Champions Oncology, Inc. (NASDAQ:CSBR) Q2 2022 Earnings Conference Call December 13, 2021 4:30 PM ET
Ronnie Morris - President and Chief Executive Officer
David Miller - Chief Financial Officer
Conference Call Participants
Matt Hewitt - Craig-Hallum
Good afternoon, ladies and gentlemen, and welcome to the Champions Oncology’s Second Quarter Fiscal Year 2022 Earnings Call. At this time, all participants are in a listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions]
It is now my pleasure to turn the floor over to your host, Dr. Ronnie Morris. Sir, the floor is yours.
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 and 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.
Overall, we had another good quarter with solid growth in our Services business as well as progress in our software and drug discovery efforts. Our Oncology Research Services business had record revenues, while our bookings remain robust. We both continue to expand our service offerings and expand our customer base paving the way for continued growth.
We continue to be encouraged by Lumin, our new software platform that was rolled out a little more than a year ago. We have been licensing this platform to our customers using a SaaS model, and our Lumin customer base now stands in excess of 150 users. While our ultimate goal is to build a significant user base, our efforts over this past year have primarily focused on further developing the platform such as adding datasets, improving the user interface, and integrating customers feedback into our software.
Our goal is to create an indispensible tool which will lead to a broader user base and result in a significant recurring revenue stream in the coming years. In conjunction with our Lumin software platform, we've launched Lumin Acuity and Lumin Workspaces. In Lumin Acuity, we provide consulting and support services to help customers answer their focused bioinformatic questions. It is often used by customers who may not have the internal resources to perform this research on their own.
Lumin Workspaces is a pay-to-play model and allows users to custom code, interrogate, and analyze Champions’ comprehensive bioinformatic datasets. In all, we have created a multifaceted data analytics platform centered around Lumin. We are excited about the potential impact of our data analytics and software platform on our long-term growth. We are actively keying in on such metrics as the customer usage, satisfaction, and renewal rates. Over the coming quarters, we will disclose more user data as it becomes relevant to our story.
With regards to our drug development effort, we continue to make good progress. To date, we have validated more than six targets and we are now advancing those targets through the development pipeline. As we have mentioned previously, we will continue to advance each of these targets either ourselves or in partnership with another entity. We will continue to explore the various opportunities to advance each target on the Discovery pipeline, evaluating each to determine the most strategic and advantageous path, assessing whether we want to partner, license, or internally develop each validated target. Most importantly, we believe we have a platform to discover multiple targets moving forward.
In summary, during the second quarter, our Research Services business continued to expand, which led to strong financial results while we simultaneously continued to capture more value from the proprietary data that we create. Our innovative SaaS business continues to grow and we are 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.
Thanks Ronnie. Our full results on Form 10-Q will be filed with the SEC later today. Our second quarter financial results were strong with record revenue of $11.8 million compared to $10.1 million in the year ago period, an increase of $1.7 million or 17%. We generated operating income of $263,000, and excluding stock based compensation and depreciation we recognized operating income of approximately $750,000 compared to $400,000 in the year ago period.
Focusing as we do on results excluding noncash expenses, such as stock comp and depreciation, our second quarter gross margin was 53% compared to 45% for the same period last year. Total cost of sales was $5.5 million compared to $5.6 million in our second quarter last year. As we discussed on several prior calls, our quarterly gross margins were pressured because we outsourced some lab work to accelerate revenue growth. By minimizing our reliance on outsourcing, we have reduced our total cost of sales even with increases in compensation, lab supplies and rent, resulting from the increase in study volume and our recent lab expansion.
Over the last few years, we've continued to invest in our business to adequately support our anticipated growth. As our revenue increases, and with much of the investment costs already incurred, we are realizing the leverage and anticipated improvement in gross margin. It's also worth noting the gross margin improvement has mainly been from our core business. As higher margin products contribute more meaningfully to total revenue, there is room for additional upward trend in margin over the longer term.
R&D expense was approximately $2.3 million compared to $1.6 million in the year ago period, an increase of $700,000 or 39%, [indiscernible] $2.3 million and overall increase is in line with guidance provided. As we indicated, we will be ramping up our R&D investment, adding data to our TumorBank, and investing in our therapeutic target discovery platform. We expect another increase in R&D expense during the second half of the year. However, we anticipate our revenue growth should offset the additional R&D spend and our operating results will be at least marginally positive. We reiterate that we will increase our R&D investment and sacrifice short term operating income for greater long-term growth and profitability.
Sales and marketing expense was $1.6 million compared to $1.3 million in a year ago period, an increase of $300,000 or 22%. 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 $1.6 million for the quarter compared to $1.2 million a year ago, a 36% increase. The increase was primarily due to an increase in compensation expense and IT expense as we invest in upgrading our IT infrastructure to support company growth.
In total, our cash based expenses were $11 million for the second quarter of fiscal 2022 compared to $9.7 million in the same period last year, an increase of approximately $1.3 million or 14% with the increases primarily stemming from investment for future growth.
Now turning to cash. At the end of the quarter, we had $4.8 million of cash on the balance sheet, an increase of $800,000 from our prior quarter. For the quarter, net cash generated from operating activities was approximately $1.2 million due to improving cash based operating results. Cash used in investing activities of $500,000 was primarily due to continued investment in our software platform, along with fixed asset purchases for our laboratories.
In summary, we had a strong financial quarter, hitting a new revenue record of $11.8 million. We generated operating income on both a GAAP and non-GAAP basis and with the underlying strength in our research service business we're positioned for continued revenue growth while we expand our Lumin platform and advance our target discovery program. We are excited about the company's progression and look forward to our next update call in mid March.
We would now like to open the call for your questions.
[Operator Instructions] Your first question is coming from Matt Hewitt with the Craig-Hallum. Your line is live.
Good afternoon, gentlemen and thank you for taking the questions. Maybe to kick things off just a couple items on Lumin, obviously a nice jump in the number of users here this past quarter up to 150. I'm just curious what the feedback is from those customers that have been on board for maybe the past year, and what's driving some of the new adoption?
Thanks. Thanks, Matt. So I think the feedback continues to be strong. People are getting used to using Lumin. I think a lot of the new users are -- haven't really used it enough to really understand what their adoption is. I think what we've learned is that we have to support people. We have to help them become higher users, more of a user. This is a new technology. This is a new software and what we've learned through the first year is that we need to support them more. We need to help them understand how to become a better user on the platform. So, overall as we support people, as people use Lumin more, I think that what we've gotten back is a very positive response. I would still put us in the category of the early learning. We continue to grow the user base. We continue to grow the functionality. We think the platform is getting stronger, but we're still kind of in that early stages where we're getting a lot of feedback, where we are working with the users, and we're trying to get them to be using it more and more.
Got it. And then it sounds like you've added a new sales team, specifically geared towards that Lumin platform. How many members are on that team? Maybe what was their prior experience before joining champions? And is some of their role going to be on the support side or are they purely out finding new customers?
Yes, I would say it's a mixture. We have four members of the Lumin team right now that do a combination of support and sales. I would say one of the changes we've made as of late is really getting our whole sales force more in tune with Lumin, so that they can also be out there more talking to our customers as well and becoming more proficient within Lumin so that they can try to bring some of our customers along, and bring it to our internal sales group. So, at this point, I think a lot of it is both sales, but also support in terms of getting users up to speed. In terms of support for the software itself, from a technical perspective, we have a whole team that supports that outside of this team.
Got it? Okay, maybe shifting gears a little bit, I've got two questions, and then I'll hop back in the queue. First up, maybe you could update us on the flow cytometry pipeline, how that's progressing? And then I guess the last question would be regarding the European lab that is officially opened as of or opened during the quarter, if you could give us an update on how those discussions are going and whether or not you've started to generate revenues out of that facility? Thank you.
Yes, so in terms of the Europe, both questions kind of go together, we opened up the European site so we can be, so we can better be in a position to do more of the larger flow cytometry and also, I would say the biomarker in general studies, clinical studies. The lab just opened. We opened it a couple months ago, but it just opened to be able to start doing some work and some validation. So, we really haven't seen any shift in that respect, because we're literally just being able to validate some of our assays there. So, I expect over the next quarter or two, we should see a real movement in whether we have the ability to win some of these larger studies.
In terms of the biomarker business, in general, it's something that we're still excited about. I think we've made great strides. Operationally, I think we've also done well bringing in some of the business. You know, probably honestly, not as robust as I expected, and I think I've mentioned that before on this call not what we expected. I still believe we will get there, but it certainly hasn't taken the trajectory that we thought it would. I still would say that, as I look to champions, two years from now, I still see it as a large percent, a significant contributor to our growth, but it really hasn't played out that way as of yet. A lot of the other parts of the business have grown at a faster pace. I do like the signs that we're seeing in terms of just the work that we're doing, the quality of the conversations we're having with our customers, the teams that we've built, and I think it's just a matter of time. It's certainly taking a little bit longer than I expected though.
Understood. Great, thank you for taking the questions.
You're welcome Matt.
Your next question is coming from Scott Henry. Your line is live.
Thank you and good afternoon. Just a couple of questions. First another strong sequential gain from first quarter to second quarter of fiscal '22. Would you care to make any comments on the second half of the year? I believe we're thinking about sequential gains in the next two quarters as well, perhaps even larger gains, so just any thoughts you have on that would be great?
Sure. I'll take that quickly. So, I do anticipate that we'll have sequential gain in the second half of the year over the first half of the year, but there's no need to change any of the guidance that's currently been provided. We will be towards the higher end of the guidance, but there's no need to change it at this point.
Okay. Perfect, thank you. And then the gross margin of 52% in 2Q, do you expect I mean, that was a pretty good number, it was a pretty good number in the first quarter as well, can we expect those levels to stay that high throughout the second half of the year?
I do anticipate that those levels are, those are the levels that where we should be near. The slight book fluctuations, but I certainly see that and yes overall steadying of the margins at the 50% level, and with an upward trend over the longer term.
Okay, great. And then one more model question, I think R&D was $2.3 million in 2Q.
I believe you said it's going to step up in the second half of the year. What size magnitude? Are we talking about a couple $100,000 per quarter here or larger than that?
Potentially slightly larger than that. The exact timing of when we're going to hit the -- have the ramp up is difficult to predict. But I would anticipate, we are planning on bumping that number up by several $100,000 over the next, you know, each quarter.
Okay, but it sounds like that may be more pronounced in the fourth quarter than the third quarter, did I hear that correctly?
It's really simply a matter of timing being with some of the planned spend, so it will be exactly where it was, it could be Q3 or Q4. It's hard to tell right now.
Okay, great. And then the final question, you mentioned the six targets in the proprietary pipeline, how should we think of the timeline to either partner those programs or reach an inflection point? I mean, are we thinking a year out or are we thinking two years out? Just trying to get a sense of when we may see some catalysts on that front?
Yes, I think it's in between those two numbers you put out there, Scott, I think it's between a year and two years that that will be at the point, will either be at an IND enabling stage or it will be at a point where we will out license or partner. So I think that that's a reasonable kind of goalpost.
Okay, great. Thank you for taking the questions.
You're welcome, sure.
We have no further questions from the lines at this time. I would like to turn the floor back to Dr. Ronnie Morris, for closing remarks.
Thank you. And thank you, everybody, for joining us for our quarterly earnings call. We're certainly excited about the direction we're taking with the expansive services business as well as our two new efforts, which include the SaaS platform, our software platform, as well as our drug development. This is an incredibly exciting time for Champions Oncology. We feel we're on the right path, and we're at an inflection point. So we look forward to continuing our updates over the next couple quarters with everybody on this call. Thank you and have a good evening.
Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.