Joel Ackerman - Chief Executive Officer & Director David Miller, CPA - Vice President Finance..

Analysts:.

investing and innovation and achieving profitability. We’ve always been committed to both these goals, but the relative emphasis has certainly changed overtime. Over the last few quarters, we’ve increased the focus on achieving profitability.

We’ve talked a lot both internally and externally about our drive to reach profitability by the end of our fiscal year in April 2017.

Over the last couple of years, it’s become clear to us that public market investors were concerned about our liquidity and future dilution, and no amount of innovation or revenue growth could make up for continued operating losses.

As a result, we viewed it as a company imperative to demonstrate our ability to be profitable and not be dependent on future capital raises. We also realized that we had to accomplish this while ensuring we were establishing a business and platform that was poised for continuing growth.

Achieving profitability is a simple proposition for us, grow the revenue and manage the expenses, so our plan was simple. First, we wanted to continue to grow the TOS revenue. We’ve delivered approximately 30% annual growth in TOS since we joined and we wanted to see that either continue or accelerate. Second, we needed to manage our expense base.

Going back six to 10 quarters, our quarterly cash costs which we define as operating income excluding stock based compensation, were generally in the range of $4.5 to $5 million per quarter. Our goal was to manage our cost structure to stay in this range while delivering 30% plus revenue growth.

We knew some of our variable costs would continue to grow as our revenue grew, so we needed to do this by lowering our fixed costs. There’s no magic bullet to this, but we set out a plan that included upgrading our team, investing in systems for productivity improvements, reengineering our processes to improve our quality and lower our costs.

So, let me talk a little bit about the progress we’ve made on these financial results. So, the plan was clear and this is exactly what we told shareholders we would accomplish, grow the revenue and get to profitability. As you can see from the financial results in the press release, we’ve taken a huge step forward on both these dimensions.

First, the revenue. Year-over-year revenue growth for the quarter was 50%. Growth in TOS was 59%. This is the accelerated growth rate we’ve been talking about. The result is consistent with guidance we gave and represents a giant step forward for us.

David Miller will talk more about the underlying drivers later in the call, but I want to mention two things about the results. First, we continue to expect volatility in the future. As I’ve said, every quarter since we started having a quarterly call three years ago, our revenue number will bounce around from one quarter to the next.

Second, this is a very clean high quality revenue number. There are no one-time items or particularly large studies that allowed us to achieve this result. Said another way, within the context of normal volatility, we see this as the new baseline off of which we will continue to grow.

Looking forward, we see our next quarter, which ends in January, as being another quarter of strong growth. By that I mean, well above the historical 30%ish range and we continue to believe in our guidance of $16 million to $18 million of revenue for the year.

Now, let me talk about our progress on achieving profitability, but before I talk about the results, I want to talk a little bit about how we think about profitability versus cash flow. You might notice that I talk about profitability and cash flow positive interchangeably.

While these are very different metrics for some companies, they are very similar at Champions. Because we do not have much capital expenditures and we have a very conservative approach to revenue recognition, our operating income excluding stock based comp is a good proxy for our cash flow.

We prefer this metric rather than actual cash flow from operations, because it’s less volatile from quarter-to-quarter. Our actual cash flow numbers is impacted by quarterly swings in accounts receivable, accounts payable, and deferred revenue, and as a result, can be volatile from one quarter to the next.

However, over the course of a few quarters, we expect our operating income before stock based comp to be very close to our actual cash flow from operations. Now, the results. As you see in the release, we are proud to announce today that we were profitable for the second quarter. Our operating income excluding stock-based comp was $40,000.

Simple math shows that this achievement was the result of two trends. First, the revenue growth that I just talked about. Second, expense control. David will talk more about this later in the call.

Like the revenue though, this number does bounce around from quarter-to-quarter, however, I do want to emphasize that there were no one-time events or non-recurring items that drove this expense number. We’re laser focused on managing our costs and we’re able to hold costs basically flat from last year, despite 50% revenue growth.

Looking forward, we think there’s more opportunity for us to leverage economies of scale and process improvements to continue to drive down fixed costs. As a result, we see at least another million of cost savings available to us to continue mitigating the cost pressure associated with revenue growth.

In addition, we’re working on a few initiatives that will bring down our variable costs such that most of the revenue growth falls straight to the bottom line. We’re not ready to give specific guidance on this, but we see an opportunity to increase our gross margins in the TOS business from here.

Stepping back, I think it’s hard to overestimate how important this is for us. For investors, achieving profitability removes what has been one of our biggest challenges and risks, the need to continue to access the capital markets to finance the business.

With more than $4 million of cash on the balance sheet and a burn rate that is close to zero and improving, we should have full control on when and how we decide to raise money in the future. Looking forward, I want to talk briefly about our views for the short term and the long term.

For the short term, I want to make sure that everyone understands what we expect for the next few quarters. We’ve come a long way. We’ve gotten to this point a few quarters earlier than we expected and we view this as a new level from which we will continue to grow and improve, not an anomaly of a quarter.

That said, there will continue to be volatility in the financial results. Over the course of a few quarters, we see these fluctuations evening out each other and we have more than enough cash cushion with more than $4 million on the balance sheet to ensure lots of financial flexibility and no need to raise equity unless we want to.

For the longer term, we’re continue to focus on two strategies simultaneously. First, continue to deliver on our core business. This means continuing to deliver revenue growth, managing our costs to ensure growing margins and profitability. Second, we’re going to increase our efforts towards innovation.

We have built an incredible platform over the last few years, 150 customers, high quality operations, and a strong commercial distribution force. We think we are at a place where we can accelerate our efforts to leverage this platform for accelerated revenue and margin growth. Remember, innovation is not new for us.

We’ve invested in our platform every year and have increased the size of our tumor bank, the types of cancer we work with, and the size and scope of the studies we offer. Going forward, we want to do more of the same; just faster.

Many customers have talked to us about expanding our technology and platform to provide them with enhanced products and services based on our current offering. I want to emphasis one very important point about our innovation strategy; it will not come at the expense of profitability.

We have achieved profitability this quarter while investing about $4 million in R&D per year. We expect to continue to grow our profitability while driving more innovation. One way of accomplishing this will be with sponsored research from our customers.

We have succeeded over the last couple of years at working with customers to have them fund significant portions of our innovation efforts. AML is a great example of this, we now have a very successful AML offering, the development of which was funded by two customers.

In addition to customer sponsored research, we’re exploring other sources of non-dilutive funding. For example, we have applied for a $2 million SBIR Grant to cover the cost of an innovative approach to developing PDX models.

We’re also talking to potential strategic partners that work with our customers that have plenty of capital, but not much growth about ways to partner to drive mutually beneficial innovation. With all this progress, Ronnie and I’ve been thinking about the needs of our senior leadership team.

We have worked as partners for more than six years now since joining the company as the CEO and president. A lot has changed since then. We’ve obviously grown a lot; we went from a team of eight employees to approximately 70 employees today. We have developed a robust high quality senior team that works extremely well together.

Operationally, we’re delivering incredible high quality work, while continuously improving our people, processes, and systems. Financially, the business is finally on very solid footing. Revenue is growing, costs are well controlled, and we have the cash we need to build the business.

Strategically, we’re looking forward towards leveraging a strong foundation to accelerate our growth based on an increasing focus on innovation. In this context, we’re announcing two important changes to the senior leadership team. First, we’re bringing Dr.

Philip Breitfeld, the newest member of our board of directors, on to the senior management team as the chief strategic and innovation officer. Phil will increase the knowledge and expertise of our senior team in the area of drug development. Phil is an oncologist and has more than 30 years of experience in oncology, research, and drug development.

He was the senior medical director and head of the global clinical oncology development unit in the US for Merck KGaA and was associate chief medical officer at BioCryst. Most recently, he was global vice president at Quintiles, responsible for the therapeutic centers of excellence, where his focus was business development and innovation.

Phil has contributed a lot to our understanding of what it takes to get our customers, most of whom have never run a study more than $200,000 in size, to shift their paradigm and think about running studies of $500,000 or $1 million.

He will be deeply involved in helping the organization with this new mindset, and will be hands on in his work helping to sell customers on the new paradigm. Second, it has become clear to us that the dual role of CEO and president has become redundant.

We set this structure up six years ago when the business was more complicated, less stable, and the management team was new and unproven. Today, the business is a lot simpler, very stable, and run by a broad group of experienced senior executives. As a result, we do not see the need for both a CEO and president to run the business day-to-day.

To this end, we have initiated a transition process that will result in me assuming the role of non-executive chairman of the board, and Ronnie taking over as CEO. This will be a gradual process, which will last into January and should be a very smooth transition.

I will remain involved with the business as chairman with a particular focus on strategy, operational, and financial progress. Ronnie will run the business day-to-day. With our strong financial and operational results, we think this is now a great time for this transition. Finally, a couple of quick additional items to talk about since the last call.

As we announced last week, we did sign a very large $2 million contract with a large pharma company. As you know, this contract is an order of magnitude larger than our typical contract. It has some exciting components related to immune oncology work and sets us up for what we expect to be a great bookings quarter.

Also, during the quarter, we’ve seen a dramatic improvement in the liquidity of our stock. I generally refrain from commenting about the price of our stock, however, I have been taught for many years on Wall Street, that if we deliver good financial results, the stock price will reflect that.

The big caveat to that historically for champions, was liquidity. We’ve been working diligently on this issue and have made steady but insufficient progress as of last quarter. We ended the July quarter with an average daily volume of about 10,000 shares. Real progress over the 1,000 shares a day we had seen in the past, but still not enough.

As those of you who follow us carefully will have noted, we finally achieved a sustained level that enables buyers to build real positions in reasonable timeframes without needing to chase the stock up. Our average daily volume is now about 80,000 shares.

We’ve also seen some big blocks trades and to the best of our knowledge, the large seller who was active in the market has fully liquidated their position. With that, I’ll turn it over to David Miller, our VP of finance and administration to talk about bookings and other financial results. I’ll then wrap up and take some questions..

Staring with bookings, because as we’ve discussed on prior calls, bookings is or single most important indicator for evaluating our future revenue growth. Q2 was another strong books total for Champions. As Joel mentioned earlier, our second quarter financial results were not influenced by any one-time or significant event.

The same held true for our second quarter bookings, with our largest booking contributing only 10% to our quarterly total, while we’re still strive to have, and will, sign large scale studies that will contribute significantly to our quarterly bookings and comprise a larger percentage of a future quarterly total.

The compensation of [inaudible] comprised of a well-diversified customer base and study sizes, we’ve [inaudible] to believe that our bookings have reached a new baseline and will continue to growth from these levels. We signed more than 40 new studies and [inaudible] with over 30 different customers.

Additionally, we continued to sign studies and new product lines which we discussed before, AML and immuno-oncology We expect this will result in continued revenue acceleration and scientific innovation as the AML and immuno-oncology results contribute to the growth of our core TOS revenue.

Looking forward, we feel confident in the bookings potential for the rest of our fiscal year. As already announced, we had a strong start to the third quarter, signing a $2 million contract and our sales pipeline representing potential opportunities, is at historically high levels.

As such, we remain confident in our bookings growth for the remainder of the year and the revenue guidance for fiscal 2017 that we provided of $16 million to $18 million. Now, let me revenue the financial results we announced for our fiscal second quarter. The full 10Q will be filed on or about December 14th.

Overall revenue for the quarter was $4.45 million, at the middle of the guidance range we provided. It’s worth noting that we exceeded the high end of our revenue guidance for the first quarter, which was partially attributed to revenue initially included in our second quarter revenue projection.

Put another way, we’re near the high end of our revenue guidance for the first six months for our fiscal 2017. TOS revenue was a record $4 million for the quarter, an increase of 59% over the same quarter last year.

The increase was due to the conversion of revenue of our strong prior period bookings, which we have been reporting the past several quarters. TOS’ gross margin was 54% for the second quarter, a 12% point improvement over last year. Gross margin continues to be a volatile line on our income statement.

As our revenue continues to grow, we expect an improving gross margin as we leverage our fixed cost against a higher revenue base. However, along with the growth, at times, we expect variable cost to increase as we begin new studies before revenue is recognized, which will put short term pressure on margins.

Long term however, we reiterate that we expect an overall trend of higher gross margin as we continue to operate more efficiently and search for new ways to lower our cost. TOS revenue was up again for the second quarter to $497,000, a 2% increase over last year.

The increase is primarily the result of growth in sequencing and drug panel revenue, offset by a decline in implant and tumor board revenue. As with our overall operations, we are continuing to focus on lowering our costs in this business and as you can see, we have made great progress.

We have reduced our costs by almost $200,000 or 34% from the prior year, while still maintaining consistent revenue levels. As a result, we posted gross margins of 25% for the quarter, and are continuing to deliver on our guidance of achieving positive gross margins in this segment.

Our reporting operating expenses including R&D, sales and marketing, and G&A were $2.7 million, a decrease of $700,000 or 21% from the second quarter last year.

This decrease was the result of a non-tax increase in stock based compensation of approximately $200,000 and more importantly, cash operation expenses decreases of approximately $500,000 resulting from reductions in legal and audit fees, IT costs, and other personal related expenses.

This was achieved while our revenues were $1.5 million higher than the same quarter last year. As we’ve repeated, we have kept a very tight control on our expense line even as we grow our revenue base.

Looking forward, we will continue to be laser focused on expense management along with uncovering additional opportunities for further baseline cost reductions. While we anticipate some marginal increase in our third quarter expenses overall, any significant increase in expenses will be directly attributable to business growth.

Our non-GAAP earnings, which is operating income excluding stock-based comp was a positive $40,000 for the quarter. We have talked a lot about the goal of profitability and we are excited to have reached it a couple of quarters earlier than expected.

While we expect some volatility around this metric in future quarters, this is a new baseline from which we will measure future results and set new goals. A direct result of operational profitability was reduction in our quarterly cash burn to less than $150,000.

As we’ve discussed on prior calls, our cash burn is basically our operating income or loss before stock-based comp adjusted by changes in key balance sheet accounts. Capital expenditure is not a significant number.

As we anticipated, our growing revenue base, along with our continued emphasis on cost containment [inaudible] significant improvement in our cash flows. We achieved these results with strong cash collections on our completed study milestones along with a reduction in our expenses.

With $4.3 million of cash in the bank, we are confident that we have plenty of capital to meet our operating needs. Now, let me turn it back to Joel for some final remarks..

As I hope you all can see, we delivered another great quarter, 50% revenue growth, profitability, and a very strong cash position. I could not have asked for a better quarter on which to start my transition to chairman. With that, we’ll open things up to Q&A..

Great. Thank you all for your time. I hope you are excited about this quarter as we are and we look forward to updating you next quarter. Thanks everyone..

This concludes this afternoon’s teleconference. You may now disconnect your lines..