Champions Oncology, Inc (CSBR) CEO Ronnie Morris on Q3 2019 Results - Earnings Call Transcript

Mar. 18, 2019 7:08 PM ETChampions Oncology, Inc. (CSBR)
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Champions Oncology, Inc. (NASDAQ:CSBR) Q3 2019 Earnings Conference Call March 18, 2019 4:30 PM ET

Company Participants

Ronnie Morris - CEO

David Miller - CFO

Conference Call Participants

Matt Hewitt - Craig-Hallum Capital

Paul Knight - Janney Montgomery Scott

Unidentified Analyst -

Unidentified Analyst -

Unidentified Analyst -

Operator

Greetings, welcome to Champions Oncology Third Quarter Fiscal Year 2019 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. I would now like to turn the conference over to Ronnie Morris. Mr. Morris, you may now begin.

Ronnie Morris

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.

Our financial results for the third fiscal quarter reflect a continued revenue growth and strong demand for our services. We recorded a third consecutive quarter of revenue in excess of $6 million and another quarter of year-over-year revenue growth in excess of 20%. As we head towards the end of fiscal 2019 we reiterate our guidance of at least 20% revenue growth for the year.

Now I will turn to specific highlights. Our bookings for the quarter continued their upward trend as we continued to see strong demand for our services from new and existing customers. Within our core line of products customers continued to seek innovative study designs, expanding the use of our platform. This demand coupled with our bookings growth is setting the stage for continued incremental revenue as we head into next fiscal year. As discussed on prior calls in addition to our existing services we have been developing new services to add to our product line.

I am pleased to announce we launched two new products in the quarter, our ex vivo platform and clinical flow cytometry services. These products represent a significant achievement for Champions as they demonstrate our power to both leverage our tumor bank and our relationships with pharma to expand our capabilities. Our ex vivo products focuses on large early screening studies ideally leading to further PDX pre-clinical studies while our flow services create an entry into the clinical space. We're excited by the early interest in both of our offerings. As a reminder clinical flow will typically have a longer conversion cycle from bookings to revenue within our traditional PDX offerings. Accordingly we do not expect any meaningful contribution to revenue from these offerings until the second half of next fiscal year.

At the same time we are incurring expenses as we ramp up our sales capabilities and lab operations including securing additional lab space which we completed this quarter to support these new opportunities. The additional space provides room for service expansion without limiting the capacity of our core PDX business. Over the coming quarters as we focus on selling these offerings and building our pipeline we will share some additional details. Although we had a successful quarter the rapid growth in bookings has got some speed bumps along the way. We've had some study execution challenges which caused models to be delayed leading to an inability to recognize the revenue in the current quarter. That along with the expense of having to repeat some studies has led to a quarter where our revenue was slightly lighter than expected and our expenses were higher than expected.

Without getting into the operational specifics we constantly are enhancing our operational processes to allow us to continue to absorb our increased bookings and growth. To summarize our results and position, our strategic priorities and financial guidance are on the course outlined for the year. We have a growing business that despite occasional quarter-to-quarter fluctuations is set up for improving financial results in the future. We're excited about our two new product launches and we're confident that we're tackling the operational challenges that often accompany aggressive growth and expansion. Now let me turn the call over to David Miller for the highlights of our financial results.

David Miller

Thanks Ronnie. Our full results on Form 10-Q will be filed with the SEC later today. We had another good quarter for revenue recording $6.4 million for third quarter of fiscal 2019, an increase of 26% compared to $5.1 million in the same period last year. Excluding stock-based comp and depreciation we recorded our third consecutive profitable quarter on an operating basis for $91,000 versus $184,000 in the year ago period and bringing our total net income through January 31st to $1.3 million. Our total costs and operating expenses have increased by $1.6 million or 32% compared to $5.1 million in the year ago period. Excluding stock-based compensation and depreciation, our total cost and operating expenses were $6.3 million compared with $4.9 million in the year ago period, an increase of $1.4 million or 29%.

The increase in total expenses is mostly due to an approximate $1 million increase on the cost of sales. This increase was driven by a combination of factors. Our revenue has increased and our bookings remain strong. As we incurred costs in advance of future revenues, the rising cost of sales is an expected result. In addition as Ronnie mentioned we have experienced some study execution challenges which negatively impacted results on two fronts. The delays in completing some of our studies during the quarter led to lower than expected revenue recognized while at the same time correcting those issues led to incurring some unanticipated costs in the period.

Our sales and marketing expenses increased $200,000 or 33% over the year ago period which is mainly a result of commissions paid on exceeding sales quotas. As a result our sales and marketing expenses are generally higher in the latter half of the year and is an indicator of new business generated. On a GAAP basis we reported a third quarter loss from operations of $370,000 compared with compared with a loss of $66,000 in the same period last year.

Now turning to cash, net cash generated from operating activities was $1.2 million for the three months ended January 31, 2019 compared to net cash generated from operations of $400,000 for the same period last year. At the end of the quarter we had approximately $3.3 million of cash, continuing our trend of strengthening our cash position and balance sheet. We expect this to continue even as we invest for future growth.

In summary while we encountered some short-term challenges in the period we delivered another quarter of revenue growth in excess of 20%, we achieved operational profitability, and our accelerated bookings and a strong pipeline of new business opportunities are setting us up for continued future success. We remain on track to deliver full year revenue growth in line with guidance and in excess of 20% for fiscal 2019 and we're confident in the underlying long-term strength of the business. I would now like to open the call for your questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Thank you. First question will be coming from the line of Matt Hewitt with Craig Hallum. Please proceed with your question.

Matt Hewitt

Good afternoon and thank you for taking the questions.

Ronnie Morris

Hi Matt.

Matt Hewitt

First up regarding the speed bumps as you noted them, is there any way to quantify what the impact on those studies was both from a revenue and maybe from a margin perspective?

David Miller

Yes, so we think that that had everything go on as expected -- as we had expected. We probably were looking at another $600,000 of revenue that would've been recognized in this quarter and probably on the expense side somewhere in the $400,000 range of expenses that we felt we incurred because of having to redo some studies and other examples like that.

Matt Hewitt

Okay, that's helpful. Thank you and then looking at I guess a couple different items, first, I think earlier this year you had set a target of maybe 100-150 tumors to be added to your tumor bank this year, maybe an update on where you sit with that target?

Ronnie Morris

Yes, so I think as we had talked about earlier in the year we were looking more for unique tumors not so much the number but we're looking for cohorts of very unique tumors. We're actively adding to our bank as we speak with a lot of different collaborations. So we are on track to be adding the tumors that we had talked about. I think probably more than 100 to the bank this year but I think we're certainly on track for what we've been looking for.

Matt Hewitt

Great and then as far as the new offerings ex vivo and flow cytometry, maybe if you could give us a little bit more color on the traction, the interest that you're seeing from your installed base of customers, any details there?

Ronnie Morris

Yeah so, two separate update. The ex vivo platform first, I think we're seeing a lot of excitement from the pharmaceutical companies for our ex vivo platform. They've always asked us for a platform earlier on in their drug development pipeline when they're just evaluating compounds where they can do a larger screen against many, many models. So that's been -- we're finding a lot of interest in that. Just so we're clear in the ex vivo platform it's not like a light switch where one day we have one the next day you don't. We have rolled out the first installments of our ex vivo platform and we continue to do research and development on a more expanded platform.

So as we continue to grow over the next year I would say we're going to continue to expand this platform and we have a development plan to roll out multiple aspects of the ex vivo platform. But at least with the initial product that we've rolled out we are seeing a lot of interest and we've already had bookings this past quarter which is going to turn into revenue this coming quarter and we're seeing more bookings this quarter that will turn to revenue next quarter. So that's actually a offering that is currently there's a lot of interest for it and we're currently seeing bookings and going to be seeing revenue very, very shortly.

In terms of the flow side, the clinical flow cytometry again, that's something that we currently do pre-clinically but it's something that we've identified and some of our pharma partners have identified that it is something that they would like to see us offer. We -- it's taken almost a year to set up the capabilities to be able to do this and we've also seen interest again. That is a much longer sales cycle, it's also much longer cycle to revenue but on the other side the contracts are much larger. But again as we said before because we're in clinical space and we're going to be doing samples on patients in a clinical trial we followed the clinical trial. So if the clinical trials take 36 months then we recognize the revenue over the course of that trial.

Matt Hewitt

Oh that's really helpful, thank you maybe one more from me and I will hop back in the queue. As far as gross margins I realize that sometimes there are some timing and then the speed bump this quarter will that bounce back in Q4 or how should we be thinking about gross margin next quarter or this quarter I guess it is?

Ronnie Morris

Do you want to take that David or do you want me to…

David Miller

Sure, sure, I mean the best way to answer the question is simply if we read -- we had some delays and we are certainly going to expect them, I mean see our comments [indiscernible] but to determine exactly when we will see that margin switch and when I anticipate I will see it, a small improvement in Q4, sure. And the more revenue that actually hits us in Q4 that we had anticipated in Q3 so really we will see a greater increase. But to get that exact percentage will be difficult because we're still figuring out the exact timing of when we will recognize some of this revenue.

Matt Hewitt

Understood, alright, thank you very much.

Operator

The next question comes from the line of Paul Knight with Janney Montgomery Scott. Please proceed with your questions.

Paul Knight

Hi, can you talk to the customer profile on the ex vivo and the flow cyto side that you're talking to, is it pre-clinical, is it academic, is it pharma, can you talk a little bit about that? Thanks.

Ronnie Morris

So, on the ex vivo side it is really all of the pharma, biotech and it's primarily on the pre-clinical side. So it's anyone from the large pharma, mid pharma, small biotech that I want to assess a signal and a compound, want to do more screening studies before they move into in vivo which is more expensive and do actual modeling. With regard to the clinical flow cytometry that's a later stage company that's already doing clinical trials. So that's usually a pharma company at that point and there they have plans to do a trial so that would be in the clinical space.

Paul Knight

And then the follow-up to that would be would you expect that these projects to be larger than your traditional PDX projects size and I guess part of that question would be is -- are these studies on the flow side linked to the large increase we're seeing in the world and in the world of immuno-oncology trials?

Ronnie Morris

So, I think it's linked so first of all to answer your first question I would say the clinical flow cytometry contracts are in the order of the millions of dollars where as the regular, our average let's say PDX study would be in the hundreds of thousands of dollars and the ex vivo studies somewhere about half where the PDX study was. So those are the differences in terms of order of magnitude of different studies. In terms of your second question which is the -- what is your second question again Paul, I'm sorry/

Paul Knight

I was just interested in the flow cytometry part of your offering, is this linked to the surge in immuno-oncology work or what category is it if it's not immuno-oncology?

Ronnie Morris

I think it's both. I think it's both for companies doing immuno-oncology as well as other end points where they need flow cytometry. So I think it's a combination of both. I think it's just an increase, we're seeing an increase type of demand for that in all of our other services. I don't know if it's necessarily a specific thing in oncology, I think it's specific to the fact that in oncology there's a lot of investment in oncology obviously. Oncology continues to get a lion's share of the R&D budgets and there's a lot of R&D when it comes to oncology both immuno-oncology and other oncology. So I think it's all of the different R&D initiatives that need both pre-clinical and clinical work being done.

Paul Knight

Okay, and lastly, sorry for the length, the -- and specifically are they looking for biomarkers or safety, what are they trying to obtain on the flow side?

Ronnie Morris

What they're looking for is just an expression or a marker for a patient on a trial. They're looking for an endpoint to understand what's happening to the patient who's on the trial.

Paul Knight

Got you, perfect, thank you.

Operator

The next question is from the line of Bob Bostman [ph] with Dustin James [ph]. Please proceed with your question.

Unidentified Analyst

Hey, thanks for the datas and congratulations on the good quarter but just one question and I don't really want to focus too much on the current quarter but maybe you could go back, step back a little bit and give us some color on how are some of your 3-D partnerships with Puma and AstraZeneca how those are progressing and whether you see some additional partnerships, some being signed in the future?

Ronnie Morris

Yes, so we have we have ongoing studies with some of the larger pharmaceutical companies. Those were primarily -- well one of them that you mentioned was a co-clinical trial where we still have some outstanding. I would say the way we think of our partnerships going forward is less around a specific study. I think the way we think about partnerships going forward is just doing more and more work with the pharmaceutical company on a broader basis. So, working with pharmaceutical companies earlier in the pipeline pre-clinically with our ex vivo platform, working with Cell Lines, Syngenetics [ph], moving on to PDX, moving on to pre-clinical flow, moving on to clinical flow doing more of a broad based partnership with some of the large pharmaceutical companies and that's kind of what we're seeing. We're seeing more and more of pharmaceutical companies that we're working with using us for more things. And that's kind of the way we view partnerships going forward not on a study basis that we're going to go into a project with them but more on a basis where we're looking to have more of a strategic partnership.

Unidentified Analyst

Okay, well thanks and congratulations again.

Operator

Next question is from the line of Mike Arnold [ph] with Pivotal Ventures. Please go ahead with your questions. Mr. Arnold your line is live for question.

Unidentified Analyst

Hey guys, nice quarter. I wanted to just go back and talk about the speed bump for a quick second, the way I understood it was there's about 600,000 in mix revenue in the quarter which should be coming in the next couple of quarters an additional 400,000 in expenses so your GAAP earnings should have been a $1 million higher, is that what I'm hearing?

Ronnie Morris

It's what we would have expected before the quarter correct.

Unidentified Analyst

Okay, and then I want to deal with your cash balance for a quick second, I noticed in your latest 10-Q that did not renew a $1.5 million credit line and then you also have 25 million or 26 million -- 25 or 26 open job requisitions in your group careers page, I'm just curious you know you have $3.3 million of cash in your balance sheet what gives you the confidence to cancel that credit line and also to hire all these people?

Ronnie Morris

So, I would answer in two points. The first is that we canceled the credit line because we can see our pipeline pretty far in advance, we can see what's going to book this quarter.

We have a pretty good insight on what's going to book next quarter and we see the trends in terms of the new products that we're offering and we see the excitement from the marketplace. So we felt pretty comfortable that we've passed the period where we felt that there was a risk of actually losing money from operational perspective and we felt like we didn't need the credit line and the cost associated with a credit line because if we actually did need to raise money there is certainly money that we could raise. And we've also shied away from that as well. So we felt like we were out of the danger zone, we thought it was coming down the pike and we felt like we could easily manage with our current cash balance plus our increasing cash balance as we go along.

In terms of the open positions we have certainly grown, we've expanded, we do have open positions but those are not open positions that we're looking to fill tomorrow. We're looking for good people, we're constantly looking for good people and as we continue to grow we're going to expand our teams. But I wouldn't say that we're looking for 30 new people tomorrow.

Unidentified Analyst

Okay, and just to that point I've noticed that a lot of new hires according to Linkedin have come from Crown Biosciences which is one of your larger competitors. I'm just curious you know why are people coming to choose to work for Champions?

Ronnie Morris

That's a great question. So, we've certainly had a lot of people come to try to work for us from our competitors not only Crown but some other competitors as well. I think it speaks to the culture of Champions, I think it speaks to our strategy over the last couple of years being a high quality kind of a data driven company that really provides excellence in terms of both the quality of work and the customer relationship. And I think that from when I've interviewed these people that they've felt like perhaps some of the organizations where they came from didn't necessarily have what they were looking for and they wanted to join Champion. So I think from our perspective it was a good thing that a bunch of our people who were competing against us just wanted to come on our side and we're very happy to have them.

Unidentified Analyst

Okay, okay good. And then I am just curious go back to cash a little bit, there's obviously some warrants in the capital structure, when did it expire and how much capital will it bring on the balance sheet and what's the plan around these warrants in the near future?

Ronnie Morris

You want to take it.

David Miller

Yeah, so I will take that. So, there are couple of [indiscernible] the next time it expires in January of 2020. Obviously they are regular right now, the warrants or the money [indiscernible] the money or put that cash on the balance sheet.

Unidentified Analyst

Okay, that's one avenue you guys have to raise money if you need to.

Ronnie Morris

Yeah.

Unidentified Analyst

Okay, and then lastly just in terms of the IR strategy, you guys obviously have a lot of innovative stuff going on at the company and I haven’t seen an official press release from the company since December, I'm just curious what the IR strategy is going forward to communicate to shareholders on maybe more frequent basis about some of your success along the way?

Ronnie Morris

Yeah, I think that's a good point. I'll be honest with you, I think that we kind of have successes every day just in terms of the growth of the company. I don't feel like we've felt like we want to just come out with press releases like a bunch of our competitors and that was probably something that we should do. So I think we can do a better job doing that but it's not -- it isn't like we're holding back a big contract or bigness. A lot of the big contracts that we sign or a lot of the big deals that we have going on we can't really announce anyways. But I think it's a good point and I think it's something that we can do a better job at

Unidentified Analyst

Okay, alright, thanks for your time.

Operator

Thank you. The next question is from the line of Clay Hoffman [ph], Clay Hoffman LLC [ph]. Please go ahead with your questions.

Unidentified Analyst

Hi guys, thanks for taking my call. Congratulations on your quarter. If you at all put out a number for your booking and the increased bookings you have seen over the last quarter?

Ronnie Morris

I'm sorry Clay, could you repeat that.

Unidentified Analyst

Yeah, the output, you are talking about how your bookings have increased. If you put a dollar value on the bookings and the percent increase that you've seen for the last quarter?

Ronnie Morris

So we have not historically given the amount of bookings or really talked about the percentages. What we have mentioned is that our bookings continue to increase and we continue to have increased quarter-over-quarter. But we have never historically given a number nor do we give one on this call as well.

Unidentified Analyst

Okay, and one other thing, this is more of a long-term question. The partnerships you have with Puma and others way down the road if you had some FDA approvals on some drugs, would you be getting royalty percentage on those.

Ronnie Morris

So we don't we don't currently have any existing royalty agreements in place for any of the drugs. It's something we have thought about, it is something we are approached about, about whether we would do a reduced fee for service in exchange for some type of royalty or milestone payment. It's something we certainly would think about in the future to partner with some pharma or biotech in general. It is the early biotech that the cash is very sensitive to, that would be interested in that. It is not so much that -- it isn't so much the big Tier A's that are really interested in that type of model but it's a tricky type of proposition and something that I think we would be open to at some point in the future. But we haven't done it historically.

Unidentified Analyst

Yeah, okay. That's more info [ph] and one last question you have GAAP loss this quarter, but you're saying you generated 1.2 million in cash from operations and obviously a depreciation of some other non cash, but could you give a little more color on that where the generation of cash came from?

Ronnie Morris

Sure, you take that David.

David Miller

Sure, you basically had a couple of points. We recently had stock-based comp and depreciation which contributed to the GAAP loss and overall just as our operations, as our income improves you'll see more cash generated. There are definitely timing differences in the operational accounts, the accounts receivable, etc. So there are times where it takes a little bit longer to collect but then we do collect on those receivables and that's what hit this quarter but there is certainly a replenishment of those receivables at the same time. So it's really just the ordinary course of business improving operations, improving net income and then just turning over of operating accounts.

Unidentified Analyst

And I also believe there was a component in there of some exercise of the warrants, am I correct David.

David Miller

Yes, that is but that is on the -- that is in the investing, you know it is financial section but I think you’re referring to specifically the operations.

Unidentified Analyst

Okay, operations, okay fine. Okay.

Unidentified Analyst

Alright, thank you, again congratulations guys.

Ronnie Morris

Thanks.

Operator

Thank you. At this time I'll turn the floor back to management for closing remarks.

Ronnie Morris

Thank you very much for joining our call. We are excited about the future and stay tuned. We'll have a lot more news for everybody in the coming quarters. Appreciate you taking your time. Bye.

Operator

Thank you, this will conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.

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