Greetings. Welcome to the Champions Oncology Fourth Quarter Fiscal Year 2019 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-answer session will follow the formal presentation. (Operator Instructions) Please note this conference is being recorded.

I will now turn the conference over to your host, Ronnie Morris, CEO, Mr. Morris, you may begin..

Good afternoon. I am Ronnie Morris, CEO of Champions Oncology. I am joined today by David Miller, our CFO. Thank you for joining us for our fiscal year end 2019 earnings call.

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 of factors that could cause results to differ is available in our Forms 10-Q and Form 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. Additionally, please note that our yearend audited financial statements will not be finalized and our annual report will not be filed with the SEC for approximately another two weeks.

Therefore the numbers issued in our press release and discussed on this call are preliminary and subject to change. Overall, we had another year of significant progress, achieving major milestones and continuing the evolution of Champions Oncology.

We continued the expansion of our core business reaching record levels of bookings and revenue while simultaneously investing resources to further develop our product offerings and launch new services to sustain future growth.

Financially, we recorded another year of record revenue exceeding $27 million and achieving 34% revenue growth, easily surpassing our guidance of 20%. We were profitable for the year on both a GAAP and non-GAAP basis, and we expect to maintain annual profitability on both the rapid acceleration on multiple fronts, it did come with some challenges.

As discussed on our Q3 earnings call, we did experience some operational issues during the year. These challenges led to both an increase in expenses and a delay in revenue recognition. There is no one single explanation for these issues and some were out of our control.

As we've stated multiple times, we are dealing with biology, and the uncertainty of tumor growth, which can be unpredictable and does not always cooperate with our quarterly results scheduling.

Specifically, humanized mouse studies are more expensive than our typical PDX studies, and operational failures in those studies, mostly out of our control were particularly costly to the company. In addition, our rapid growth contributed to some of our challenges by putting a strain on our operational resources.

While that can be viewed as a high class problem to have it nevertheless did cause some pain, specifically in our last half of the year. We have spent much effort enhancing our processes, and developing advanced technology tools, training our teams and ensuring strong QA/QC compliances here.

And we feel that all of these enhancements will result in better quality and more cost efficient operations this year. However, as mentioned, due to the inherent biologic variability in studies, there remains a challenge to accurately predict the conversion of bookings to revenue, which can lead to fluctuations in our financials.

Therefore it is important to take a long term view when evaluating our results. As we think about Champions going forward, we see several levers that will enable our continued growth. First is the continued expansion of our products and services. As mentioned during the year, we introduced 2 new services during fiscal year 2019.

The first was ex-vivo services as a complementary platform to our robust in vivo PDX. Our ex-vivo platform is up and running and will contribute to our revenue growth in 2020. We plan to continue to expand the ex-vivo platform to include other assets during this year.

The second offering was to expand our preclinical flow cytometry offering to include CLIA and GCP flow cytometry offerings. It took us longer than expected than anticipated to develop those capabilities. But we have fully launched and are currently in negotiations on a handful of contracts.

GCP flow services have a longer bookings to revenue conversion cycle, and we do not anticipate a meaningful contribution to revenue in this fiscal year.

Secondly, we are strategically expanding our sales force, taking advantage of the growing demand for our services, and forging deeper relationship -- working relationships with the pharmaceutical companies, along with pursuing opportunities in as of yet untapped markets for Champions.

And lastly, the relevance and the demand for our specialized services continues to be strong. Budgets for oncology drug development continue on a healthy pace. And we see this translating to a demand for preclinical services. Our scientific expertise continues to benefit pharma, who view us as consultative partners in their drug development pathway.

In summary, we have a strong core business built on a differentiated platform. We are both enhancing and adding to our suite of services and expanding our geographical imprints. The message is clear. While we have grown substantially over the years, we are even more committed to expanding our reach and continuing to increasing our revenues.

We look forward to providing updates over the course of the year. Now let me turn the call over to David Miller for a more detailed review of our financial results..

Thanks Ronnie. Our full results on Form 10 K will be filed with the SEC on or before July 29. Q4 2019 revenue was $7.7 million, an increase of 57% during the same period last year, bringing our annual revenue to $27 million and up 34% year-over-year. Bookings continue to be strong and set us up for sustained growth in 2020.

Q4 revenue saw a particularly high increase on a sequential basis, 20% higher than the $6.4 million recorded in Q3. As we indicated on the third quarter call, Q3 revenue was weaker than expected because of the recent [ph] study completion and revenue recognition.

The combination of some revenue slipping into Q4, along with a stronger than usual second quarter bookings contributed to an unusually high Q4 revenue number.

As we think about the baseline off of which we forecast 2020 revenue, it would be prudent to view our run rate coming out of fiscal 2019 as the average of the revenue for Q3 and Q4 or approximately $7 million per quarter. However, as evidenced by these last two quarters, there will be continued revenue variability.

Excluding stock-based comp and depreciation we recorded our fourth consecutive profitable quarter on an operating basis, earning $200,000 for the quarter, and bringing our total net income for the year to $1.5 million, compared to a Q4 2018 loss of $312,000, and breakeven results for all of last year.

Including stock-based comp and depreciation, we recorded a fourth quarter loss of $117,000 and income of $270,000 for the year, compared to a fourth quarter 2018 loss of 600,000 and a loss of $1.4 million for the year.

Focusing as we do on results, excluding stock-based comp and depreciation, our total cost and operating expenses were $7.5 million for the quarter an increase of $2.3 million or 43.4% for the same period last year.

The majority of our $2.3 million increase in Q4 is due to a $1.5 million increase in our cost of sales, of which $1 million is a result of sales growth. Approximately $500,000 is due to some of the costly operational challenges discussed earlier.

Had we not included those expenses, our gross margin for the quarter would have been more in line with our expectations. Sales and marketing expense were $930,000 for the quarter compared with $650,000 in the prior year, a 43% increase as a result of commissions paid on total bookings along with salaries resulting from our growing sales force.

Looking ahead to 2020 we anticipate improving margin expansion as we leverage the fixed costs in the business and continue to resolve the operating challenges we had in 2019.

Now let me turn to cash, net cash generated by operating activities was $1.8 million for the 12 months ended April 30, 2019, compared to net cash use of $1.2 million for the same period last year. We ended the year with a cash position of $3.2 million, up from $850,000 last year.

Looking ahead to next year, while there could always be quarterly fluctuations in cash from operations, overall, we anticipate continued expansion in cash generated from operating activities. Over the coming months, we will be investing in additional equipment to support our flow business.

We are confident in our ability to fund the necessary investments. To sum up our financial results, we had strong revenue growth for the full fiscal year, hitting a quarterly revenue record of $7.7 million in Q4 and 34% revenue growth for the year, along with operational profitability.

Our bookings were strong throughout the year positioning us well for fiscal 2020. While we do not generally provide quarterly guidance, we do anticipate a decline in our first quarter revenue off of Q4 2019 levels to be followed by an increase in the second quarter. For the full fiscal year, we are on track to deliver growth between 15% and 30%.

While our growth prospects for the coming year are at least as strong as last year when we achieved our 34% revenue growth, the exact timing is more unpredictable, especially with the introduction of our flow offering. However, the message should be clear.

We're confident in the underlying long term strength of the business and look forward to our product extension contributing to our results over the long term. We would now like to open the call for your questions..

At this time, we'll be conducting a question-answer session. (Operator Instructions) Our first question comes from Matt Hewitt, Craig-Hallum. Please proceed with your question..

Good afternoon, gentlemen. Thank you for taking our questions. .

Hi, Matt..

So I've got a few here. First off, it sounds like the operational issues that you had in the third quarter were somewhat resolved based upon the results that you posted for Q4.

Is that correct? And as you look at the next year, were the issues that hit in Q3, do you expect those to return? Or is it really just contract by contract and kind of working through each of them individually, and sometimes you run into issues..

So we had some specific issues in -- actually going all the way back Q2, Q3. Some of it spilled over into Q4. But I think a lot of those core issues that we had, some attributed to growth, some attributed to some of the newer products that we had, I think we have a really good handle on those. So we're not anticipating those issues.

I think there's two sets of issues that we talk about when we talk about operational issues. I think, one is some of those issues that I think we have control for. The other issues are just the variability in the growth and the biology. And I think we continue to get better and better and more predictive. But we're still not there.

And therefore there's still going to be some type of fluctuations. I don't actually consider those operational issues, but they are going to lead to some of the fluctuations that we've seen over the last couple of years. .

Okay. All right. So that's helpful. And then I wanted to ask about one of the comments you made in your prepared remarks regarding untapped markets. Are these untapped markets meaning new services? Or are there certain geographies that you may be looking at expanding, or moving into? Maybe break that out if you could. .

Yeah, so what I was referring to is really, the geographies. But it's really true for both.

I think that whereas maybe a year ago, we were very, very focused on the bottom line and focused on just profitability, I think now we're looking at there's a lot of opportunity and a lot of expansion, both in the products that we can develop based on our relationships with pharma, based on our continuing the deeper relationships on the whole end to end preclinical services.

So we're certainly looking at that expansion. But we're also looking at expanding not only the areas that we're currently in, expanding more in Europe, but also a couple places in Asia that that we're looking at, very, very, very carefully at. So there are certain geographies that we think we really have a big opportunity to expand the business in. .

Okay, and then I guess, along those lines, maybe an update on your current sales headcount, and where you envision that as we exit, fiscal '20. .

So in terms of our sales and marketing team, we currently have 12, members in the sales and marketing team. We think that by the end of fiscal year 2020 we will probably have somewhere in that range of 18 to 20..

Okay, great. And then maybe one more, and I'll hop back in the queue. As far as the flow cytometry is concerned, I think there's a lot of excitement that's built, at least from the investment community. And we realize that that's going to have a longer tail to at least start to record the revenues.

But maybe if you could talk a little bit about the pipeline that you're seeing today, maybe even how that compares to last quarter when it was still, and it's very early days, you are in discussion. But where does that pipeline sit today? And how soon do you think you might have something to announce there? Thank you. .

Yeah, thanks, Matt. I think it's a little too early to talk about the pipeline, except to say that we're excited about the early results in terms of the conversations, we're having, the actual SOWs [ph] that we are preparing for our clients. So it's not just conversations.

So I think that gives us a lot of a lot of excitement and cause for some cautious optimism. So from that perspective, we're not yet ready to talk about actual pipelines or bookings. But hopefully, within the next quarter or maybe two, I think we will be able to make some announcements about actually finding our first GCC flow cytometry services..

That's great. Thank you..

Thanks. (Operator Instructions) Our next question comes from George Merano, Corredo [ph] Ventures. Please proceed with your question..

Good afternoon. Thank you for taking my call. I want to clarify a couple of things. So if I heard correctly, for 2020 fiscal year, your general guidance is for 35% sort of plus growth, although that's on a full year basis, and not necessarily any kind of ** in a linear order.

Is that question [ph] about, right?.

Yeah, so we said we said 15% to 30%. So I think you just said 35%. So just want to be clear. Did you say 35%, because I said 15% to 30%. .

15% to 30% for the year, okay. Now I didn't -- I want to clarify that. And then it sounds like a lot of your operational issues have been sort of cleared up, other than the ones that could always creep up due to the medical nature of it all. Then I'm assuming you expect to be cash flow positive for 2020 from -- going forward. .

Yeah..

Okay, and then on the -- to get ready for flow -- And -- well just let me back up to ex-vivo, could you give any color on the traction and in backlog and pipeline on the ex-vivo portion business, the new business..

Yeah, so we've already booked a couple of million dollars on the ex vivo. We've already -- actually had some of that come in as revenue. The way I would describe our ex-vivo platform is, we have a huge opportunity, because we have the actual tumors. We have a very well differentiated consumer bank. And that gives us the advantage.

Where I would say we are in our ex-vivo platform is we're kind of in the early stages where we have one or two products in the ex-vivo platform. We expect over the next year to expand that to multiple products, multiple other products. So I kind of see us in the early stages of ex-vivo.

Still we've a team getting the products out, we're continuing to expand that team, bring in expertise to expand the platform. And eventually we see this as being a very large platform for the company. But right now we're still kind of in the early stages..

Well, I'm kind of surprised that 2 million in bookings is early stages. That sounds pretty, pretty good already. So I'm happy to hear that..

Yeah, I mean, we have high hopes for ex-vivo the next couple of years. It's going to lead to a meaningful contribution..

Okay, and then on the cost of sales, you said there's $1.5 [ph] million increase, of which about a million was due to more growth phase and 500 was -- I trying to scale how costs of sales, how the half a million portion was not related to sales.

What was that related to then?.

It was embedded in our cost of sales, but it was -- if we had to repeat a study, so it stayed in our cost of sales. But it was unnecessary, if things had worked out worked out perfectly..

Oh, I see. Okay. And that that increased expense, is that under the category of the operational issues that you think are ironed out, or is that….

Correct. .

Correct.

So that type of expense hopefully is at the end?.

Correct. .

Okay. So but you had a million dollars in cost of goods of sales increase that sounds -- that sounds like a record high. That's a big number, I think last quarter was what, $500,000, $600,000..

Yeah, in terms of the increase, but well, yeah, so our sales are growing. And even if we don't recognize the revenue, obviously, until a later period of time it is an indication that our sales are growing, and we're incurring those expenses, along with our sales growth..

Okay, that's outstanding. All right, thank you guys..

Our next question comes from Paul Knight, Janney Montgomery Scott. Please proceed with your question..

Hi, guys. I know we have a 15% to 30% growth rate guidance. Can you say what has to go right for 30% to happen versus the 15%, I would say? I guess we could all figure out what that is.

But what do you envision to make the upper end of that range happen?.

Yeah. So I think of course a lot about what we talked about, and I think the bookings will continue to be strong. We're really excited about the pipelines and what's coming in, in terms of orders. The question for us is just an issue of the timing here.

And it's hard for -- there's for a regular PBX, study you are generally talking six months from bookings to revenue, but sometimes it could be an extra month or two.

So for us, I think the reason for the swing is not an issue of bookings, not an issue of the work coming in, it's more of an issue of when is that revenue going to get recognized?.

Okay, and where do you stand right now, in your capacity near Johns Hopkins [ph], are you at near, do you need to build more?.

Yeah, so just to remind you, we left John Hopkins about two years ago. We opened up a large state-of-the-art facility in Rockville, Maryland, about a year ago. We opened up a second state-of-the-art facility about a half a mile away in Rockville, Maryland, to do all of our ex-vivo and flow cytometry work.

So we have a fair amount of capacity both on the in vivo side, the work we do with mice as well as the non mouse work that we do, the ex vivo and the flow cytometry. So we should be okay, for a while..

Okay, and then the operating margin, I would expect that outlook to be what, increasing with your increased utilization this year?.

Correct. It all depends on how much we spend on some of our R&D resources -- R&D expenses, but overall, long term, you should start seeing an extension of the operating margin as well. .

Okay, thank you..

We have reached the end of the question-answer session. Now I would like to turn the call back over to Ronnie Morris for closing remarks..

Thank you, and thank you for taking the time everybody to listen to our update. We're excited about how things are going at Champions, a little bit of lumpiness. Some quarters better, some quarters a little bit worse. But in general the pathway is exciting for us. We see a lot of opportunity out there.

We see a lot of expansion possibilities and a lot of growth. But as I said in my opening remarks, I think it would be wise to take a longer lens, and a longer view of our growth. So with that, I wish everybody good evening and thank you for joining our call..