Joel Ackerman - CEO.

Analysts:.

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 update 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 be making 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. Overall, this was a great quarter for Champions. We are laser focused on executing on our strategy, and I have never been as excited about the direction we are heading. The market potential is huge.

We are really well positioned, and the progress is tangible. Both the actual financial results and the leading indicators of future growth are really progressing well. As you will hear, we are growing our top line, managing our expenses and on path to cash flow positive.

With that backdrop, let me talk about some of the specific highlights of the quarter. I will start today with bookings; there is no single number that predicts future revenue growth, but bookings comes as close as any metric we follow. While we do not disclose specific details, I can tell you that this was a very strong quarter for us.

Core POS bookings, the main driver of our revenue and growth, broke our previous single quarter record. It was also a well balanced quarter, with a healthy mix of business from repeat customers and new customers. Our sales team continues to gain experience and to develop deeper and wider relationships within our customer base.

We have now done work for more than 100 pharma and biotech companies. We add new customers almost every quarter, but we have also put a significant emphasis on getting more studies and a large base from our existing customers.

We believe most of our customers have not yet adopted our PDX platform to its full potential, and there is lots of growth available from working with our existing customers to push PDX along the classic technology adoption curve. To this end, as we announced before, we signed our first large clinical deal.

To put the size of this clinical study in perspective, the budget for that completed study is almost double the total of all our core POS bookings for the whole fiscal quarter. We have begun the important job of turning that booking into revenue, by executing on the study.

We are in good shape operationally, and expect the first patient on-study in the next couple of months. Although, we have already started billing and collecting cash for this study, we expect the actual revenue to start to contribute in a meaningful way to our fiscal 2017 results.

As a reminder, our fiscal year ends in April, so fiscal 2017 is just six weeks away. This is a great example of how our revenue recognition policy is conservative, and we typically collect cash from pharmaceutical customers, before we generate revenue. The result is cash flow that is better than our stated loss on our income statement.

During the quarter, we also made important progress in commercializing our ImmunoGrafts offering. As a reminder, these models combine mice with an implanted human immune system and our core PDX implant, to create a new mouse model that is being used to test immuno-oncology drugs.

This is an important initiative for us, given the amount of R&D dollars that pharma industry is shifting to immuno-oncology. As I have talked about in the past, we successfully completed our first study, using our ImmunoGrafts in 2015, and are now focusing on ramping up our commercial offering.

This opens up for us, a large and growing set of drugs and research dollars, that we were not previously able to serve. We initiated a number of new ImmunoGrafts studies during the quarter, and sold three new studies as well.

We are finding this innovative new offering as a good entrée into both new and dormant customers, and will leverage these contracts to engage around for additional PDX studies. Last quarter, we announced a new initiative in acute myelogenous leukemia, also known as AML, to develop models using peripheral blood draws.

We have now implanted half the models for the study, and we expect to have our first model ready for validation in the next couple of months. To fulfill the needs of our customers for AML models, we have also been working with our academic collaborators, to in-license the AML model that they have developed.

We recently completed our first in-licensing deal, and see this as a new opportunity to cost effectively grow our platform. We now have 18 AML models available for our customers. Pricing for these models will be about double the price for traditional PDX, because of the cost and complexity of these studies.

We are discussing potential studies with more than a dozen of our customers, and based on these discussions, we expect AML will be another contributor to an accelerated revenue growth for fiscal 2017, which starts in just a couple of months. Our tumor bank has been growing in a traditional ways as well.

We implanted 93 new patient tumors during the quarter. We expect these implants, combined with the efforts we have ongoing to in-license models from academic partners, will result in an acceleration of the growth of both the depth and breadth of our tumor bank.

Finally, I want to talk about the great progress we have made in bringing down our cash burn rate during the quarter. On our call last quarter, I talked about the factors that would contribute to a decline in our burn rate going forward. I also estimated that our burn rate for this quarter would be below $1 million.

I am happy to report that our estimates were correct, and our burn rate was actually $860,000 for the quarter. This dramatic improvement was the result of expense management, careful attention to all balance sheet items, and the cash collections in advance of revenue from our clinical bookings.

We again, estimate our burn rate for the current quarter to be below $1 million, and expect it to continue declining in our next fiscal year. Based on our expectations of revenue growth, cash collection and expense management, we believe we can be cash flow positive by the end of fiscal 2017, which is only four or five quarters away.

This will be a major milestone for the business, and one we are very focused on achieving as quickly as possible. Now let me turn to the financial results for the POS business. POS revenue was $2.1 million for the quarter, a 55% increase, but with the same quarter last year. This is our fourth quarter in a row of strong revenue growth.

We have also seen a significant increase in our bookings, as I already discussed, as well as our backlog. This gives us confidence in future growth, and our ability to deliver accelerated revenue growth in fiscal 2017.

We feel good about the revenue trends in our core POS business continuing, and the additional revenue streams from AML and clinical studies, should accelerate the growth for the coming year. POS gross margins were 24% for the quarter, compared to 5% in the same quarter last year.

The gross margins in this business continue to vary quarterly, based on timing differences between expenses and revenue, as a result of our conservative revenue recognition policy.

That said, we do see a very positive trend in our gross margins over time, as we grow the revenue of the POS business, manage our lab costs and leverage the fixed costs associated with management, IT and support services. We have been talking for a few quarters about the cost management initiatives that we have put in place.

The result of these are already visible in our quarterly expense rate. However, there is more to come, as we invest in better systems and processes, we continue to find new opportunities to do things smarter and cheaper.

Our goal is to deliver our revenue growth with a flat or declining fixed cost base, and minimal marginal cost increases for variable costs such as mice and lab supplies. This is a key initiative in our push to cash flow positive and its impact will be most obvious in our POS gross margin.

As we have talked about in the past, we continue to manage our investment in the patient or POS business, to ensure it serves its strategic purpose for Champions, while minimizing the cash burn in this business. Revenue for the quarter from POS was $416,000, an 8% decrease from last year.

More importantly, the negative gross margin from POS was only $63,000 for the quarter, a more than $150,000 improvement from last year. This is another important driver of our push to cash flow positive, and shows our ability to deliver on an improving cash flow, while still investing in the growth of the platform.

Regarding our operating expenses, I don't want to beat a dead horse, but the overall picture is one of strong cost management, despite the pressures of a growing revenue line and a strong focus on quality and customer service.

We continue to work hard to hold the line on expense growth, such that most of the revenue growth goes to improving our bottom line.

Looking at the specific expense line this quarter; year-over-year sales and marketing expenses were down more than $300,000; the biggest factor driving this decline is the reduction of sales and marketing resources, focused on the POS business.

This reflects the overall commercial strategy of the company and is proving to be a cost effective change for us. We accomplish this by eliminating our PR spending in POS, consolidating the sales and marketing leadership under one commercial leader.

R&D costs were down 100% over the prior year, as a result of slightly lower investment in genomic characterization for the bank.

I will note, that if we did not invest in R&D this quarter, we would have been cash flow positive, finding the right balance between investing in the growth of the platform, to accelerate future growth versus driving to cash flow positive is one we measure and remeasure constantly.

We have been successful at leveraging the work we do for our customers, to expand our capabilities, thereby subsidizing our platform development efforts. This allows us to get more from our R&D budget, with the drain on cash that would otherwise be required. Reported G&A was basically flat for the quarter.

Given the growth in the top line, we are pleased with this result, and view as another example of how we can manage our costs in the context of growth. Our cash position at the end of the quarter was $3.3 million down from $4.2 million at the end of the prior quarter.

I already discussed the great progress we made in lowering our cash burn rate, in the short path we see to cash flow positive. In summary, this was a great quarter for Champions. We are excited about the strategic, operational and financial progress we have demonstrated.

We have never had more visibility to our future results, and we will be starting our new fiscal year in six weeks with a great foundation. We expect fiscal 2017 to be a year of accelerated revenue growth, and a path to cash flow positive. That's the end of my prepared remarks. I will now open up the call for questions..

[Operator Instructions]..

All right. There are no questions. Well thank you, everyone. We appreciate your calling in and participation, and look forward to updating you next quarter..

This concludes today's teleconference. You may now disconnect your lines..