Champions Oncology, Inc.

Good afternoon, ladies and gentlemen, and welcome to the Champions Oncology second quarter fiscal year 2022 earnings call. At this time, all participants are on a listen-only mode, and the floor will be open for your questions and comments following the presentation. 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 would remind you that we've been 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 Forms 10Q and Form 10K. 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 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 Lumen, 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 SAS model and our Lumen 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 data sets, improving the user interface, and integrating customers' feedback into our software. Our goal is to create an indispensable 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 Lumen software platform, we have launched Lumen Acuity and Lumen Workspaces. In Lumen 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. Lumen Workspaces is a pay-to-play model that allows users to custom code, interrogate, and analyze champions' comprehensive bioinformatic data sets. In all, we have created a multifaceted data analytics platform centered around Lumen. 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 SAS 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 10Q 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 non-cash 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%. The $2.3 million and overall increase is in line with guidance provided as we indicated we would be ramping up our R&D investment, adding data to our tumor bank, 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 be 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 the 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 generating 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 Lumen 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.