Earnings Call Transcript - CSBR Q1 2022

Operator, Operator

Good day, everyone, and welcome to the Champions Oncology First Quarter Fiscal Year 2022 Earnings Call. At this time, I would like to turn it over to your host, Ronnie Morris, CEO of Champions Oncology. Please go ahead.

Ronnie Morris, CEO

Good afternoon. I am Ronnie Morris, CEO of Champions Oncology. Joining me today is David Miller, our CFO. Thank you for joining us for our quarterly earnings call. Before I begin, I'll remind you that we're 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 on our Forms 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 year-end results and company update 6 weeks ago. On that call, I outlined our transformative, strategic vision for the next few years. While we continue to progress on its execution during the first quarter, the fundamental message and status remain unchanged. Our oncology research services business, which includes in vivo and ex vivo studies, along with an extensive array of biomarker assays, continues to grow and deliver successful results, supporting our investment in other opportunities that will accelerate our long-term revenue growth. Our differentiating factor continues to be our data and scientific platform that come from our unique PDX tumor bank, combined with our expertise to provide high-quality scientific studies in our laboratories. It is this data, our platform and our scientific operational excellence that have enabled us to expand our platform and initiate software services and engage in therapeutic discovery efforts. To that end, approximately 1 year ago, we rolled out our new software platform, Lumin, a revolutionary data interpretation software tool capable of analyzing proteomic, genomic and transcriptomic data sets in real-time. We have been licensing this platform to our customers using a SaaS model, and the initial results of its launch are promising. We have integrated customers' feedback into our platform as we continue to invest in its development such as adding data sets and improving the user interface. We have sold licenses to over 100 unique customers, including several multi-seat license packages. We appreciate the level of interest from our early users, but it is still premature to draw definitive conclusions about customer satisfaction and renewal rates. We look forward to learning and disclosing more over the course of the year. As discussed on our last call as well, we have developed an internal computational discovery team to discover novel therapeutic targets. Our computational approach leverages a more complete data set that is derived from tumor models with a more authentic tumor cell biology and heterogeneity. As a result, our computational analysis identified targets that are overlooked or missed when using other data sets. We have validated more than 6 targets, and we are now advancing those targets through the development pipeline. We are evaluating each target to determine the most strategic and advantageous path to advance that target. There is no one single approach with regard to the development of these targets. We are assessing whether we want to partner, license or develop internally each validated target while working to add targets to our pipeline. We are in discussions with potential partners on ways to advance some of these targets. Continued progress has been made, and while I can't provide an exact timeline, I do anticipate we'll have announcements to share over the next quarter or two. In summary, during the first quarter, our oncology research services business continued to expand and produce positive financial results while we simultaneously continue to capture more value from the proprietary data that we create. Our innovative SaaS business continues to grow, and we're advancing our therapeutic targets through the pipeline. Now let me turn the call over to David Miller for a more detailed review of the financial results.

David Miller, CFO

Thanks, Ronnie. Our full results on Form 10-Q will be filed with the SEC later today. Our first quarter revenue was a record $11.3 million compared to $9.5 million in the year ago period, an increase of $1.7 million or 18%. Excluding stock-based compensation and depreciation, we recognized a gain of $422,000 compared to a similar gain of $421,000 in the year ago period. Focusing as we do on results, excluding noncash expenses such as stock compensation and depreciation, our first quarter gross margin was 53% compared to 44% for the same period last year. Total cost of sales was $5.3 million compared to the same $5.3 million in our first quarter of last year. As we discussed on several prior calls, our quarterly gross margins were pressured because we outsourced some lab work, enabling us to accelerate our revenue growth. We have brought most but not all of that work internally. The reduction in outsourced costs more than offset increases in compensation, lab supply and rent expenses, resulting from the increase in study volume and our lab extension in Q4 of last year. The net result is a flat year-over-year cost of sales and with the growth in revenue and improvement in gross margin. R&D expense was approximately $2.3 million compared to $1.6 million in the year ago period, an increase of $700,000 or 44%. The $2.3 million is generally in line with our guidance provided on our year-end call, will indicated we will be ramping up our R&D investment, adding data to our tumor bank and investing in our therapeutic target discovery platform. It is worth noting that by increasing our investment in R&D, we're intentionally sacrificing short-term profitability for greater long-term revenue growth, profit and revenue potential. Sales and marketing expense was $1.5 million compared to $1.2 million in the year ago period, an increase of $363,000 or 31%. The increase in sales and marketing was mainly due to compensation-related expenses resulting from the expansion of our sales team. Our G&A expense was at $1.7 million for the quarter compared to $1.1 million a year ago, a 59% increase. The increase was primarily due to an increase in compensation and IT-related expenses. In total, our cash-based expenses were $10.8 million for the first quarter of fiscal 2022 compared to $9.1 million in the same period last year, an increase of approximately $1.7 million or 19%, with $1 million stemming from increased investment in R&D and the expansion of our sales forces. Now turning to cash. At the end of the first fiscal quarter, we had $4 million of cash on the balance sheet. For the period, net cash generated from operating activities was $216,000. Cash used in investing activities of $1 million was primarily due to the continued investment in our software platform along with fixed asset purchases for our laboratories, including the new European labs. We have no debt. In summary, we hit a new record for quarterly revenue, surpassing $11 million for the first time. Excluding stock compensation and depreciation, we generated an operating profit in excess of $400,000. We continue to see underlying strength in our research service business and increasing contribution from our software platform. We are excited about the direction of the company and look forward to our next update call in mid-December.

Operator, Operator

Our first question comes from Matt Hewitt with Craig-Hallum Capital.

Matthew Hewitt, Analyst

Maybe first up, I realize it's still early days on the renewals, but what is the feedback that you've been getting from those customers that have been up for renewal? Any incremental discussions that they've been having with you? And have any of those resulted in expansions?

David Miller, CFO

Ronnie, you got that? Ronnie may take it. Sorry, Matt.

Matthew Hewitt, Analyst

That's okay.

Ronnie Morris, CEO

Hey, David, somehow I got this picture from the call. So I'm back.

David Miller, CFO

No problem.

Matthew Hewitt, Analyst

I'm not sure if you heard the question. But I realize it's early days, if you could provide us any feedback on those customers that have been up for renewal, what they're saying about the platform. Have any of them signed not just a renewal but maybe expansions as they've come back after that first year?

Ronnie Morris, CEO

Yes, as we've mentioned, it's still early in the process. We have fewer than 10 contracts that were up for renewal, and our renewal rate exceeded 80%. However, because the numbers are small, it's difficult to draw any significant conclusions. Our primary challenge now is to help our active users feel more comfortable with the platform. Users who are becoming more acquainted with it are recognizing its value. Like with any new software, the main hurdle is encouraging usage and ensuring users understand its capabilities. We're putting in the effort to provide tutorials and support to help them feel at ease. Those who have been using the platform more frequently are definitely seeing its benefits, and our current goal is to encourage more of our users to engage with it on a regular basis.

Matthew Hewitt, Analyst

Got it. Okay. One of the things that was kind of added in addition to the software itself was the ability to contract with a Champions team, essentially a services component to the Lumin platform. Has that launched? Are you seeing any traction with that?

Ronnie Morris, CEO

Yes. That has launched, and we are certainly seeing traction. We think that long term, that's going to be a big revenue driver and a value add for our customers. So as they're getting comfortable with the software, I think they're realizing that there's a lot of important analytics that they want to do. But it's a little hard for them to do it because it requires more of a deep dive into our data. And so we are seeing traction with the customers that are starting to utilize the platform more. We're seeing them come to us. And we call it the Acuity product, and we're seeing them signing up for it.

Matthew Hewitt, Analyst

Okay. And then you mentioned there towards the end regarding the European lab. Is that up and running? Have you started to sign some contracts using that facility?

Ronnie Morris, CEO

We haven't signed any international contracts yet. The lab is open, and we are currently working on certifying and ensuring compliance with all regulations over the next month or two. By the end of this quarter, we expect to be fully established there, and we are already in discussions with customers. We anticipate having serious proposals by the end of the year.

Matthew Hewitt, Analyst

That's great to hear. And then maybe last one for me and I'll hop back in the queue. Regarding the full cytometry business, maybe an update on how that's progressing, what that pipeline looks like. Any details there would be helpful.

Ronnie Morris, CEO

The biomarker business is performing well. Although growth has been slower than initially anticipated, we continue to see progress, and it remains a significant driver of growth for the next couple of years. The recent opening of our European site is expected to enhance our larger studies, which were previously limited by only having a site in the United States. Many of these larger studies require international access to patients, both from Europe and the United States. We are enthusiastic about our first international site as it will contribute positively to our clinical biomarker business. Progress is steady, and we have established quality labs that are satisfying our customers. We are optimistic about our quality performance and future prospects.

Operator, Operator

We have another question from Matt Hewitt.

Matthew Hewitt, Analyst

One of the issues that has been raised, depending on the company reporting, is the apparent disarray in pharmaceutical budgets and the timing of decisions. It appears that, overall, the budgets are performing well, but there have been delays in decision-making due to the pandemic. What trends are you observing in your business? Are you experiencing similar patterns, or has the stage of your clinical processes not been affected?

Ronnie Morris, CEO

Yes. So because most of our business is preclinical, we haven't really seen that much of a fluctuation. I would say that middle last year, the middle of the pandemic, there were a couple of months where we did see a slowdown. But as it stands right now, at least from a preclinical perspective, we feel pretty comfortable that things are back to normal, the budgets are robust, and our pipelines are strong, and there's just a lot of customers that are coming back for repeat business. In terms of the clinical biomarker space, we're a little bit newer into the scene. So it's harder for us to gauge how robust some of those pipelines were a couple of years ago as opposed to now. So it's hard for us to kind of gauge that level of activity. But we certainly have an active pipeline. We're talking to a lot of different companies about their trials, but it's hard for us to gauge that level of activity.

Operator, Operator

Okay. It seems we do not have any additional incoming questions.

Ronnie Morris, CEO

Okay. Great. Well, thank you very much for joining us for our quarterly earnings call. We are, as always, very excited about our opportunities. We're excited about our oncology services business. We're also very excited about our software services as well as our therapeutic discovery, really utilizing what we set out to do many years ago, which was build our data engine with a data strategy and data analytics. So we're excited to be using it, doing all these different things. We're excited that we're working with so many partners who trust us and the business continues to grow, which is certainly a sign that our platform has a lot of value. So with that, I thank you for joining us, and we look forward to sharing more news over the next couple of months and certainly at the next quarterly earnings call. Have a good evening, everybody.