Champions Oncology, Inc. (CSBR) Q2 2021 Earnings Report, Transcript and Summary

Greetings, and welcome to Champions Oncology Second Quarter Fiscal Year 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ronnie Morris.

Good afternoon. 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 on 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. Overall, we had a very dynamic and successful quarter with significant accomplishments on several fronts. Revenue for the second quarter jumped to a record $10.1 million. Our bookings remained at record levels, and our pipeline remains robust, which will continue to drive revenue expansion over the coming quarters. It is a repetitive message but one we do not get tired of repeating. This quarter, we announced a significant and exciting milestone for Champions, which was the launch of Lumin Bioinformatics, our proprietary SaaS platform. Over the years, we have built a highly characterized bank of strategically valuable tumors through our personalized oncology services. Data sets established through these personalized services along with other large publicly available data sets have been combined to form the data center for Lumin. To leverage these data sets, we have assembled a highly effective team of computational scientists to build tools and visualization that provide a practical way for cancer biologists to leverage computational analytics in discovery and development programs. While Lumin is still in the early launch stage, initial response has been extremely positive, and we're looking forward to increasing its adoption by customers along with increasing its capabilities over the coming quarters. Turning to our ex vivo platform. It continues to expand and contribute meaningfully to our revenue growth. This quarter, we continued the expansion of our unique hematology ex vivo platform by launching a unique CLL ex vivo offering. We have also announced the launch of a novel autologous immuno-oncology assay. This autologous ex vivo assay centers on the use of a tumor and immune system from the same patient, which greatly enhances the value of the study performed. The uniqueness of our platform is that it provides the ability to perform repeat autologous studies, which is uncommon in immuno-oncology. Our platform will enable our customers to perform more relevant studies and equip them with the tools to develop better therapeutics. While we have worked with partners over the past year to perform our solid tumor ex vivo studies, we are on target to bring most of this work in-house by the end of this fiscal year. Our ex vivo platform continues to be well received and as we continue to expand our platform and offer a comprehensive and differentiated unique set of ex vivo services that will contribute meaningfully to our revenue growth. Regarding our biomarker assays and specifically regulatory flow cytometry, we booked additional regulatory flow cytometry studies this quarter, and we remain cautiously optimistic that these recent signings are an indication that this offering will continue to expand over the coming quarters. On the R&D front, we continue to invest on expanding our service offerings and enriching the data contained within our models. As is evident by the achievements this quarter, these investments have led to additional products and services. As we stated previously, over the coming quarters, we anticipate additional spend as we invest in greater characterization on our models. The additional data will be valuable to our customers and will fuel continued usage of our models in both PDX and end point analysis studies. Additionally, the investment will enrich the data that will be added to our software platform, enabling even greater analytic work to be performed. In summary, we had an extremely vibrant and successful second quarter as we are running on all cylinders. We had both strong revenue and bookings, while we continued to progress on expanding our offerings. We launched new products including a software data platform that we anticipate will become a powerful tool for our customers. This combination of strong bookings and expanded services strengthens the foundation for sustained revenue growth over the coming quarters. 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. Our second quarter revenue was a record $10.1 million compared to $7.6 million in the year ago period, a robust year-over-year increase of $2.5 million or 33%. Excluding stock-based compensation and depreciation, we recognized income of $401,000 compared to income of $545,000 in the year ago period. Our noncash expenses, including stock comp and depreciation, totaled $393,000 for the quarter, resulting in GAAP income of $8,000. I will now focus on our results on a cash basis. Our second quarter gross margin was 45%, down from the 49% in the same period last year. Cost of sales were $5.6 million in the quarter compared to $3.9 million last year, a year-over-year increase of $1.7 million or 44%. As we discussed on our previous call, we've partnered with other companies to expedite the expansion of our service offerings, specifically our ex vivo platform to continue to drive top line growth. While these partnerships have enabled us to accelerate our revenue growth rate and meet customer demand, we have sacrificed some short-term margin. In these studies, we incur an upfront cost upon signing the business, and there was an initial mismatch between costs and revenue. This effect is magnified as we continue to sign new studies. Additionally, this work is more costly than if we were to perform it in our own lab. For the quarter, we recognized a total of $1.4 million of such expenses, accounting for a majority of the increase in our cost of sales. This increased expense placed downward pressure on our gross margin. Our strategic plan is to bring this work in-house beginning in our fourth quarter. As we do, we expect to see a lift in margins as we look ahead to our fourth quarter and next fiscal year. R&D expense was $1.6 million compared to $1.3 million in the year ago period, an increase of $300,000 or 23%. The increase is due to the continued development work to expand and enhance our product offerings, including a deeper characterization of our TumorBank to enhance our data platform. Sales and marketing expense was $1.3 million compared to $950,000 last year, an increase of $348,000 or 37%. The increase in sales and marketing was mainly due to compensation-related expenses as we continue to invest in expanding our sales team and marketing efforts. Our G&A expense increased to $1.2 million compared to $900,000 in the year ago period. As a percentage of revenue, our G&A expense remained flat at 12%, and we anticipate greater leverage in the coming quarters. In total, our cash-based expenses were $9.7 million for the quarter of fiscal 2021 compared to $7.1 million in the same period last year, an increase of approximately $2.6 million consisting of a $1.7 million increase in cost of sales and approximately $300,000 in R&D, sales and marketing and G&A, respectively. Now turning to cash. We ended the quarter with a balance in excess of $8.5 million compared to $2.8 million in the same period last year. For the quarter, net cash generated from operating activities was approximately $900,000. While there can be variability in cash from operations on a quarterly basis due to factors such as timing of receipts and disbursements in our working capital accounts, directionally, our anticipated revenue growth and underlying bookings strength should lead to an overall increase in our cash generated from operations over the coming quarters. Our balance sheet remains strong, and we have no debt. In summary, it was a very successful financial quarter. We hit a new record for quarterly revenue coming in above $10 million. Excluding stock comp and depreciation, we had a net profit of $400,000. The underlying strength of our core business and new products look promising, and we anticipate additional revenue growth in the coming quarters. Accordingly, we feel comfortable raising our revenue guidance for the full year to 20% to 25% above the 15% to 20% provided on our year-end call. We look forward to updating you on our progress in mid-March. We would now like to open the call for your questions.

[Operator Instructions] Our first question is from Matt Hewitt with Craig-Hallum.

Congratulations on the strong start to the year. I'd like to dig in a little bit on some of these new offerings. Maybe first off, the Lumin platform, maybe if you could provide a little bit of feedback on what you're hearing from the initial customers that have signed up. Any details or metrics that you can provide as far as number of seats or anything along those lines? And then how do you expect that database platform to expand over the coming quarters and years?

Yes. So first of all, we have a couple of dozen users to date. We just had a soft launch towards the end of the summer and the last couple of months. So far, it's early days for the launch. So far, we're getting a lot of positive feedback from the people using it. We conceived this and we worked on this really to help the biologists and enable the biologists to use these specific tools to analyze and visualize and do computational research, both using the public databases plus our own proprietary data. From what we're seeing so far, the users that we have seem to really -- seem to be feeling the benefit of what we set out to do. In terms of the expansion of the platform, I think there -- it goes in 2 different forms. The first form of the expansion of the platform is just to continue more functionality. We're getting a lot of the feedback from our users about what they would like to see different analytical tools or different ways to visualize the data, and we continue to upgrade the platform. The second is just in terms of the data itself. We continuously add different sources of data. We continuously are working on characterizing our own bank and adding data. So from that perspective, we see the evolution over the next couple of years, where we think we're going to enhance the platform but also enhance all the data that's within the platform.

That's really helpful. And then you launched a couple more services on the ex vivo side. I'm not sure when those hit the market, if those are in kind of a beta launch as well but maybe some initial feedback on those.

Yes. So we have a very successful hematology, both in vivo and ex vivo platform. We continue to expand the hematology ex vivo platform. We launched -- this quarter, we launched CLL, which is a -- which is unique in the sense that there aren't many CLL platforms out there. So ours is one of unique platforms if anyone's studying that disease. In terms of the autologous ex vivo platform, that's also very unique. There aren't many platforms like that out there as well. So we continue to innovate, and we're excited about the ex vivo platform. We really think ex vivo -- as we've spoken about on this call many times, we really think the ex vivo platform is going to be something that we're going to rely on over the next couple of years for a lot of our growth, including some of our other products.

That's great. And then shifting gears to the flow cytometry. Obviously, you got your first order last quarter. Now you're announcing that you've gotten a couple more. Maybe talk about the hurdle rate that you're seeing from customers as far as how big of a deal was it to get that first one on your belt. And is that just getting that one signed? I guess it is now 2 quarters ago. Is getting that sign really just kind of opening the floodgates? And how should we be thinking about the cadence for additional flow cytometry wins?

Yes. So I don't think anything's really changed in the way we're thinking about this offering. I still think -- I think as we've mentioned on this call before, we're excited about getting into the clinical space, both with histology and cytometry and soon to be some other areas as well. We think it's a good space for us because we have the expertise preclinically. Definitely got a little bit of a slower start than we thought. We've been encouraged over the last couple of quarters that we have been having some bookings and some signings, and there seems to be traction. So from that perspective, I don't think anything's changed. I think regarding the COVID, I think, has slowed us down a little bit in terms of the trials; and so from that perspective, I think that's slowed down our progress slightly. But I don't think anything's changed from that perspective, Matt. I don't think that we yet see the floodgates opening; but at the same time, we are encouraged by what we're seeing.

All right. And then maybe one last one for me, and you just brought it up. COVID, obviously, we're seeing another spike in cases, varies across the country, but we are seeing an increased utilization of hospitals and more lockdowns coming on. Where besides Florida are you maybe seeing a little impact if any?

Yes. So we continue to see minimal impact from COVID. We certainly are concerned like everybody else about the spike, and we're anxiously awaiting the vaccine and the light at the end of the tunnel. But from our perspective, we continue to be diligent. We continue to be very, very careful within the lab. So from our perspective, nothing has changed. We haven't really had an outbreak or many of our essential workers have problems with COVID. But we're watching it carefully, and we're being very, very diligent. We're being even more diligent with this next wave, and we're just hoping that this thing will be in the rear mirror soon. But there really hasn't been any change for us, and there hasn't been a major impact.

And our next question comes from Scott Henry with ROTH Capital.

Congratulations on the strong results.

Thanks, Scott.

I just had a couple of questions. First, on the top line revenues, any comments how sequentially we should expect it to go? Would you think about continuing growth in a quarter -- sequential quarters for Q3 and Q4 fiscally?

So I think it's fair to say that you'll see sequential growth, let's say, for the second half of the year, over the first half of the year. In terms of the exact percentages quarter-over-quarter sequential growth, we're not going to provide that specific direction. But overall, we just increased our overall guidance, and so I think you can -- taking that, you can kind of piece together that we do expect sequential growth for the second half of the year.

Perfect. And the Lumin Bioinformatics, how should we think about the revenue potential of that segment. And I don't know if -- without giving specific numbers, I'm just trying to understand the magnitude how we should think about it perhaps relative to flow cytometry. Just trying to get my arms around that and what it could mean in the long run.

Yes. So I would say, Scott, that the way we think of Lumin, we're very excited about Lumin. We think it's based on our experience based on the users so far that we have. We're very excited early on, but it is still early on. So it is definitely the potential to be transformative, and there is no question that if we continue in this trajectory and it's a system that's used by many, many companies and biologists, so it certainly could have a huge impact for Champions. But I think it's still too early for us to know if this is going to be something that's interesting, that's more of a niche product and platform primarily used by people that use our services or is this something that's going to be widely used by many biologists because it's just a really good platform and has the ease of use and the capabilities and gives people the capacity to do a lot of the computational research that they weren't able to do otherwise. So I really think it's early to be talking about the impact. Obviously, there's a lot of biologists in a lot of the biotech and biopharma companies. Not to mention other biologists. So we'll have to see how our platform holds up and who's using it over time. And I think certainly over the next year or 2, we'll be able to give you a lot more insight into that.

Okay. Fair enough. And now I would expect that, that would be a high-margin business. Is it, in fact, significantly higher margins than your current business?

Yes.

It's a high-margin business. Okay. And I guess it may depend just on the size of it. But would you expect in fiscal year 2022 that you would disclose revenue by segment? Or would you just kind of blend in flow cytometry and everything else into a basket? Just trying to get a sense of how we can monitor the progress there.

Yes. So we currently don't break out, as you know, our different segments. It's certainly possible that, over time, we will. We just have to see how things shake out. But as you know, we currently don't do that, break out the different segments.

All right. Fair enough. And I guess the final question, when it comes to gross margins, I guess, it sounds like when business is really good, gross margins kind of take that upfront hit. But at some point, I would imagine we'd be at a steady state or that upfront hit would be a diminishing impact on the overall margins. When would you expect the gross margins would start ticking higher again? I mean is that a second half of this year event? Or maybe business is really good and it doesn't get impacted until fiscal year 2022? Just any color you can provide would be great.

Yes. Sure. No, I think we could see some marginal impact in the -- not just the second half but towards the fourth quarter as opposed to the third quarter. And I think a lot of it will actually be dependent upon our strategy to take some of this work that we're outsourcing in-house. If we're able to do that, I certainly think that, in the first quarter of our fiscal year 2022, you could start seeing a nice spike in our gross margin. But again, we have to just weigh the -- there -- we're really pretty busy, and so there is a benefit to outsourcing some of this work. So if we're able to bring this work in-house, you'll see a quicker impact on our gross margin. If it takes a little bit longer, you'll see the revenue, but you'll still see a little bit of that margin pressure. So that's the balance that we're trying to strike.

And ladies and gentlemen, we have reached the end of the question-and-answer session. And now I'd like to turn the call back over to Ronnie Morris for closing remarks.

Thanks. So we're very excited about the quarter. We've made a lot of progress. We're specifically excited about the launch of Lumin as well as some of our other products and services. We look forward to continuing to update everybody on this call over the next couple of quarters. But we're feeling very, very good about where we're at as a company. So with that, I thank you all for joining us for the call, and we look forward to updating you in a couple of months. Thank you.

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