Champions Oncology, Inc. (NASDAQ:CSBR) Q4 2016 Earnings Conference Call July 28, 2016 8:30 AM ET
Joel Ackerman - Chief Executive Officer
Good morning. I am Joel Ackerman, the CEO of Champions Oncology. Thank you for joining us for our Quarterly Earnings Call. I will start the call today with highlights and updates since our last call, then discuss the financial results and then open up the call for questions.
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 10-K. Reconciliation of the non-GAAP financial measures that may be discussed on the call to GAAP financial measures is available in the earnings release.
For highlights and updates I'll cover five broad areas today; bookings, new products, the TumorBank, operations, financial projections, and our recent financing. Over the last quarter I spent a lot of time talking to shareholders including existing shareholders new investors and potential investors. I've listened carefully to the feedback and will be adjusting certain aspects of our Investor Relation strategy.
One of the changes I hope you will notice is a more detailed approach to our Investor Call. As a result the call will be longer than in the past and will cover more topics in more detail. Our business is simple to understand at a very high level, but it's a complex one once you look under the hood. Our goal is to give the investors the details they need to assess the progress we're making and the future potential of our business.
Overall, we had another great quarter of progress. I'll talk more about each of these topics in the rest of the call, but as an overview our bookings are strong and growing and giving us the confidence to provide forward-looking projections in which we have a lot of confidence. The cost control efforts we established over the last year continued to pay dividends and we're getting more done with fewer people keeping us on a path to profitability.
Our cash position is strong. We're well-capitalized with the declining burn rate that gives us confidence that we will reach cash flow positive without us requiring to raise more capital to fund operations. And strategically we’re focused on a number of new products that provide us with plenty of runway to grow revenue on an accelerated pace.
Let me start with the bookings, because as I've said in the past there's no single indicator of our future success that is more important than bookings. As I talked about on our call in March the January quarter was the strong bookings quarter for Champions. I'm happy to report again that our April quarter was an even stronger quarter. We signed 22 new studies with 16 different customers. Seven of these studies were above $200,000 each.
The April quarter was particularly promising with new customers we added nine new customers during the quarter to the more than 100 pharma and biotech companies for whom we have done work in the past. Since we reported our results later in the quarter after our fourth fiscal quarter which is our April quarter, for this earnings call we also add insight into bookings for our current quarter which ends in July. With only a few days left in the quarter we're having an excellent quarter as well. We'll talk more about this on our call in September.
Overall the pattern of bookings that we have delivered over the last three quarters supports our projection of accelerating revenue growth in fiscal 2017. So I hope the message is clear, our core TOS business is progressing very well. As anyone who has heard me talk about our strategy knows we have a number of new products all within the umbrella of TumorGraft or patient derived xenograft that will contribute to the acceleration of our revenue growth.
The three efforts that are currently getting the most attention are AML, ImmunoGrafts and our co-clinical products. Let me update you on each of these. First, AML more than a year ago we saw the need among our customer base for modeling AML using a PDX approach because AML is not a solid tumor. The standard techniques we use for implanting and measuring growth do not work with AML.
To develop this new commercial offering we've created two different collaborations pursuing two different technological approaches to building these AML models. From a technology standpoint we demonstrated this quarter that both approaches were successful at establishing models for use in testing patient response to difference compounds. We have more work to do with the second methodology to ensure that the take rates are high enough to make the product commercially viable. This work is ongoing and I expect we'll know more about this in the next three months.
From a commercial standpoint, AML has started to contribute to bookings in revenue more rapidly than expected. We expect to see our first meaningful AML revenue when we report the July quarter and are now confident that AML will be a meaningful contributor to our accelerating growth in fiscal 2017.
AML was also serving as a model for us for the future. We are spending more time looking for new technologies and product lines to add to our platform that compliment our existing core business. We've built a powerful, commercial and operational engine and we can rapidly test and commercialize new offerings from academic and commercial partners. I would add that we did not invest any meaningful R&D expense or capital in building these AML capabilities. Our customers fund the development expenses through sponsored studies that allowed us to test the viability of these new approaches.
The second new product I would like to discuss is ImmunoGrafts. We've been working on ImmunoGrafts for more than a year now. It is developed to the point that I would consider it a full commercial offering. While we have recognized some revenue from this work it is typically slower to convert from bookings to revenue because of the longer time lines of these studies.
From an operational standpoint, these studies continue to be more expensive and complicated than our traditional TOS studies. Given the excitement and attention that immuno-oncology is receiving in the pharmaceutical and biotech industry; we are planning to increase our investment in ImmunoGrafts.
We see opportunities to innovate in the development of next generation models for testing immuno-oncology drugs. These innovations include different types of host mice, new humanization procedures, and complementary technologies to patient-derived xenograft. Similar to what we've done in AML, we are looking for partners to offset the cost of some of this R&D work to ensure we remain on our path to cash flow positive in the end of fiscal 2017.
The third new product I've talked about in the past is our co-clinical TumorGraft offering. As a reminder, these are studies done in parallel with human clinical trials in which we typically build TumorGrafts from clinical trials patients to supplement and expand the information gained by pharma companies as part of their early stage human trials. This information is used by our customers to develop a clinical development strategy for the later stage in trials.
We signed our first co-clinical deal towards the end of calendar 2015. These have been slow to start because of changes in the timing of the human trials and our customers. However, we have now enrolled our first patient in these trials and expect them to ramp up slowly during the rest of fiscal 2017.
In July, we signed an additional co-clinical deal with the mid-tier pharmaceutical company. This is a pilot study with a relatively small number of patients and only a few hundred thousand dollars of revenue. However, we've already enrolled our first patient in this trial and expected to accrue patients very rapidly.
This study is an important opportunity for us to demonstrate our ability to build models from patients from clinical trials and operationalize the concept co-clinical trials. From a revenue per study perspective, co-clinical trials have more potential than any of our other products and we believe that having a completed study will allow us to tap into the potential of this product over time.
Next, I'd like to give a quick update on our TumorBank. The biggest news since the last update are the AML models that I've already discussed. We're looking at other potential academic collaborations that would allow us to grow both the breadth and the depth of the TumorBank. We see these as cost effective ways to supplement the Tumor acquisition and model building activities that we do.
Going forward, we are focusing our model development efforts on filling holes in the TumorBank for specific tumor types and patient cohorts with an emphasis on high demand models rather than just growing the number of models in the bank. This will ensure a high return on capital for the investment we make in our TumorBank and ensure we are using our limited R&D capital wisely.
Operationally, the Company continues to deliver very high quality to our customers. We are routinely audited by our large customers and are consistently getting high marks. While this is challenging under any circumstances, we are particularly proud of these results in the context of the expense management efforts we have put in place over the last year.
Relative to six months ago, despite significant growth in the business, we have almost 10% fewer employees at the Company. We are using our lab capacity more efficiently and have eliminated a number of external costs. We are on a path to cash flow positive and we are on track to getting there by increasing our revenue and managing our costs very carefully.
Looking forward, we have a number of new initiatives being implemented that will enable us to generate the same amount of revenue with fewer mice. Thereby improving our gross margins and increasing our lab capacity. We’re at the final stages of developing a new lab information management system that will lower our IT costs, enable more efficient operational management of our studies, and improve the access we have to real time information to continue to improve our processes in the future.
Now let me update you on our financial projections. As I discussed before, our bookings for the last three quarters have been strong and growing because it typically takes time for bookings to convert to revenue. We have visibility for about a few months into our expected revenue for our core TOS business. There remains some variability because we can't predict exactly when studies will start or end.
Also our co-clinical revenue which we expect to contribute to our fiscal 2017 revenue growth is harder to predict. Therefore, we expect revenue for our first fiscal quarter ending in July will be between $3.25 million and $3.5 million and revenue for our second fiscal quarter ending in October 2016 will be between $4.25 million and $4.75 million.
As you can see Q2 is a big increase in revenue versus our historical results. We expect to achieve this dramatic increase again to revenue in Q2 of between $4.25 million and $4.75 million; we expect to achieve this dramatic increase with bookings that have already been signed. There is also potential upside to this number, but we prefer to remain conservative in our future projections.
Looking forward for the rest of the fiscal year, our visibility naturally becomes less clear. However, we currently expect our revenue for fiscal 2017 ending in April of 2017 to be between $16 million and $18 million for the year. At the midpoint of this range that represents growth of more than 50% year-over-year. We’ve taken a conservative approach to estimating these numbers and I’ll have a lot of confidence that we will deliver on that.
From an expense standpoint, we continue to expect our productivity efforts to deliver savings during the year. We do anticipate our cost of sales to increase overall, but at a rate significantly lower than our revenue growth. Over the course of the year, we expect our gross margins in TOS to reach our target margin and our POS gross margins to become breakeven.
On the operating expense line, we currently expect to deliver this accelerated revenue growth with minimal increases in operating expenses. As a result, we believe we are on target to reach cash flow positive by the end of the year. This has been an important goal for us and one that gets a lot of the attention at the Company, besides the revenue and expense progress that I've talked about. We are also focusing on all our balance sheet lines with a particular focus on accounts receivables and deferred revenue to help us achieve cash flow positive by the end of the year.
Let me end with financing. On June 15, we raised net proceeds of $4.4 million through an underwritten public offering of 2.25 million shares, which includes the green shoe which was exercised. The Board of Directors spent a significant amount of time thinking about how to size the offering.
There were three goals that we took into account. First, to ensure we capitalize the Company’s cash flow breakeven. I cannot overemphasize how important it is for us to get the cash flow positive and we wanted to ensure we have the capital to get there.
Second, was to minimize the amount of dilution to the existing shareholders. As you know, the Board of Directors and management are significant shareholders and we feel that dilution like every other shareholder, so we wanted to minimize this as best as possible.
And third, we wanted to increase the public float, increase the daily trading volume and shrink that bid ask spread. Historically, our stock has been hard to buy and hard to sell and this has prevented some potential investors from accumulating positions. We wanted to keep chipping away at this barrier. We believe we accomplished all three of these goals with the financing. We have the capital we need to get the cash flow positive.
We mitigated dilution by not upsizing the deal and getting it done without any warrant coverage and we've seen the trading volume go up and the bid ask spread come down. We're pleased with the job our underwriters did and are excited to have a new group of investors in the stock.
Now let me review the financial results we announced. Our full results on Form 10-K. will be filed before the weekend. TOS revenue was $2.3 million for the three months ended in July 2016 a decrease of about 20% over the prior year. The decrease was due to an unusually high revenue number in the prior year as we've talked about most quarters in the past our revenue can vary significantly from one quarter the next. We expect this phenomenon decrease as their bookings and revenue continue to grow.
For fiscal 2016 TOS revenue increased 26%. For most companies 26% growth is a great outcome. We however are not satisfied with this. As I said before we expect our growth for our current fiscal year to be approximately double this rate. TOS gross margin was 16% for the fourth quarter. This continues to be one of the hardest lines to interpret on our income statement.
Our cost of sales in Q4, were heavily influenced by the growth in our bookings. Because the costs we incurred in Q4 for increased mouse purchases for example are related to studies and revenue that will be recognized in Q1 and Q2. The result is that rapid growth for us temporarily deep presses our gross margins. As we get bigger we expect this phenomenon to decrease.
POS or Personalized Oncology Solutions revenue was up for both the fourth quarter and the fiscal year. The increase is primarily the result of growth in sequencing and tumor board revenue offset by a decline in implant and drug panel revenue. Going forward we're not expecting POS to drive revenue growth. However, it provides us with the strategic value in our work with the pharma industry and academic collaborators.
We are continuing to focus on lowering our cost in this business and as you can see we've made great progress. Gross margins were positive for the quarter as a result of a sustained effort to manage our product and processes and costs. We committed to achieving this and our results exceeded our expectations. We expect the gross margins on the business to bounce around from one quarter the next, but we do not anticipated consuming significant capital going forward.
Research and development expenses were $1.2 million for the April quarter and $4.2 million for the year. These increases are largely due to lower expenses in genomic characterization of our Champions TumorGraft Bank. Sales and marketing expense was also down in the April quarter and for the year. The decrease is due to the consolidation of sales and marketing personnel resources of the POS and TOS divisions. But as you can see, we're making more efficient use of our team and getting more bookings for less sales expense.
G&A was also down year-over-year. The decrease is due to aggressive cost management to maintain cost controls even as the business grows. I don't expect we'll see further declines in this line, but we do not expect to see significant increases for the future either.
From a cash standpoint, the burn rate remains well below a $1 million for the quarter. AR/AP and deferred revenue all moved in the right direction in the fourth quarter as we work to lower our burn rate. We continue to feel good about our cash position after the financing and expect to have sufficient cash to get the cash flow breakeven later this year. As you can see, we made a real effort to get into more detail on the call today. I hope our excitement and confidence in the future of the Company came through in my highlights.
Now, let me open up things for questions.
[Operator Instructions] We do have Thomas Shelton. Your line is live.
Hey, Joel. This is Tom Shelton. How are you? Congratulations.
How are you, Tom? Thank you.
Good. I’ve been reading a lot about the tests for humans where they use the blood, the liquid, diagnosis or whatever you want to call it for cancer.
Yes. And I’d like to either explain in if you could in relatively simple terms. The advantages of our model with the animal model and why we won't get displaced by these blood tests?
So the liquid biopsies and I’m not an expert on them. But in general, they are a simpler less invasive way to test patients to see whether they have cancer or not right for diagnostic purposes and potentially for prognostic about how they might respond to a given drug or a different treatment.
From our standpoint, our revenue really is more about the work we do with the pharmaceutical industry in testing how their drugs will or won't respond to different drugs. So we don't really compete with liquid biopsies in the TOS business. From a POS standpoint, again, what we do generally tests for different things and what you tests for in a liquid biopsy.
But there is certainly the possibility that it could have some impact. We are actually looking at technologies that would try to develop PDX like models using just blood so not having to do a full tumor biopsy. So we're actually looking to see if there's an opportunity to take advantage of the technologies that are being developed around liquid biopsies to make it easier for us to build our models.
Are you saying you could use the blood to implant into our animals?
What you would do is you would take the blood and then you would isolate what they call circulating tumor cells which is have generally these liquid biopsies work is the physical tumors shed some cells and those are called circulating tumor cells or CTCs. What we would look to do would be work with collaborators who could isolate those CTCs out of blood and then we would inject to CTCs into the mouse.
It is a technology that is not viable today as the best of our understanding, but that doesn't mean it we can't develop it for the future. So it is one of the areas as I think about new product development is on the list of things that we are considering spending some time in money in pursuing.
I appreciate very much and again congratulations. I look forward to the next call.
End of Q&A
[Operator Instructions] There are no questions at this time.
Great. Well, thank you all for listening. We look forward to updating you next quarter.
Thank you. This concludes today’s teleconference. You may now disconnect your lines.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!