Champions Oncology, Inc. (NASDAQ:CSBR) Q1 2020 Results Earnings Conference Call September 16, 2019 4:30 PM ET
Ronnie Morris - Chief Executive Officer
David Miller - Chief Financial Officer
Conference Call Participants
Casey Woodring - Janney Montgomery Scott
Lucas Baranowski - Craig-Hallum Capital Group
George Marema - Pareto Ventures
Please stand by. Good day, ladies and gentlemen, and welcome to your Champions Oncology First Quarter Fiscal Year 2020 Earnings Conference Call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions].
At this time, it is my pleasure to turn the floor over to the CEO Dr. Ronnie Morris. Sir, the floor is yours.
Good afternoon. Joining me today is David Miller, our Chief Financial Officer. Thank you for joining us on our quarterly earnings call.
Before I begin, I will remind you that we'll 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 Form 10-Q and Form 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 2019 year-end results and company updates six weeks ago.
While there was a high level of activity since the last update, the fundamental vision and strategies for the coming quarters remain unchanged.
Revenues for the first quarter of fiscal 2019 (sic)  grew by more than 8% to $6.7 million compared to $6.2 million in the year-ago period. Excluding stock-based compensation and depreciation, Champions had a loss of $300,000.
In looking at the quarter, revenue was below expectations, mostly due to normal fluctuations that we have discussed in the past, but our confidence remains high because of our increased bookings trends.
While with regard to expenses, we continued the trend of investing in new product capabilities and specifically, for this quarter, there's accounting changes for the way we accrue the commissions.
Although those results are a little worse than expected, it's important to put them in the context of the company's long-term view, which will be my focus today.
While quarterly results are important, the story for Champions is our pursuit for sustained revenue growth and profitability over the coming years. We will sacrifice near-term quarterly results for greater future financial successes.
Our insight into the longer-term prospects is not always visible in the quarterly numbers. This is not unfamiliar territory. A few years ago, our expenses outpaced revenue, but we were confident in our future as we saw the catalyst in place that would justify our investment and, ultimately, propel us to breakeven and then operational profitability.
We are in a similar position today. We continue to see strength in our core services. Our bookings are well outpacing quarterly expenses and those bookings will drive an increase in revenue over the year.
As we have been discussing, we have been focused on expanding our service offerings. Last year, we focused on setting up our lab to enable us to offer GLT and clinical flow cytometry services.
During the current quarter, we have begun aggressively selling and the level of interest is promising. We're in active discussions with customers and have several potential deals in front of us. We hope to be able to announce a deal in the near future.
We have also launched the first part of our ex vivo platform, which will continue to evolve and expand over this fiscal year.
In addition to clinical flow services and an ex vivo platform, we have plans to continue adding to our product line, expanding our international footprint and exploring monetizing our data bank.
Each of these opportunities takes time to operationalize, but has the potential to meaningfully contribute to the long-term growth of the company. As these opportunities materialize, we will provide an update.
I hope the message is clear. The demand for our core services is strong and will drive higher revenue in the coming quarters and support the opportunity to reinvest in additional offerings which will lead to sustained revenue growth.
While we are more focused on long-term revenue growth than the short-term profitability, we're keeping a close eye on cash and we're not going to put ourselves in a situation where we will need a capital raise to fund operations.
Quarterly fluctuations should be viewed in the context of our long-term strategy and prospects and we remain confident in both.
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. As discussed on our year-end call, Q1 revenue was expected to decline from Q4 levels. Total revenue for the first quarter of fiscal 2020 was $6.7 million, an increase of 8.2% compared to $6.2 million in the same period last year.
Excluding stock-based compensation and depreciation, we recognized a loss of $300,000 compared to a gain of $675,000 in the year-ago period.
Our first quarter gross margin was 44% compared to 51% for the same period last year. Cost of sales was $3.77 million compared to $3.07 million, an increase of $700,000 or 23%.
The increase in expense and reduction in gross margin was due to our higher bookings and studies in process and the recognition of associated expenses in advance of the revenue.
R&D expense was $1.3 million compared to $1.1 million in the year-ago period, an increase of $200,000 or 20%. The increase is due to the continued development work to expand and enhance our product offering.
Sales and marketing expense was $848,000 compared to $511,000 last year, an increase of $337,000 or 66%.
The increase in sales and marketing was mainly due to two factors. First, we have continued to expand our sales force to opportunistically capitalize on the growing demand for our services.
Second is our treatment of commission. Historically, we did not accrue commissions over the course of the year as we waited until sales targets were achieved. This has led to higher sales and marketing expenses in our fourth quarters.
Since we are confident that our sales goals will be achieved, we have begun accruing commissions quarterly. This should lead to a more evenly distributed sales and marketing expense throughout fiscal year 2020, but it also contributes to the quarter's year-over-year increase. The combined impact of the sales team expansion and commission accrual was approximately $275,000.
In total, our cash-based expenses were $7 million for the first quarter of fiscal 2020 compared to $5.550 million in the same period last year, an increase of approximately $1.5 million.
Similar to our treatment of commissions, we started accruing for year-end 2020 bonuses in the first quarter. The result should mitigate the annual expense spike in Q4, but in Q1 it added approximately another $75,000 to our total.
In summation, we had a $700,000 increase in cost of sales, $200,000 in additional R&D investments, $275,000 in sales and marketing, and $75000 in bonus accrual. While there will certainly be fluctuation, we believe the current quarter's expenses are a good baseline. And as the revenues grow, we expect to achieve cash-based profitability over the coming quarters.
Now turning to cash. At the end of the first fiscal quarter, we had $2.2 million of cash on the balance sheet. For the period, net cash used in operating activities was $279,000 and $750,000 for investing activities.
The investment was primarily for lab equipment for our flow services. With our anticipated revenue growth and underlying bookings strength, we remain confident that our cash on hand is sufficient to fund our operating activities.
In summary, echoing Ronnie's message, while there can be quarterly fluctuations, we are very confident in the underlying strength of our core business and long-term prospects for the company. We look forward to our next update call in mid-December. We would now like to open the call for your questions.
Thank you. [Operator Instructions]. Our first question comes from Paul Knight of Janney. Please state your question.
Hi, guys. This is actually Casey on for Paul. Are you still reiterating the 15% to 30% revenue growth guide that you gave just a few weeks ago? And, I guess, maybe to get to that that high-end 30% range, we'd see outsized revenue growth in the back half of the year. Just what's your visibility on that, if any? Thanks.
Yes. Thanks, Casey. So, our visibility, we're still confident about that range. And I think as we've discussed, we have good visibility into the pipeline, into the bookings, into the demand for our services. The reason we gave the range is because we don't have as good a visibility in terms of the short-term quarters, of what's going into fall into Q3, Q4 and what might get pushed into Q1 of next year. So, from that perspective, as I said many times, I think it's easier for us to predict a year from now than it is to predict a couple of quarters from now because we see the volume picking up, but it's just hard for us to know when these studies will get done precisely.
Got you. And then, maybe just one more. On the last call, you said that you had about, what was it, 12 salespeople. If you added any in the quarter maybe? And then, do you still expect to get to 18 to 20 by the end of the year?
Yes. So, we're about 15 now and we think we're going to continue to add as we also expand internationally. So, I think, over the next one or two quarters, we'll probably get up to that 18 or 20.
Got you. Thanks, guys.
[Operator Instructions]. Our next question comes from Matt Hewitt of Craig-Hallum. Please state your question.
Yeah. This is Lucas Baranowski on for Matt Hewitt here at Craig-Hallum. Just a few questions today. First off, on the flow cytometry, it sounds like you're still kind of working to get your first deal signed there. So, maybe just anything you could tell us about how many potential customers you're talking to and maybe when you think that first deal could be signed?
Yeah. So, it took us pretty much the whole year to get our lab operational to be able to offer these services. We feel very confident that we have the right team in place. We have the right operations in place now to be able to offer the service, and we're actively talking to multiple different pharmaceutical companies. And we think, within the – most likely within one quarter, we should be able to – we feel confident that we're going to be able to get a study – book a study.
Yeah. Thanks. That's definitely helpful. And then, once you do actually book a study, I guess how quickly would you expect to be able to start the work for that customer?
So, we would start the work pretty quickly depending on the specific study. But as we've mentioned many times, so the revenue for that work, we've really said it was really going to come a year from now. So, now depending on the study, they vary by the services that we are going to provide. So, there is potential that some of it could still hit later in our fiscal year 2020. But the guidance that we have generally given is that it will be about a year until you recognize that revenue, but the work starts as the patients are getting enrolled by the pharma company.
Okay. Thank you very much. That's all I had.
[Operator Instructions]. Our next question comes from George Marema of Pareto Ventures. Please state your question.
Yeah. Hi, guys. Thank for taking the call. Can you give a little color on the ex vivo business?
Yeah, sure. So, we started developing ex vivo platform a couple of quarters ago. We think of the ex vivo platform differently than we think of the capabilities now to do clinical flow cytometry or the GLP flow cytometry. That was a heavy lift to get our labs operational.
The ex vivo platform is more of a work-in progress. We have a very large, well differentiated TumorBank. And we want to use that TumorBank in order to be able to do ex vivo screening. But there's a lot of different types of ex vivo platforms. And not only are there different ex vivo platforms, but different tumor types are more appropriate for certain types of platforms. So, there's the 2D screening. There is organoids, spheroids. There's a whole bunch of different types of assays within the platform.
So, we have rolled out the beginnings of our platform. We have a team working on expanding the platform and we have a timeline that we think will take us about a year, maybe a little bit longer until we have a complete ex vivo platform. And I say a complete ex vivo platform to what we were describing on our previous call where we see that as being a major driver for the revenue over the long term.
So, right now, we are doing bookings with our product and we are recognizing revenue for the product. And we see, over the year, we're going to be adding different elements to the ex vivo platform. And as we add elements to the ex vivo platform, we'll certainly be giving updates.
And how is the core PDX business going?
The core PDX business is actually very strong and we continue to grow the core PDX business at a very nice rate. I would say that most of our revenue and most of our growth still comes from the core PDX business.
And a quick accounting question. So, I know you made some accounting changes on how you handle commissions and bonuses. So, what are the total accruals now for this quarter that was due to the change in total?
All in. Okay. So, if you didn’t make the change, it would be $250,000 less expenses this quarter. Okay. Okay. All right, guys. thank you.
And there appear to be no further questions at this time. I will now turn the conference back over to management for any closing remarks.
Thank you. I just wanted to thank everybody for joining our quarterly conference call. We still remain very positive and excited about the future of Champions Oncology. There's a lot of interest and there's a lot of demand for what we're doing which is driving us to lighten up a little bit on this stretch for profitability. But really looking at the opportunity two, three years down the road and putting the building blocks in for us to be able to expand what we do as pharmaceutical companies and to be able to expand our reach and we're really excited about the prospects.
So, stay tuned. We'll keep everybody updated and we appreciate your time today. Thank you.
Thank you. This does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.