Letter To Champions Oncology: Time For Open Market Buys

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About: Champions Oncology, Inc. (CSBR)
by: Mike Arnold
Summary

Champions Oncology is a profitable, free cash flow positive contract research organization serving the immune-oncology and oncology market.

While management is executing on its growth strategy, it must also more proactively engage shareholders, including retail investors.

Certain dog whistles signaling strength in the business have fallen on deaf ears — it is time to send another signal to the market, open market stock purchases.

Often times in small cap investing, time (and clear communication and transparency) is of the essence.

Champions Oncology (CSBR) risks losing investor interest in the stock simply because the “chart looks bad” and liquidity is drying up. Yet this comes at the exact time that the company is introducing new services (which were requested by existing customers), dramatically expanding Champions’ total addressable market and engagement with current and prospective customers.

The company has been sending dog whistles about the underlying health of the business, but no one appears to be able to hear it.

In October 2018, the company did not renew a $1.5M credit line.

Source: Company

And on February 1, 2019, the first day of the new quarter, management paid down $244k in equipment financing it had been paying $11k per month, due in July 2020.

Source: Company

The company did this with only $2-$3M of cash on its balance sheet.

Those actions show clear confidence in the pipeline and future cash generation of the business. The problem is no one appears to know or care judging by recent trading in CSBR shares. Recent trading volume has dried up to ~20k per day or so.

To that end, a signal that many investors might respond to is open market, insider buying by management and the Board. The stock now trades near levels where CEO Ronnie Morris bought 20,000 open market shares in December 2018 when the entire equity market was melting down.

If management and the Board are confident regarding the future of the business, perhaps now is time to make some open market purchases if the trading window is open, or as soon after it opens again as practicable.

Realizing the management and the Board already own more than 50% of the shares, this could cause an impediment among institutional investors interested in building a position in Champions by locking up more of the float. But so does a lack of liquidity needed to build a meaningful position in the first place.

Open market insider buys will likely have the impact of attracting more eyes to this high quality business which is managing aggressive growth and generating free cash flow while providing valuable services to the oncology market.

The other item management should consider is providing some more clarity around bookings each quarter. While “bookings” can be lumpy from quarter to quarter, it can be one more metric to judge the health of the business on a go-forward basis. While relying on management statements that bookings are growing is OK, those are qualitative statements without much quantitative information for investors who rely on numbers to make decisions about valuation.

To that end, given the core TumorGraft business is growing at 20%+ per year, if management has good enough visibility around revenue contributions for its two new service offerings — ex vivo and clinical flow cytometry — then let investors know that growth should accelerate to higher levels in the years ahead. It is implied that revenue growth should accelerate in FY2020 given management opened a second lab facility in early 2019 which seems to anticipate growth from ex vivo and flow cytometry services.

As a reminder, ex vivo engagements should be in the $50 to $100k range, and flow cytometry in the $1M+ range. Given CEO Ronnie Morris suggested clinical flow cytometry revenue should start in the back half of FY2020 (November/December 2019) and because flow cytometry has a longer revenue cycle than the core TumorGraft business, I would expect that clinical flow bookings are happening now.

In my mind, large $1M+ bookings should be disclosed to investors contemporaneously since they carry a larger value and so investors can begin to model FY2020 and discount new awards into the share price.

Conclusion

This is not a fault finding letter, far from it. I believe Champions Oncology has turned a meaningful corner by inflecting from a serial cash consumer to a business that is consistently generating cash coupled with a long run way for growth in revenue and earnings. These qualities make CSBR an attractive investment candidate, yet there is much work to be done to enhance shareholder value from a transparency and communication perspective.

Disclosure: I am/we are long CSBR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.