Champions Oncology, Inc. (CSBR) Earnings Call Transcript & Summary

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

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 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 Forms 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. 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 6 weeks ago. While continued progress and successes have been achieved since 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 remain 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 budget 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 assay and a 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 of 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 on 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 will be 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 recognized income of $421,000 compared to a loss of $300,000 in the year-ago period. Our noncash expenses, including stock comp and 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 on 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 was an initial mismatch between cost and revenue. This effect is magnified as we continue to sign new studies. For the quarter, we recognized a total of $1.2 million of such expenses in cost of sales, accounting for a majority of the increase compared to last year. This increased expense negatively impacted our gross margin. Looking ahead over a few quarters, we expect improving margins as we will 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 our cost 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 and marketing efforts. As a result, our sales and marketing expense increased $300,000 to $1.16 million compared to $848,000 last year. Our G&A expenses remained flat year-over-year at $1.1 million for the respective quarters. In total, our cash-based 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, net cash used in operating activities was $715,000. The negative cash flow 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 $250,000 and a reduction in our payables and accrued expenses of $800,000. With our anticipated revenue growth and underlying bookings trend, 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-based comp and depreciation, our net profit exceeded $400,000. The underlying strength of our core business and new products is promising, and we anticipate additional revenue growth in the coming quarters. As such, we reiterate our guidance of 15% to 20% revenue growth for the year. We look forward to our next update call in mid-December. We'd now like to open the call for your questions.

[Operator Instructions]. Our first question comes from the line of Matt Hewitt with Craig-Hallum Capital Group.

Congratulations on the strong quarter. First off, a couple of questions on the flow cytometry win. Congratulations. Maybe walk us through, so was this one win or multiple wins? And how should we be thinking about the costs associated with these versus when -- the timing of when the revenues will be recorded? I think historically, you've talked about typically about 1 year lag, but is the bulk of the investment or cost upfront and then it tapers off over the next few quarters? Just maybe help us understand the timing here 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 2 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 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 validations and you're still waiting on others?

So we had one that culminated in SoW for the actual trial and the others we're currently doing some validation studies on.

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

We're still in the same range, but we are looking to expand that over the next 1 or 2 quarters by a couple of salespeople. We have -- and again, I think as we 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, I guess, companies such as your own are adjusting to this new normal and things are kind of getting back on track?

Right. So in terms of the preclinical business, I think we're back on track. I think -- as I think we mentioned on the -- one of our last 2 calls, there was a little bit of pause when -- I would say, February, 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 or I would say, a pause in some of the clinical trials due to enrollment. And we're kind of new to the game in clinical medicine clinical trial. 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.