services for several quarters. As we previously mentioned, after approximately one year of building the necessary infrastructure, including state-of-the-art equipment and scientific expertise, we began aggressively selling our regulatory GLP flow services last quarter. We are building an impressive pipeline of opportunities that we are confident will lead to sign studies in the coming months. Because these are generally larger studies and are tied to the planning of a clinical trial, we expect the sales cycle as well as the conversion to revenue be longer than our preclinical business. In addition, because of our new GLP flow cytometry lab and our newly acquired scientific and operational excellence, market awareness of our comprehensive suite of services has increased significantly resulting in an increase in preclinical flow cytometry bookings as well. Another exciting area of product development has been our ex-vivo platform, which as a reminder leverages our TumorBank to support large screening studies and assist our customers with their early preclinical work. We've had a successful launch of the initial phase, which has contributed to our bookings pipeline and revenue. Our recently announced partnership with PhenoVista has enabled us to develop a unique imaging-based solid tumor platform, which complements our numerous internal platform development strategies well. This multifaceted approach to our ex-vivo platform development will allow Champions to offer a comprehensive, differentiated, and unique set of ex-vivo services. In summation, it was a solid quarter for the company, and we remain encouraged by the growing demand for our core PDX services and the market opportunity for our new products. 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 will be filed with the SEC later today. We had a successful quarter, realizing the anticipated jump in our revenue off our Q1 levels as well as achieving profitable results. Second quarter revenue increased to a total of $7.6 million compared to $6.7 million in the year-ago period, an increase of 14%. Excluding stock-based comp and depreciation, we recognized income from operations of $550,000 compared to income of $480,000 in the year-ago period. Including stock-based comp and depreciation, we recognized income from operations of $300,000 for the quarter. I’m going to focus on costs excluding the stock comp and depreciation. Our gross margin for the second quarter was 49% compared to 48% for the same period last year, with cost of sales increasing $440,000 or 13%. The increase is in line with the uptick in revenue and continued expansion of studies and process. R&D expense was $1.3 million compared to $1.1 million in the year-ago period. We increased our R&D investment to continue growing our TumorBank along with expanding the capabilities of our in vivo models. This continued investment allows us to design and provide pharma the tools to run increasingly larger and more complex in-vivo studies. Sales and marketing expense was $950,000 compared to $700,000 in the year-ago period. The increase was mainly due to two equally contributing factors. We are strategically growing our sales force to penetrate deeper into existing territories as well as expanding into new geographies and product lines. Additionally, as discussed on our first quarter call, we adjusted our methodology for accruing commissions by allocating those costs over the course of the year. While this treatment results in the second quarter year-over-year increased, it should mitigate the sequential quarterly spike we've seen in the second half of prior fiscal years. Our G&A expense was $917,000 for the quarter and notably mostly flat compared to the year-ago period. In total, our costs excluding stock-based comp and depreciation expenses were $7.1 million for the second quarter of fiscal 2020 compared to $6.2 million in the same period last year, an increase of approximately $865,000 or 14%. The majority of our expense increase was in cost of sales and the result of our revenue growth. Overall, our expenses for this quarter and for the first half of fiscal 2020 are generally more aligned with the long-term operating leverage we believe exists in our business model. Our sequential quarter-over-quarter expenses were mostly flat, while revenue grew by almost $1 million. Looking ahead to Q3, we are doing -- we do anticipate an increase over our second quarter levels. The increase will mostly be in cost of sales as we are currently running studies in more expensive advanced mouse models. Overall, however, and while there will certainly be percentage fluctuations, we believe we'll see positive operating margins as our revenues continue to grow. Now turning to cash. At the end of the second quarter, we had $2.8 million of cash on the balance sheet, approximately $800,000 higher than the same period last year. For the quarter, net cash generated from operating activities was $363,000. With our anticipated revenue growth and profitability, we reiterate our confidence that cash on hand is sufficient to fund our operating activities. Looking ahead to the remainder of fiscal year 2020, we will maintain our quarterly profitability and continue to see an uptick in can revenue. For the full year, we anticipate our revenue growth will come in towards the lower end of the guidance range provided, and we expect continued revenue expansion as we head into fiscal year 2021. In summation, we had a strong financial second quarter and we remain confident in our long-term prospects of our core business and new products. We look forward to our next call in mid-March. We will now open the call to questions.

Thank you. [Operator Instructions] We will move first to Matt Hewitt at Craig-Hallum Capital Group.

Good afternoon and thank you for taking our questions. First one for me, and I think you -- David I think you might have just touched on it there at the end as far as the 15% to 30% growth for the year, it sounds like you're now looking towards the lower end of that range. Did I hear you correctly?

You’ve heard me correctly.

Okay. And then I guess looking back at the 15% to 30%, did the 30% maybe include the potential or the opportunity for a flow cytometry deal, and so if you’ve taken that out, are we really looking at 15% to 20% growth for the base business?

Correct. So that is something I think even discussed on the first -- the part of the – you know, on our earnings call in July was that we had a wide range because weren’t sure of the timing of flow, and if it kicked in early, we would have that potentially. But also, all in all, there’s a lot of timing and we've discussed this many, many times in terms of our revenue. So, long term, we're really confident in the growth prospects of the business, but there can certainly be fluctuations quarter to quarter, but as we are able to narrow it down a little bit, so we just want to guide a little bit towards the lower end.

Makes sense. Okay. Thank you. And then Ronnie maybe a question for you. Regarding the PhenoVista partnership that you announced intra-quarter, may be you could provide a little bit more color about their assays, the opportunity that that relationship creates, who is running those assays? Any additional color would be helpful.

Yes. Sure, Matt. PhenoVista has really strong capabilities in the ex-vivo world, especially in terms of imaging assays. So, that's an area that we felt partnering with PhenoVista would be really beneficial. They are experts in that area. We have the TumorBank. We have the solid tumors, and they're able to take our solid tumors and provide a lot of different 3D/2D assays with specialized imaging specification. So, from that perspective, PhenoVista will be doing the work. The work will come through Champions. It will be our clients. We will be doing some of the work internally for our ex-vivo platform, some of it will be working with partners like PhenoVista. So we're excited, because it's going to be able to allow us to expand our ex-vivo platform more rapidly than all the internal work. I mean, plus we're also doing internal work to build up a platform within Champions, but this is a complementary service.

That's great. And then maybe one last one for me and I'll hop back in the queue. As far as sales reps, I think you exited 15. Last quarter you were targeting 18 to 20 by the end of the year, and where does that sit?. Thank you.

Yes, we're still expanding our sales force. We're still the number 15, but we're looking at some different regions, looking at some different business development folks. So, we're still looking to expand. We see a lot of interest both going deeper in the current territories that we're in, but also expanding in geographies. So, both are on the horizon.

Excellent. Great. Thank you very much.

Welcome.

We'll go next to Scott Henry at ROTH Capital.

Thank you and good afternoon. Just a couple of questions. I think in the prepared remarks at least the way I understood it, you expected expenses to be higher in third quarter versus second quarter, driven by the COGS line. Did you give guidance? I mean should we -- on the revenue side, should we think about sequential increases from Q2 to Q3 to Q4? It seems to be kind of the seasonal pattern although Q3 versus Q2 can be harder to predict, but just looking for some color there, on the sequential pattern.

All right. So, there is -- we do anticipate that there will be a sequential uptick in Q3 revenue off of Q2 level. Q3 and Q4 may be similar, so it is a little bit too early to predict. I'm not anticipating an overly large spike in Q3 cost of sales, but I do think that it's an area where if we have a little bit of insight and expectation, so at least to know that it's something that we -- that we expect as opposed to something that we are not prepared for. We know that we're running some models -- some studies that are more expensive. And so, it's just giving a little bit of a warning in advance.

Let me also add, Scott. Let me just add that, in general, we have never really talked about the bookings, we've only talked about revenue, and we have a very good sense from increased bookings -- our bookings continue to remain strong. So, we have a good sense where we're spending our money on studies and the bookings that continue to incrementally be increased quarter-after-quarter, the issue for us as we've always talked about, it’s just the timing of revenue as well. So, it's harder for us to know exactly from our perspective, for the long-term it's easier for us to see revenue growth. It's harder for us to say, oh it's exactly going to be -- it's exactly going to March in this quarter after that quarter after that quarter, because as we've discussed many times some of the studies take longer time, some of them are linked to larger studies that just take longer to complete until we can recognize revenue because they are just larger studies with more models and more endpoints. So, from our perspective, we also believe that that costs will go up because we continue to increase our bookings, which means we're starting in doing more work, and as you remember, we recognize expenses as we do the work. We recognize revenues only when it's at the completion.

Okay. Thank you for that color. And when we look at the business long term excluding flow cytometry, how should we think about kind of the organic growth rate? I mean, if you grain to 15 to 30, including flow cytometry, should we think about kind of 15% to 20%, for the PDX business or might we see it increase going forward as you reach higher scale. Just trying to get a sense of how you think of it organically in the long run?

Yes. So, that's a really good question and we've seen historically -- probably in our core PDX business, somewhere around a -- somewhere around this year about 10% to 15% where we think we'll be increased just of core where I think it could be more than that is once the ex-vivo services start to kick in, what we see a lot of the purpose of ex-vivo services is as large screening studies of our in-vivo bank. So, we anticipate that as more people do larger screening studies, of let's say, 100s of models using the ex-vivo platform, they will then end up doing more in-vivo studies as well, do more. PDX studies, there will be more hypotheses of some biomarkers, and therefore that will redirect more investigation within the core PDX bank. So, as it down -- as it stands now, we continue to grow the core PDX services. We think that somewhere in the 10% to 15% range just on its own, but we think that there are some catalysts that can actually accelerate that growth over time.

Okay, great. And then just two small modeling questions. Gross margins seem to go up in Q2 versus Q1. Now, obviously it bounces around a little bit, but would you expect that to kind of go down a little in Q3 or are there any fundamental changes, is that just normal variation?

I think there's definitely some normal variation, and I think a lot of it ties into what Ronnie just mentioned in terms of the fluctuations of quarterly revenue numbers, and the timing of expenses. So, I am not anticipating necessarily a decrease in gross margin, I wouldn't put that in for Q3, because there I do anticipate that there will be an uptick in our revenues as well. But in terms of getting the exact number, so much of it is dependent on the timing of when some of these studies complete. That it's difficult to say, okay, we're going to be at 52% or 47%. So, there will be -- we should be in a similar range for Q3.

Okay. And then similarly on G&A, that dropdown in Q2 versus Q1, is that just bouncing around or are we still talking about smaller numbers or is there any kind of shift there that I should be factoring in?

I mean, I think that's a good base level where we are now. There's nothing specific that caused the decrease other than -- I think we’ve spent a lot of last year building up our business than in-group preparing for the anticipated next level of growth. And I think we've seen some of that now like [indiscernible] as we go forward.

Great. Thank you for taking the questions.

We will move next to Paul Knight at Janney.

Hi, guys. This is actually Casey on for Paul. Can you give us a ballpark estimate on how much ex-vivo contributed to revenue this quarter? Maybe percentage of revenue and would that increase in the back half of the year now with the PhenoVista partnerships? Hello.

Yes. Sorry about that. So the actual revenue of ex-vivo this quarter was about 10% of our total revenue. And I don't remember the second part of your question, I'm sorry. Could you repeat that?

Do you see that increasing in the back half of the year, that with PhenoVista partnership.

So we do see a -- so just we were background on our ex-vivo platform. We rolled out the first part of our ex-vivo platform, which is an internal effort which is primarily surrounding hematologic malignancies. What we're doing with PhenoVista is more of a solid TumorBank organoids [ph] and 3D cultures of our solid TumorBank. We do expect because of the work we've been doing with PhenoVista, we do expect that the revenue coming from that partnership will happen sooner than some of our internal other ex-vivo R&D development. So it's possible. I don't know next quarter but certainly quarter-after that I could certainly see some ex-vivo revenue from this partnership.

Okay. That's good to know. Thank you. And then as far as flow cytometry goes I think it with last call you were expecting maybe to get a deal signed this quarter. Was that pushed out into potentially 3Q or maybe you can give us some color on how those negotiations are going?

Yes. That is true. We have a very strong pipeline. We were hopeful that we would have actually had a deal already signed. And there are still a bunch of deals that we're working very closely on in negotiation. So we're still hopeful that we will be able to announce a deal fairly soon. It didn't happen as soon as we thought, but we still have a robust pipeline. Again, even the deals that we signed, it's going to be a longer revenue cycle. So even a deal we sign theoretically in a couple of weeks or a couple of months, we're not going to recognize that revenue for probably about a year. So certainly looking and anxious to get the first couple of deals signed. We have been having a lot of discussions and site visits from different pharmaceutical and biotech company. So we're excited about the opportunity.

Got you. Great. Thank you, guys.

Thank you.

[Operator Instructions] Gentlemen, I have no other questions holding. I'll turn the conference back for any additional or closing comments.

Well, thank you very much for joining our quarterly earnings call. We're excited about where we're going in the progress. I think the overarching item for us is all about the timing. There is a lot of opportunity, a lot of interest. We've developed a great team and we have a good core platform. And it's just about when these things are all going to happen, not if they're going to happen. So thank you for joining us and we look forward to talking to you in the next quarterly earnings call. Thank you.

Thank you. Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time and have a great day.