Champions Oncology (NASDAQ:CSBR) Q2 2019 Earnings Call

0:00 Greetings and welcome to the Champions Oncology second 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. 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.

0:30 Good afternoon. I am 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 Gap Financial Measures is available in the earnings release. I'll start by pointing out we will continue the call format started last quarter where we minimize some of the repetitive messaging and information easily obtained by reading our earnings release and financial statements.

1:15 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 Robert Brainin. Our Exvivo platform and CLIA approved clinical flow cytometry to expand and enhance our growth beyond our core products. The Exvivo 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 Exvivo services which yielded promising results and we've just recently officially launched our Exvivo platform.

2:19 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 expect a very modest increase in bookings from clinical 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.

3:10 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.

3:59 Thanks, Ronnie. Our full results on Form 10Q will follow with the SEC later today. As mentioned, We have altered the format of our quarterly calls to highlight noteworthy financial results. Additional details, comparisons to prior periods, and the primary drivers of any variances can be found in our press release and 10-Q. I will move through some of the highlights of the financial notes 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%. Thank you very much. Our total operating expenses were $6.2 million for the quarter ended October 31, 2018, compared with $5 million in the year ago period, an increase of $1.2 million, or 24%.

5:11 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 for 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 bucket for increased cost of sales is the result of our new products that Ronnie had previously mentioned. We have been gearing up to offer these new services, which includes hiring staff and performing study work to test our operational capabilities.

5:57 We believe that the costs 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 will continue to monitor these costs and will do our utmost to ensure that increases will primarily be the direct result of sales growth. For the second quarter of fiscal 2019, we recorded our second consecutive profitable quarter on both an operating and gas basis. on a GAAP basis 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 and depreciation, we achieved net income of $514,000 versus income of $175,000 in the same period last year. We remain confident that we will maintain profitability on a quarterly basis as we progress throughout the year.

6:49 Now turning to cash. Net cash generated by operating activities was $400,000 for the six months ended October 31, 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 had 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 that our cash on hand is sufficient to fund our operating activities. In summary, we had another rapid high quarterly revenue, our sales pipeline remained strong, and we're on track to deliver revenue growth in excess of 20% for fiscal 2019. We are profitable on both a gap and non-gap basis and expect this trend to continue in the coming quarters.

7:35 I would now like to open the call for your questions. Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Matt Hewitt with Craig Hallam. Please proceed with your question. Good afternoon and thank you for taking our questions.

8:24 Good afternoon. A few for me. First off, the $800,000 of incremental cost of goods that hit in the quarter, could you break out how much of that was related to the demand that you're seeing versus how much of that was related to the new products?

8:42 Do you want to take that, David? Sure. To make it relatively simple, it's actually about half and half. So certainly there's a piece that is related to our consumer sales growth, and then another 50% is related to the new product launches.

8:58 Okay, great. And then as we look out at the next couple of quarters, you mentioned that, number one, obviously the 50% is related to the demand that you're seeing. How should we think about the impact on gross margin over the next couple of quarters as you start to recognize the related revenues?

9:17 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 may continuously see increased costs, 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 our Q4 gross margin is going to go up to 56%, that's difficult to predict because hopefully we'll be seeing a corresponding increase in our bookings over that time as well.

10:03 So from our perspective, maybe a way to model this is somewhere in the high 40s range, at least given the demand that you're seeing for the next couple of quarters?

10:13 Mm-hmm. You can pick it up a little bit.

10:17 Okay. All right. So maybe something closer to 50.

10:21 Low 50. Low 50.

10:22 Okay. Fair enough. And then related to some of the new products, you know, the launching of the X-Vivo and the pending launch of full cytometry, maybe either you or Ronnie, some description of how the conversations are going with your potential customers, the... 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.

10:55 Yeah, so we're definitely seeing a lot of excitement for the Exvivo 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 Thank you very much. These patients are already in a clinical trial, and what we found is that there's a big demand as well for quality clinical cytometry services.

11:51 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 out 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 that there's a lot of demand out there for the services.

12:25 That's great. And then maybe one last one for me. As the full 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? 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.

12:57 Yeah. 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're the $50,000 to $100,000 range, so they're different sizes for both.

13:21 That's great. Thank you very much.

13:24 You're welcome, Matt. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you would like to ask a question, press star 1 on your telephone keypad. One moment, please, as we poll for questions. Our next question comes from the line of Paul Knight with JMS. Please proceed with your question.

13:50 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.

14:07 Thanks. So we actually have two labs right now in the Roxville 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 $6 to $7 million of revenue from that lab. I don't see that as even going to be an issue. Okay, gotcha. Thanks, guys. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. One moment, please, as we pull for questions.

15:17 Our next question is a follow-up from Matt Hewitt from Craig Helm. Please proceed with your question.

15:24 Hi. Just one follow-up for me. Obviously, a very strong quarter here. It sounds like from a bookings perspective, we're now – I think historically that's been a slower quarter from a bookings perspective, if I recall correctly, and it sounds like you bucked that trend. So maybe what was driving the increased demand or any additional color there? Thank you.

15:59 Yeah, 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 as 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.

17:02 So we see a lot of demand out there, and we continue to see strong interest.

17:10 Okay, and then maybe one last one. Given the strength that you're seeing, and this is in the first quarter, I mean, you've had a nice track record here, and I'm curious if there's 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.

17:35 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 a change in my mind in regards to the competitive landscape.

17:58 Thank you. 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.

18:14 Thank you.