Champions Oncology, Inc. (CSBR) Q1 2021 Earnings Report, Transcript and Summary

Greetings and welcome to Champions Oncology First Quarter Fiscal Year 2021 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] As a reminder, this conference is being recorded. I would now turn the conference over to our host, Dr. Ronnie Morris, President and CEO of Champions Oncology. Thank you. You may begin.

Good afternoon. I am Ronnie Morris, CEO of Champions Oncology. Joining me today by David Miller, our Chief Financial Officer. Thank you for joining us for our quarterly earnings call. Before I begin, I will remind you that we 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 during the call to GAAP financial measures is available in the earnings release. I will start by pointing out that our prepared comments for today will be relatively brief, as we just recently provided our fiscal 2020 year end results and company update six weeks ago. While continued progress and successes have been achieved in the last update, the fundamental vision and strategies for the coming quarters remain unchanged. Revenue for the first quarter of fiscal 2021 jumped to a record $9.5 million compared to $6.7 million in the year ago period. Our bookings and pipeline remained strong, which will continue to drive further revenue expansion. During the quarter, we completed our move to new lab space, consolidating all our work under one roof. The additional space and increased capacity will enable us to meet the growing demands of our business. Despite the continued pandemic and uncertain economic environment, to-date, our overall business and operations have been minimally affected. The active measures we took in early February to mitigate the risks of COVID remain in effect. As of now, all indications point to continued robust oncology R&D budgets and a demand for our services. As we have mentioned many times before, our platform was based on our unique PDX bank and data, and that has led to our growth in in-vivo services over the last several years. Recently, we have capitalized on our unique bank to introduce our ex-vivo services as well. Our ex-vivo platform continues to grow rapidly and contribute meaningfully to our total revenue. As discussed previously, we are investing to expand our ex-vivo offering and plan to have a comprehensive internal offering by the end of this fiscal year. Strategically, we continue to look for ways to capitalize on our unique platform, data, and experience in working with the pharmaceutical companies in their drug development efforts. Regarding our biomarker assays and in specific regulatory flow cytometry, we booked our first clinical flow cytometry study this quarter. As we mentioned on our year end call, we have signed several regulatory flow validation studies. As a reminder, the validation study is often the initial step prior to signing the full regulatory flow statement at work. I will caution that the signing of these studies does not change the revenue guidance and expectations for the current fiscal year. However, we are cautiously optimistic that these recent signings are an indication that this offering which has taken longer than expected to generate the desired results has turned the corner and the product's future will be more in line with our initial expectations. On the R&D front, we continue to invest and expanding our service offerings and enriching the data contained in our models. Specifically, over the coming quarters, we anticipate additional spend to obtain additional characterization on our models. We believe the additional data will be valuable to our pharmaceutical customers, and will fuel continued usage of our models in PDX and endpoint analysis studies. In summary, overall, we kicked off fiscal year 2021 with a strong first quarter. We had both strong revenue and bookings, while we continue to progress on expanding our offerings. The combination of strong bookings and expanded services lays the foundation for sustained revenue growth over the coming quarters. We look forward to providing further 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-Q, we filed with the SEC later today. Our first quarter revenue was a record $9.5 million compared to $6.7 million in the year ago period, an increase of $2.8 million or 42%. It is worth pointing out that the high growth percentage was due in part to the relatively low Q1 2020 revenue results. Excluding stock-based compensation and depreciation, we recognize income of $421,000 compared to a loss of $300,000 in the year ago period. Our non-cash expenses including stock company depreciation totaled $396,000 for the quarter. I will now focus on our cash-based results. Our first quarter gross margin was 44% remaining flat compared to the same period last year. Cost of sales was $5.3 million compared to $3.75 million in the year ago period, an increase of $1.6 million. As we discussed in our year end call, we've partnered with other companies to expand our service offerings and drive revenue growth. In these studies, we incur an upfront cost upon signing the business and there is an initial mismatch between costs and revenue. This effect is magnified as you continue to sign new studies. For the quarter, we recognized a total of $1.2 million of such expenses and cluster sales, accounting for a majority of the increase compared to last year. This increased expense negatively impacted our gross margins. Looking ahead over a few quarters, we except improving margins as we recognize more of the revenue associated with these studies. Additionally, as part of our longer term strategic plan, we intend to bring some of this work in-house which will lower costs and provide greater leverage, alleviating some of the margin pressure. R&D expense was $1.6 million compared to $1.3 million in the year ago period, an increase of $300,000 or 23%. The increase is due to the continued development work to expand and enhance our product offering. We continue to invest in expanding our sales team -- we continue to invest in expanding our sales team and marketing efforts. As a result, our sales and marketing expense increased $300,000 to $1.16 million compared to $840,000 last year. Our G&A expenses remain flat year-over-year at $1.1 million for the respective quarters. In total, our cash base expenses were $9.1 million for the first quarter of fiscal 2021, compared to $7 million in the same period last year, an increase of approximately $2.1 million, consisting of a $1.5 million increase in cost of sales on a revenue jump of $2.8 million and approximately $300,000 in sales and marketing and R&D respectively. Now, turning to cash, at the end of the first fiscal quarter, we had $6.9 million of cash on the balance sheet compared to $2.2 million in the same period last year. For the quarter that cashed us and operating activities was $715,000. The negative cash flow from our -- from operations was primarily due to fluctuations in our working capital accounts in the normal course of business, highlighted by an increase in our accounts receivable of $260,000, and a reduction in our payables and accrued expenses of 800,000. With our anticipated revenue growth and underlying booking strength, we anticipate an overall increase in our cash balance over the course of the year. We have no debt and no plans to raise capital. In summary, we hit a new record for quarterly revenue coming in above $9.5 million and excluding stock comp and depreciation, our net profit exceeded $400,000. The underlying strength of our core business and new products looks promising and we anticipate additional revenue growth in the coming quarters. As such, we leverage our guidance of 15% to 20% revenue growth for the year. We look forward to our next update call in mid-December. We now like to open the call for your question.

We will now be conducting a question-and-answer session. [Operator Instructions] First question comes to mind of Matt Hewitt with Craig-Hallum Capital Group. You may proceed with your question.

Thank you and congratulations on the strong quarter.

Thanks.

First off for a couple of questions on the flow cytometry wins, congratulations. Maybe walk us through so was this one win or multiple wins? And how should we be thinking about the cost associated with these versus when -- the timing of when the revenues will be recorded? I think historically you've talked about typically about a year lag, but is the bulk of the investment or costs up front and then it tapers off over the next few quarters, just maybe help us understand the timing a little bit?

Yes. So the bulk of the investment was to get the labs up and running and in regulatory shape so that we can offer the services. Once we book a study -- there are two components primarily to study Matt; one is just the validation or the transfer assay study where they want to make sure that we can do the work. And that we get -- that's a separate SoW [ph], generally, and so we recognize the revenue as we do the work. And then there's the samples that come in over the period of time of the clinical trial. And that's going to be a longer lag and that we really don't incur those costs until the samples come in.

Okay, that's helpful. And was it -- because I think I heard you add an S to the end of the flow cytometry wins, if you will. So, was there multiple wins in the quarter? Or is it just one of the validation, and you're still waiting on others?

So, we had we had one that culminated in SoW [ph] for the actual trial and the others were currently doing some validations.

Okay, very helpful. Thank you. And then shifting gears a little bit here. So, I think last quarter, you were at 19 to 20 sales people, I know that's been a point of emphasis for you. Where does your sales head come sit today?

We're still in the same range. What -- but we are looking to expand that over the next one or two quarters by a couple of salespeople. We have -- and again, I think as we've mentioned in the past, we're looking to both expand our geographies as well as within the geographies go a little bit deeper. So, we're looking to do both expand geographies and also increase the amount of business development activities that we have within those areas.

Great. And then one last one for me, and I'll hop back into queue. Obviously, there was some pretty significant disruption earlier this year. The coronavirus is still out there and causing problems, but maybe if you could provide an update on where you see the clinical trials in general, and whether or not those -- some of those or the I guess, companies such as your own are adjusting to this new normal and things are kind of getting back on track. Thank you.

Right. So, in terms of the preclinical business, I think we're back on track. I think -- as I think we mentioned on one of our last two calls, it was a little bit of pause when I would say, February and March, when things first hit, but I think we're back to a normal cadence with the pharmaceutical companies. And from a preclinical perspective, we feel like we have good line of sight to our bookings. When it comes to the clinical trials, there has clearly been a slowdown -- I would say a pause in some of the clinical trials do enrollment. And we're kind of new to the game in clinical medicine -- clinical trials. So, we're still -- I think where we sit, we see a pretty good pipeline. We're excited about the conversations we're having about some of the early validation work we're doing. And clearly things have shifted a little bit in terms of -- a little bit of a delay, but from our perspective, I don't think it's going to be that long of a delay. And I think what we're seeing now with our different conversations, and different work with the validation studies is, hopefully the beginning of things returning to normal.

That's great. Thank you very much.

Welcome Matt.

Our next question comes from the line of Scott Henry with ROTH Capital. You may proceed with your question.

Thank you. Good afternoon. Very strong results. A couple questions. First, in the press release, you mentioned achieving record quarterly bookings, should we think about that as a leading indicator for sequential gains throughout the year in revenue?

Yes, I think we've -- as you know, Scott, we don't disclose our actual bookings. But I think what we're trying to convey is that we continuously see an increase in our bookings, and I think we've mentioned that before. So, yeah, I think what it shows that we're going to continue to grow. And we continue to have one quarter after another where we have better bookings one after the other. And I think that's -- that's, I think the take home point is that we see growth.

Okay. And I guess, more specifically, what I'm thinking about is the sequential trajectory, should Q2 be stronger than Q1, Q3 stronger than Q2. I mean, because I know there's going to be growth year-over-year, but would you expect the sequential growth as well? Up, strong numbers--

We've certainly -- this is, I think, something that we struggle with, whereas we're because of the type of work that we do, and I think we've mentioned this, many, many times on these calls, because we're working with these large studies that that are the biological systems. There are times when a study will shift a month or so. So, we're working with mice, we're doing all of our studies and for whatever reason, the pharmaceutical company wants to extend it, they want to change something, or the study is going really well or the mice take a longer time to engraft. So, there's a natural shifting of the sand between one quarter and the next. So, it's harder for us to predict exactly how things are going to roll out quarter-to-quarter. But when we look at bookings, member of booking that we do today, can -- will generally turn it into revenue approximately six months from now or a couple quarters from now. So, sometimes if it's an ex-vivo study that'll turn to revenue earlier. If it's a in-vivo study, sometimes it can be delayed a little bit. So, I think it's still too early to say that every single quarter we have increased bookings is going to mean that the next quarter is going to be higher revenue. But I think as a general rule, yes, we're expecting higher revenue because we have higher bookings. And we expect growth, and that's why we have the guidance for growth.

Okay, thank you for the color on that. Shifting gears, in the press release, you highlight ex-vivo services, becoming a more meaningful contributor to revenue. Could you talk a little bit about that segment? You know what specifically you're doing there and is the same customer base? And I guess in the bigger picture, you know, how meaningful of a contributor could that be? How big of a component of revenues could that grow to? Just trying to think about that business a little more.

Yeah. So, let me try to remember Scott, all the different questions in there. So, we're excited about our ex-vivo business. I'll put that first and foremost, right now, I would say it's certainly over 10% of the revenue. Over time, it can certainly climb to a higher percentage. We still don't even have full complement of what we think our, our complete ex-vivo platform is going to be in the end. So, I think over time, it could play a larger and larger role. The pharmaceutical customers seem very excited about having this. The way we think about ex-vivo is, it allows the customers to do larger, more screens and more work over a broader array of models. And then they can look at what the screening results are and then they can hone in for more targeted in-vivo work. So, when they need to do the extensive PBX work, they actually are using the models that they've screened in an ex-vivo setting. So, we continue to see a lot of synergy between our ex vivo and our in vivo service lines. We're excited about it. And we think over time, it's going to continue to grow and be a -- even larger part or larger percentage of our revenue.

Okay, great. Thank you for that color. And then I guess the final question, when we look at gross margins, as the revenues continue to decline, when would you expect to see gross margins start to improve in a more meaningful way? Would we expect that kind of in the second half of 2021? Or is that a fiscal year 2022 event?

I think it will start improving in the second half of 2021. Again, a lot of it will depend in terms of how much work we continue to outsource to some of our partners. And it has a compound effect. The more work we signed with some of these partners and so -- it means that we're growing, but that also increases our upfront costs initially. So, I do expect as more and more of this revenue does convert, we will see an improvement, but at the same time, we'll have something pulling in the opposite direction as we continue to see more of these studies. That will still have some impact -- a downward impact on the margins, but overall, the second half of the year.

Okay, great. Thank you for taking the questions.

Sure.

Thanks Scott.

[Operator Instructions] Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn the floor back over to Dr. Ronnie Morris for closing remarks.

I just want to thank everybody for participating in our Q1 call. We're excited about our progress. And we look forward to updating everybody on their next call in a couple of months. Have a good evening, everybody. Thank you.

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