Champions Oncology, Inc. (CSBR) Q3 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to Champions Oncology's Fourth Quarter Fiscal Year 2019 Earnings Call. [Operator Instructions] 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.

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'll 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 on 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. Overall, we had another good quarter, and the theme for this call will be similar to prior calls, as we continue to execute on our strategy and update you on the results. We had a record-breaking quarter with revenue reaching $9 million for the first time. Excluding stock-based compensation and depreciation, we recorded net income of approximately $900,000. Bookings in both our core products and new product launches continue to strengthen, setting the stage for continued revenue expansion in the quarters ahead. As most of you know, we launched our regulatory clinical flow cytometry services a couple of quarters ago. And to date, we have not yet signed our first study. However, our pipeline of opportunities in GCLP flow is growing, and we are encouraged by the level of interest in the early stages of this product launch. We have had multiple pharma companies give us positive feedback after expecting and auditing our facilities and as a result, have added us to their preferred vendor list. This will enable us to bid on their future regulatory flow cytometry opportunities. While we understand there is anticipation for immediate results, we reiterate that we are building an impressive pipeline of opportunities, we are increasing our float sales force, and we are confident it will lead to signed studies in the coming months. We have also realized an unintended positive benefit while we have been aggressively marketing our GLP flow cytometry services, which highlights the state-of-the-art equipment and operational excellence. As a result of these efforts, we have seen an approximate 40% increase in our preclinical flow cytometry services, leading to larger studies in our core preclinical business. We look forward to additional growth in both preclinical and clinical flow over the coming quarters. Our ex vivo platform, which leverages our tumor bank to support large screening studies and assist our customers with their early preclinical work is growing steadily and contributing to our revenue growth. As discussed previously, we're investing in expanding our internal ex vivo capabilities and have partnered with PhenoVista to provide a unique imaging-based solid tumor ex vivo platform. We have been excited with the enthusiasm and interest in our ex vivo product launch. This has contributed to our revenue growth. And as we expand the ex vivo platform, we anticipate that it will be a great contributor to our overall growth in general. In addition, we continue in our R&D efforts to offer both new models for in vivo and ex vivo assays as well as to expand our biomarker endpoint analysis. In summation, it was a strong quarter for the company as we saw the expected results of our strategies come to fruition. We are excited about the interest in our core services as well as our expanded products, and we anticipate our revenue will continue to grow steadily. Now let me turn the call over to David Miller for the highlights of our financial results.

Thanks, Ronnie. Our full results on Form 10-Q will be filed with the SEC on or before March 16. We had a strong quarter, kicking off the second half of our fiscal year with record revenue of $9 million and near-record net income. Our revenue increased by $2.6 million or 40% compared to the year-ago period. Excluding stock-based comp and depreciation, we recognized a gain of approximately $900,000 compared to a gain of $91,000 in the year-ago period. Including stock-based comp and depreciations, we recognized a gain of $430,000 for the quarter compared to a loss of $370,000 in the year-ago period. Focusing as we do on costs, excluding stock-based comp and depreciation, our gross margin for the third quarter was 52% compared to 47% for the same period last year, with cost of sales increasing by $900,000. The increase is mainly attributed to the revenue growth and continued expansion of studies and process. R&D expense was approximately $1.4 million compared to $1.3 million in the year-ago period. We increased our R&D investment to continue growing our tumor bank, along with expanding the capabilities of our in vivo and ex vivo platforms. This investment allows us to design and provide following the tools to run increasingly complex studies. Sales and marketing expense was $1.2 million compared to $826,000 in the year-ago period. The increase was mainly due to compensation expense in the form of salaries and commissions. We expanded our business development team to penetrate deeper into existing territories as well as opening up new geographies and product lines. Additionally, as discussed on our prior earnings call, we adjusted our methodology for a [ cooling permission ] by allocating these costs over the course of the year. Historically, commissions were heavily weighted into our fourth quarter. This accrual, combined with commissions earned on robust sales, contributed to the increase. Over the coming quarters, we intend to continue to grow our business development team to capture more market share as well as explore other strategic opportunities. Our G&A expense was $1.2 million compared to $845,000 in the year-ago period. The increase is primarily due to higher salary expense, along with approximately $150,000 in bad debt write off. Let me be clear, bad debt expense in our business is minimal, and this is not expected to be a recurring quarterly item. In total, our cash-based expenses were $8.1 million for the quarter compared to $6.3 million in the same period last year, an increase of approximately $1.8 million, of which $900,000 within cost of sales as a result of revenue growth and $400,000 in sales and marketing. Now turning to cash. At the end of the third quarter, we had $3.3 million of cash on the balance sheet. For the quarter, cash used in operations was approximately breakeven, mainly due to the normal variability in the timing and accounts receivable and payable. With our anticipated revenue growth and profitability, we reiterate our cash from operations will grow over the long term. Additionally, subsequent to the quarter end, we have added approximately $4 million, mostly the result of [ warrant exercises ], solidifying our balance sheet with a cash balance of $7 million and no debt. Looking ahead to the remainder of fiscal year 2020, with the understanding there is a bit of global uncertainty, we anticipate maintaining our profitability, and we reiterate our year-over-year revenue guidance provided last quarter. In summation, we had a record-breaking revenue quarter, and we're very confident in the long-term prospects of the company. We look forward to our next call, which, because it's our year-end, will be at the end of July. We'll now open the call to questions.

[Operator Instructions] Our first question today comes from Matt Hewitt of Craig-Hallum.

Congratulations on the strong quarter. First one, obviously, on everybody's mind, I'm just curious, what impact, if any, are you seeing from coronavirus? Maybe how is that impacting the start times from some studies or anything along those lines?

Yes. So obviously, it's first and foremost, on our minds right now. We've been meeting regularly, the management team. As it stands right now, we are fully operational. We have sent all nonlab employees to work remotely just so that we won't have an increased risk of exposure to the other essential employees that work in the lab. We've increased our vigilance for hygiene and lab sterilization with more frequent cleanings. And obviously, all the other hygiene improvements that we've been able to do. We are closely monitoring the situation. It's hard to know how -- what the full exposure is, Matt. Obviously, things change on a daily basis. As it stands right now, we haven't seen a letdown in our bookings. And as long as we can keep our lab healthy, we have ordered a couple of months of supplies in advance. So in case there's a supply chain issue, we're well compensated for that. But what we're really monitoring is just the extent of the spread of the disease and whether it will impact the operations of the workforce within our lab operations. And that's something we're monitoring. We're working very hard to reduce the risk of exposure, but we'll only know in the next couple of weeks or months. There was one supplier of mice of ours that comes from China that impacted that. It wasn't a very large supplier, so might impact revenue a little bit. But for the most part, up until now, we haven't been impacted. But it's just starting, so we'll have to keep you posted on that.

Along those lines, I've seen some articles talking about the -- I think it's -- and correct me if I'm wrong, but the ACE2 mice and how those are in very short supply. I don't -- correct me if I'm wrong, but I don't think you guys work with those types of mice, correct?

We don't. We don't. Correct.

Okay. All right. I guess shifting gears a little bit, you commented in the press release and then in your prepared remarks regarding adding to the sales and business dev head count. Where does that sit now? And where do you see that going over the next year?

So over the last 6 months, we've roughly increased our head count by about 1/3, about 30%. We feel like there's a lot of opportunity out there, and we feel like -- that we're going to continue increasing our business development head count. So I don't know the exact number yet, but we feel like there's an opportunity out there. We continue to grow our bookings and -- while we have an increase of demand. And one of the things we've been doing, as you know, is we've also been increasing the products and the services. So that also leads to a demand, meaning more salespeople because we're doing more work and we're doing deeper work with more pharmaceutical companies. So for the past 6 months, I'd say it's about 30%. That includes a bunch of geographies as well as just going deeper in the areas that we're currently at.

Got it. Okay. And then maybe last one, and I'll hop back in the queue. Thank you for the update on flow cytometry and the incremental color that you provided as far as some of those pharma customers have come in, inspected, you're now on their approved list. Any additional color that you could provide as far as how frequently are those types of opportunities coming up for bid? Do you have any sense for how frequently that occurs and when, I know it's difficult, but when you might anticipate seeing some contracts being signed there?

Yes. It's -- I think to be fair and honest, we had already anticipated that we would have signed 1 or 2 studies. We are talking to a lot of groups. We are being seen as a favorable. I mean at this point, there have been multiple pharma companies, as I said, who have come in and ordered us and talked to us and really like the work that they're seeing that we're doing. I think it's just a matter of timing. I don't know the exact timing. I believe very strongly that it will happen, I have a little less clarity on exactly the right timing. I do believe in the next couple of months, we will get our first signed contracts. But stay tuned for that.

[Operator Instructions] We do have a follow-up from Matt Hewitt of Craig-Hallum.

I'll keep going. As far as -- there was a mention of a small bad debt, a nonrecurring bad debt write off. What was the amount of that during the quarter, David?

$150,000.

$150,000. Okay. That's great. And then I guess the last piece here, regarding -- as you add these new services and new market opportunities and you're adding some salespeople, how quickly are those new services translating into bookings and revenues? Is that -- are you able to flip the switch on those pretty quickly? Or do they require some lead time, maybe not to the extent of flow but maybe they require a couple of quarters before those orders start to flow?

Yes. So I think it depends on the services that we have. So for instance, one of the services that we currently have, but we're making more robust and we plan to add it in a bigger way, is histology services. That's something that we currently do. Our partners, pharma customers and partners utilize that. And that, once we roll out the more robust platform probably the next couple of months, that we see almost an immediate impact. Ex vivo was similar once we had -- obviously, the ex vivo platform is not just one assay. It's going to be multiple assays. But once we had 1 or 2 assays that were ready to go, the implementation and the execution was almost immediate, 1 or 2 quarters. When we talk about winning bids for clinical studies, I think it's just a longer period of time because we're attaching ourselves to a clinical trial. There's a lot more regulatory hurdles that we have to go through. And so there's a lot more auditing and investigating our capabilities. And quite frankly, a lot of the companies had previous relationships. So in that respect, we were kind of breaking into a new area. Whereas in the preclinical space, when we add new services -- and a lot of the new services that we're adding are just biomarker-analyzed or other ways that we can measure things within cells or expression levels. So those that come off a study, off a preclinical study, those the -- those that we will be adding, we see a much quicker and a faster path to the commerciability and revenue.

There are no additional questions at this time. I would like to turn the call back to Ronnie Morris for closing remarks.

Great. Thank you. So I guess, just to sum it up, we had a really nice quarter. We continue to be really excited about what's happening at Champions Oncology. We're building off an exciting platform with really exceptional people, great science, and we just are excited to continue this. And we look forward to talking to everybody on our next quarterly call. And in the meantime, hopefully, by the time our next quarterly call comes out, the world will be in a more stable place. So I appreciate it. Have a good evening, everybody. And we appreciate you coming on our call. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.