Earnings Call Transcript - CSBR Q1 2021

Operator, Operator

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. 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.

Ronnie Morris, CEO

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 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 specifically 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 in 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.

David Miller, CFO

Thanks, Ronnie. We filed our full results on Form 10-Q with the SEC later today. Our first quarter revenue reached a record $9.5 million, compared to $6.7 million in the same quarter last year, marking an increase of $2.8 million or 42%. It's important to note that this high growth percentage was partly due to the lower revenue in Q1 2020. Excluding stock-based compensation and depreciation, we reported an income of $421,000, in contrast to a loss of $300,000 in the same quarter last year. Our non-cash expenses, including stock and company depreciation, amounted to $396,000 for the quarter. Now, focusing on our cash-based results, our first quarter gross margin was 44%, remaining consistent with the same period last year. Cost of sales rose to $5.3 million from $3.75 million last year, an increase of $1.6 million. As mentioned in our year-end call, we’ve collaborated with other companies to broaden our service offerings and boost revenue. These collaborations involve upfront costs at the signing and initially lead to a mismatch between costs and revenue, which compounds as we secure more studies. For the quarter, we incurred a total of $1.2 million in such expenses, significantly affecting our gross margins. Looking ahead, we expect margins to improve as we start recognizing more revenue from these studies. Furthermore, we plan to bring some of this work in-house as part of our long-term strategy, which will help reduce costs and enhance leverage, easing some margin pressure. R&D expenses rose to $1.6 million from $1.3 million last year, reflecting a $300,000 or 23% increase due to ongoing product development efforts. We are also investing in expanding our sales team and marketing initiatives, leading to a $300,000 increase in sales and marketing expenses, totaling $1.16 million compared to $840,000 last year. Our general and administrative expenses remained stable year-over-year at $1.1 million for both quarters. Overall, our cash-based expenses totaled $9.1 million for the first quarter of fiscal 2021, compared to $7 million in the same period last year. This increase of approximately $2.1 million stems from a $1.5 million rise in cost of sales against a revenue increase of $2.8 million, along with about $300,000 in sales and marketing and R&D expenses. As for cash, at the end of the first fiscal quarter, we had $6.9 million in cash on the balance sheet, compared to $2.2 million in the same quarter last year. The cash from operating activities for the quarter was $715,000. The negative cash flow was mainly due to changes in our working capital accounts, highlighted by a $260,000 increase in accounts receivable and an $800,000 decrease in payables and accrued expenses. With our anticipated revenue growth and strong bookings, we expect an overall increase in our cash balance throughout the year. We have no debt and no plans for raising capital. In summary, we achieved a new record for quarterly revenue above $9.5 million, and excluding stock compensation and depreciation, our net profit surpassed $400,000. The robust performance of our core business and new products is encouraging, and we anticipate further revenue growth in the upcoming quarters. Accordingly, we are guiding for 15% to 20% revenue growth for the year. We look forward to our next update call in mid-December. Now, we welcome your questions.

Operator, Operator

We will now be conducting a question-and-answer session. First question comes from Matt Hewitt with Craig-Hallum Capital Group. You may proceed with your question.

Matt Hewitt, Analyst

Thank you and congratulations on the strong quarter.

Ronnie Morris, CEO

Thanks.

Matt Hewitt, Analyst

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 costs associated with these versus 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 upfront and then it tapers off over the next few quarters? Just maybe help us understand the timing a little bit?

Ronnie Morris, CEO

Yes. The majority of the investment was aimed at getting the labs operational and compliant with regulations so we can deliver the services. When we begin a study, there are two main components. The first is the validation or transfer assay study, which confirms our capability to carry out the work, and we typically recognize the revenue as we complete that specific task. The second component involves the samples collected throughout the clinical trial, which will have a longer lead time, and we usually incur costs related to these samples once they arrive.

Matt Hewitt, Analyst

Okay, that's helpful. Did you mention multiple flow cytometry wins in the quarter, or is there just one validation while you're waiting on others?

Ronnie Morris, CEO

So, we had one that culminated in Scope of Work for the actual trial and the others were currently doing some validations.

Matt Hewitt, Analyst

Okay, very helpful. Thank you. 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 head count sit today?

Ronnie Morris, CEO

We're still in the same range, but we plan to expand that in the next one or two quarters by adding a few salespeople. As we've mentioned before, we are aiming to broaden our geographic reach and also deepen our presence in existing areas. Our goal is to both extend our geographies and increase our business development activities within those regions.

Matt Hewitt, Analyst

Great. I have one final question before I return to the queue. There has been significant disruption earlier this year due to the coronavirus, which is still affecting us. Could you provide an update on the status of the clinical trials and whether companies, including yours, are adapting to this new normal and getting back on track? Thank you.

Ronnie Morris, CEO

In terms of the preclinical business, we believe we're back on track. As mentioned in previous calls, there was a brief pause around February and March due to the initial impacts, but now we feel we're back to a normal rhythm with pharmaceuticals. We have a clear view of our bookings from a preclinical standpoint. However, there has been a noticeable slowdown in clinical trials due to enrollment challenges. As we're still adapting to the clinical trials environment, we see a solid pipeline ahead. We're excited about the early validation work we’re engaged in, and while there has been some delay, we don’t anticipate it will be extensive. The conversations and work we're seeing with the validation studies suggest we may be on the cusp of returning to normalcy.

Matt Hewitt, Analyst

That's great. Thank you very much. Welcome Matt.

Operator, Operator

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

Scott Henry, Analyst

Thank you. Good afternoon. Very strong results. A couple of 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?

Ronnie Morris, CEO

Yes, I think we've consistently seen an increase in our bookings, which I've mentioned before. It indicates that we are on a path of continual growth, achieving better bookings quarter after quarter. The key takeaway is that we are experiencing growth.

Scott Henry, Analyst

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?

Ronnie Morris, CEO

We've certainly been grappling with this issue due to the nature of our work, which involves large studies of biological systems. There are times when a study may be delayed by a month. While working with mice on these studies, various factors such as requests from pharmaceutical companies to extend the study, changes in the study design, or delays in mouse engraftment can occur. This results in a natural fluctuation between quarters that makes it more challenging for us to predict outcomes reliably. However, when we analyze bookings, these generally convert to revenue about six months down the line or over the next couple of quarters. In cases of ex-vivo studies, revenue might materialize sooner, whereas in-vivo studies can sometimes experience delays. Therefore, while we can’t guarantee that an increase in bookings in one quarter will lead to a corresponding rise in revenue in the next, we are generally optimistic about seeing higher revenue due to increased bookings. We anticipate growth, which is reflected in our growth guidance.

Scott Henry, Analyst

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, 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.

Ronnie Morris, CEO

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 a 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 an even larger part or larger percentage of our revenue.

Scott Henry, Analyst

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?

David Miller, CFO

I think it will start improving in the second half of 2021. A lot of it will depend on how much work we continue to outsource to some of our partners, which has a compound effect. The more work we sign with these partners means we're growing, but it also increases our upfront costs initially. I do expect that as more of this revenue converts, we will see an improvement. However, we will also have challenges pulling in the opposite direction as we continue to see more studies, which will have a downward impact on the margins. Overall, I expect improvements in the second half of the year.

Scott Henry, Analyst

Okay, great. Thank you for taking the questions.

David Miller, CFO

Sure.

Ronnie Morris, CEO

Thanks Scott.

Operator, Operator

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.

Ronnie Morris, CEO

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.

Operator, Operator

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