Champions Oncology, Inc. (CSBR) Q4 2020 Earnings Report, Transcript and Summary

Greetings and welcome to Champions Oncology fourth quarter fiscal year 2020 earnings call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. I would now turn the conference over to our host, Ronnie Morris, Chief Executive Officer of Champions Oncology. Thank you. You may now 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 2020 earnings call. Before I begin, I will remind you that I 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 the non-GAAP financial measures that may be discussed on the call to GAAP financial measures is available in the earnings release. 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. We also recently expanded our lab space and capacity in order to meet the demand of our growing business. Financially, revenue exceeded $32 million, resulting in 19% revenue growth, in line with our mid-year guidance. Our expenses were higher than expected and that was mostly due to revenue that was associated with our outsource partners and other one-time expenses. Despite the uncertain economic environment, our bookings continued to increase, laying the foundation for continued revenue growth heading into fiscal year 2021. Speaking of the current times, it's been a challenging several months as we all adjust to living and working during the COVID pandemic. Fortunately for Champions, we have up to this point weathered the storm fairly well. We planned and worked originally in the early stages of COVID anticipating some of the expected challenges. For example, we increased our laboratory supply spending during the fourth quarter, stocking up on items such as PPE that we suspected would become scarce and hard to purchase. We took active measures to mitigate the risk of COVID entering our lab workspace. We immediately increased the level of disinfection on a daily basis. We added additional work shifts to reduce the number of lab technicians at any given time while still ensuring the work was completed timely for our pharma customer. It's a testament to our dedicated employees that we were able to continue providing a high level of service that our partners are accustomed to. The demand for our services remain strong and while we can't precisely predict our pharma customers' budget for oncology drug development over the long term, initial indications are for continued demand for our services and we remain well-positioned for continued growth. Our ex vivo platform continues to show interest, is growing rapidly and becoming a healthy contributor to revenue. As discussed previously, we have partnered with PhenoVista to develop a unique imaging base solid tumor platform and we have seen tremendous growth in this opportunity, especially in the second half of this year. Additionally, we are expanding our own internal ex vivo platform and capabilities. The plan as we look ahead to this year is to invest in additional equipment that will enable us to bring more of this work in-house by the end of this fiscal year. We anticipate this investment will reduce cost and improve our margin in this fast-growing opportunity. In summary, ex vivo has been a successful product launch contributing for revenue growth and we will continue to expand and our offer comprehensive, differentiated and unique set of ex vivo services. Now let me update you on our regulatory flow cytometry business which we launched several quarters ago. It has taken longer than anticipated to gain traction, although we have reported encouraging signs led by the growth in our pipeline of opportunities. This is the area of our business most impacted by the COVID pandemic. This is due to the delay in human clinical trials that had originally been scheduled by the pharma companies to commence over these last several months but have been pushed off to a later date. However, despite the challenges, we have succeeded in signing several regulatory flow validation studies. These are the initial steps in the process prior to signing the full regulatory flow study. While a validation study does not guarantee a full commitment to the clinical trial work, it is certainly a positive development and a tangible first step which affirms our belief that the business will come and we get more traction over time with our customer base. While it is too early to predict the impact on revenue, this fiscal year we are cautiously optimistic this business line will develop and contribute t the future growth of Champions. On the R&D front, we continue to invest and focus on enhancing our existing platforms while also creating new service offerings. As an example, we are developing our tumor genomic sequencing capabilities with the expectation that we can sequence the tumors in-house and gain valuable genomic data. We anticipate that bringing this functionality in-house will have multipronged effect Along with reducing sequencing cost for our internal effort to increase our tumor database, we envision that as we gain experience and expertise, we can offer sequencing services to customers as well. This not a near term revenue contributor but an example of how we continue to expand our capabilities and potential revenue generators. This capability will allow us to add more data on our tumors cost effectively and at a faster pace which will lead to more relevant tumor models for our pharmaceutical company partners to work with. It is still too early to discuss the specifics, but as potential opportunities come into focus, we will discuss in greater detail our strategy throughout the year. In summary, overall we had a good fiscal year 2020, continuing to build a foundation for future revenue growth. We have a strong core business built on a differentiated platform. We are both enhancing and adding to our suite of services and we gained traction in our new service offerings. While we have grown substantially over the years, we envision continued revenue growth and improving results over time. 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. During the fourth quarter, we achieved the second half revenue growth we had predicted. Fourth quarter revenue increased to $8.7 million compared to $7.7 million in the year ago period, an increase of 13% and bringing our annual revenue to a record $32.1 million and up 19% year-over-year. Excluding stock-based comp, depreciation and goodwill write-off, we recognized a fourth quarter loss of $1.2 million compared to a gain of $200,000 in the year ago period. For the full year, we were at approximately breakeven compared to a gain of $1.5 million in the year ago period. Including stock-based comp, depreciation and a goodwill write-off, we recognized a loss of $1.9 million for the quarter compared to a loss of $118,000 a year ago. For the full year, we recognize a loss of $1.8 million compared to a gain of $270,000 in the year ago period. I am going to focus and identify specific costs that led to the expense increases and losses for the quarter. First, while we generally exclude non-cash expenses such as stock-comp in our quarterly call narrative, it is worth highlighting the $335,000 write-off of goodwill. Historically, we add several hundred thousand dollars of goodwill on our balance sheet allocated evenly between our POS and TOS segments. As we continue with our stated strategy of exiting the POS business, combined with the continued growth in TOS, we decided to reevaluate the goodwill asset associated with POS and a determination to take this non-cash expense write-off this quarter. Focusing back on cash related expenses, our cost of sales was $4.9 million for the fourth quarter of fiscal 2020 versus $4.3 million for the same period last year, which was an increase of $628,000 or 15%. As Ronnie mentioned, we successfully partnered with other organizations outsourcing work to increase the breadth of our offerings. The short term downside to these partnerships is that we incur approximately half of the cost immediately with minimal offsetting revenue. As we discussed regularly, we recognize our expenses as incurred well in advance of revenue recognition. However, in these partnerships, the impact is magnified. We incur a larger immediate cost upon signing the business combined with the fact that there is limited leverage. As the volume of bookings spikes in the fourth quarter the result has been a jump in expenses. For the quarter, we had a total of 1.2 million of partnership related expenses against $1 million in recognized revenue. As a result, there was added pressure on our gross margin for the quarter which dipped to 44% compared to 45% in the year ago period. Going forward, we expect improving margins as we recognize the revenue associated with these costs combined with the fact that we are negotiating better pricing terms with our partners. Additionally, as part of our longer term strategy, we intend to start bringing this work in-house which we expect will occur in the later half of this year. This will lower our overall cost, provide data leverage and mitigate the impact of upfront charges which accumulate quickly when bookings are expanding rapidly. We will however have an increase in cost of sales related to the expansion of our lab. Our rent expense will increase approximately $150,000 per quarter. However, it is a necessary investment to ensure we have enough capacity to meet growing demand. Sales and marketing expense was $1 million compared to $900,000 in the year ago period. For the year, sales and marketing expense was $4 million compared to $3 million in the year ago period. The increase was mainly due to two factors, salaries and commissions. We continued the expansion of our business development team to penetrate deeper into existing territories as well opening up new geographies. Looking ahead to this year, we anticipate a continued expansion of the business development team and marketing efforts. Our G&A expense was $2.2 million compared to $1.1 million in the year ago period. The increase was primarily due to executive compensation attributable to the following. During fiscal year 2018 and most of 2019, Ronnie Morris did not receive any compensation in order to preserve the company's cash. As our cash position has improved considerably and the company has grown, the Board recently decided to compensate Ronnie for that period of time. In lieu of additional equity, the Board approved an $850,000 one-time award as compensation. We accrued this expense in the fourth quarter and it will be paid out quarterly over time. Now turning to cash. We ended the year with $8.3 million in cash on the balance sheet. For the quarter, cash from operations was $2 million, mainly due to the normal variability in the timing of accounts receivable and payable along with the increase in deferred revenue due to our strong bookings. In addition, the final tranche of warrants were exercised during the quarter infusing an additional $4 million of cash to the balance sheet. With our anticipated revenue growth, the elimination of some one-time costs and reduction in specific outsource expenses, we expect to be increasing our cash balance over time. In conclusion, we ended our year in a strong cash position and we strategically utilize our cash for appropriate growth opportunities in fiscal 2021. In summation, looking back at our fiscal 2020 result, we reached another annual revenue record as we grew our topline by 19%. We recognize that our expenses were higher than expected which impacted profitability. We have specifically identified the causes and will focus even more on expenses over the current fiscal year. We are in a strong cash position and we are excited to capitalize on the opportunities that lie ahead. We are confident in projecting another year of 15% to 20% revenue growth which will result in another annual revenue high as we hit new quarterly revenue milestones during the current fiscal year. We are already almost complete with our first quarter and accordingly we look forward to another update in about six weeks when we report our first quarter result. We will now open the call to question.

[Operator Instructions]. Our first question comes from Matt Hewitt with Craig-Hallum. Please state your questions.

Good afternoon and thank you for taking the questions.

Sure Matt.

Maybe the first one. Could you give us an update on where the clinical trials are currently sitting? As far as I know early on in the lockdowns, some of those trials were delayed. We started to see more elective procedures coming back. But could you provide an update on where like the clinical trial processes are?

So the clinical trials are definitely progressing. They are progressing slowly, except for any of the COVID related trials. Depending on where you are in the country or in the world, a lot of patients, as you know, are not coming in necessarily for their routine care or the people who are associated with these academic institutions, they don't necessarily have the full complement of caregivers. So what we see and obviously we are in the earlier parts of, from our perspective, we are in the earlier parts of negotiating primarily Phase 2 clinical trials, Phase 1, Phase 2 clinical trials because the flow cytometry and what we have been seeing is just some of the conversations around the trials and when they are going to start, being stalled, leading to what we think is just a little bit of a delay in some of these things coming down the pipeline.

That's helpful. Thank you. And then I guess following on that with the flow pipeline. I guess first, with these validation projects that you are doing, kind of, are you comfortable, is there a way to are describe may be the revenue contribution from those as compared to a full-blown clinical study for the flow cytometry?

Yes. So validation study will probably be somewhere in the range of about $100,000 to see if we can actually perform it in a way that the pharmaceutical company expects it to come out. And then once were able to do that, the contract is anywhere between five and 10 times that amount. A lot of it depends on the size of study. It depends if it's multi, if it's an international or only U.S.-based. It depends on how many patients are actually going to be enrolled in that study. But that's, I think, a general guideline for the ones we have so far been booked for, from a validation perspective.

Okay. That's great. That's helpful. And then I think you touched on this a little bit or maybe David did. As far as the sales and marketing, I know that you have been looking to add headcount there. Maybe an update on where that sits today versus maybe where it was a year ago and what your plans are for fiscal 2021?

You want to take that, David?

Sure. So over the course of the year, we have gone from about 12 salespeople to approximately 19, 20 salespeople. And as we look forward to 2021, we do see that number increasing. The exact number, we will decide over the course of the year. Certainly as we see an existing opportunity or geography, we are certainly not hesitant to add resource. But we have immediate plans even in this current fiscal, this current quarter to add a couple of more salespeople and I expect that that will, you will see that trickle effect over the course of the year.

That's great. Maybe one last one and I will hop back in the queue and I don't know if you are going to have this information but I think investors would find this helpful. You obviously had get incremental expenses during the quarter related to the Coronavirus. You talked about adding, kind of splitting your shifts up a little bit to create that distancing. Obviously, buying additional PPEs so that you prepared. Is there any way to quantify what that impact was on the quarter? And obviously it might still be ongoing. But what was the cost of Coronavirus to Champions?

So, certainly some of the supplies, I can actually quantify it in terms of ramping up, just comparing it even to historical period. And it has been in the range of $200,000 to $250,000 more than usual. I think I did not include that in our discussion of some double costs that we expect to come down over time, just because hopefully as we grow we may see that supply cost remain at those levels as we grow. But just in terms of attributing specific costs in terms of ramping up, I would say that was the impact on the supplies. And the shift cost, there was some additional over time, et cetera. I don't know if we can too specific in terms of specifying the exact dollar amount. There certainly has been some cost associated with it but the supply cost were the ones that were very easily identifiable.

Understood. All right. Thank you very much.

Sure.

[Operator Instructions]. Our next question comes from Scott Henry with ROTH Capital. Please state your question.

Thank you and good afternoon. I guess for starters, could you talk about the revenue trajectory for 2021? I guess we only have four days left in the first quarter. But just your sense of how we should think about that and I don't know if COVID-19 plays into that trajectory at all. But any color there would be appreciated.

Yes. Go ahead, David.

No. It's fine. I mean we just stated that we expect, I think, a 20% revenue growth. I certainly see some sequential growth over the Q1. And so around the way it's projected is that we will increase sequentially quarter-over-quarter over the course of the year, obviously, we always say with our revenue, the lumpiness and the variability. But I think as we look at it overall, we are confident with the 155 to 20% revenue growth and as we sit here today, we should start seeing sequential quarterly increases. I am sorry, Ronnie. I think you wanted to add additional color.

Yes. I just want to add that, the big elephant in the room obviously is how is COVID going to affect us long term. And we don't what's going to happen long term. I can say a couple of things. One, I think that we have continued to be operational. We never really slowed down. And we see ourselves continuing through to be operational to that there have been, on both sides, there have been some companies that have ramped up work with us because they had to shut down some of their internal lab capacity and work. And there are other companies who, for one reason or another, because of COVID have had to delay things. So I think that, from the net effect, I think we continue to see a lot of positivity out there. We continue to see a lot of activity and a lot of people working from home but still working with us and a lot of scientists in the pharma biotech companies continuing to work with us even if it's remote and their budgets seem to be the same as they were before COVID. So from that perspective, at least from a short term, we feel pretty comfortable that we will be able to continue to grow at the trajectory that we just mentioned.

Okay. Great. And then staying on the income statement, obviously a lot of one-time events in fourth quarter. Would you expect to just kind of turn cash flow positive again right out of the gate in fiscal 2021? And I guess just to add another question into this question, how should we think about gross margins when we get to a steady state?

Okay. So I will take those two questions. So in terms of cash flow positive, I will just defined that. So first of all, do I anticipate that will improve to be operationally profitable in Q1? Yes, I do. Whether or not on the cash flow statement specifically, there can always be timing differences between accounts payable and accounts receivable. So just to be clear, I think from an operational perspective, we will be profitable in Q1. But if you look at the cash flow statement loss the way you see it in terms of the exact timing of cash receipts, et cetera. And then over time, I think we have stated several times in terms, to grow at a steady state, I think it's fair to say that we would be in the low 50s in terms of gross margin and incrementally increasing as we grow. A lot the times, it's very difficult to see that on the P&L on our Qs or Ks because especially as we continue to grow, our expenses increase initially and then we recognize the revenue later on. But in a steady state, low 50% range, gradually increasing to the mid-50s.

Okay. That's very helpful. And then on R&D, I mean that was higher than is typical by roughly $500,000. I don't recall if there were any extenuating circumstances in that line. Question is, how should I think about that number going forward?

Yes. So we made a conscious effort about a year ago to be less focused on profitability. We saw a lot of opportunity ahead of us, a lot of excitement ahead of us and so we took that as an opportunity to expand some of the internal work that we are doing. I think that's really why the R&D line, we were being opportunistic about some opportunities. We mentioned some of them, expanding our ex vivo platform, looking at some other opportunities. So I think that in this coming year, we will do the same. We will aim to be a little lower than where we were this year. But if the opportunities or opportunistic things come about where we think we have a really good idea and we can afford it, I think we do want to work on profitability. And I think it is important us to be somewhat profitable but not at the expense of an opportunity.

Okay. Thank you. And the final question. I guess, with regards to flow cytometry which you mentioned has been impacted by COVID-19, when should we think about kind of material revenues coming out of that division? Should we think late fiscal 2020? Or is that a fiscal 2022 timeframe?

I think it's fiscal 2022. I mean there could be some contribution towards the end of fiscal 2021, certainly these validation studies will contribute during the fiscal year. But I think that for the business that we had anticipated, for it to be a real driver for the growth that we have been talking about, I think we are talking about certainly not this fiscal year.

Okay. Thank you for taking the questions.

Thank you.

Ladies and gentlemen, there are no further questions at this time. I will turn it back to management for closing remarks. Thank you.

Thank you very much for joining us for our end of year call. We look forward to updating everybody in approximately six weeks on Q1. We are excited about the direction Champions Oncology continues to be headed. And with that, I wish everybody a good evening. Thank you.

Thank you. This concludes today's conference. All parties may disconnect. Have a good day.