Earnings Call Transcript - CSBR Q1 2024

Operator, Operator

Greetings. Welcome to the Champions Oncology First Quarter Fiscal Year 2024 Earnings Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Dr. Ronnie Morris, CEO of Champions Oncology. You may begin.

Ronnie Morris, CEO

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'll make forward-looking statements during today's call and that actual results could differ materially from what is disclosed 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'll 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 six weeks ago. On that call, I provided an update on the accomplishments from fiscal year 2023, along with the longer-term strategic vision for the company. I also highlighted the challenges we encountered such as the overall economic environment, which led to cancellations well in excess of our historical norms. Additionally, we identified some operational issues that led to slower revenue conversion and put pressure on our operating results that may extend into fiscal year 2024. As indicated, those challenges are impacting our current year's results. However, I'm cautiously optimistic that we have made significant progress towards reversing those trends. We have made the necessary operational changes with some key hires in internal restructuring that we're confident will lead to greater efficiencies and an improvement in our operations. Externally, some of the economic pressures that were impacting customer behavior, resulting in a longer sales cycle and higher and quicker propensity to cancel studies seems to be easing. On a positive note, our quarterly bookings have continued to grow, and we're seeing a softening of the cancellations over the last couple of months, retreating towards historical levels. We continue to be excited about our expanding ex vivo platform, which we anticipate will lead to increased sales and revenue growth over the coming quarters. In our clinical biomarker services, we've made some key business development hires during this quarter. We have seen an increase in lead generation in addition to an uptick in clinical bookings. As discussed over the years, the revenue from clinical work has a longer cycle than our traditional services, but the increase in the pipeline and in bookings are positive developments that should contribute to revenue growth over time. With regard to Corellia, our wholly-owned drug development subsidiary, our lead discovery programs are progressing well through the therapeutic discovery stages with our two lead programs exhibiting promising results. We have begun building therapeutic programs around these targets. Our platform has identified many other exciting targets, and we are actively engaged with investors in an effort to raise capital to support and accelerate our growth. In summary, the quarter's performance was generally as expected. We anticipate that improvements will slowly take hold and put us back on our targeted path. Despite this being a challenging period, we continue to have robust bookings and a comprehensive platform, a stellar reputation and a strong team that is poised for the next growth spurt. We are confident that we will emerge with strong revenue and profitability over the longer term. 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 $12.6 million, a decline of 9% from the first quarter of 2023. As highlighted on our year-end call and reiterated by Ronnie, the challenges encountered last year will impact our financial performance in the first half of 2024, with a gradual improvement occurring over the course of the year. On a GAAP basis, our loss from operations for the first quarter of 2024 was $2.6 million compared to a loss of $284,000 in the prior year. Included in the $2.6 million loss were noncash expenses of stock compensation and depreciation totaling approximately $900,000. Excluding these noncash items, our adjusted loss was $1.7 million for the quarter compared to adjusted EBITDA of $450,000 in the year-ago period. Turning the focus to our cash-based results, the total cost of sales was $7.5 million compared to $6.9 million in our first quarter last year, an increase of 9%. The increase relative to the same period last year was primarily due to an increase in outsourced lab services and launch costs. Due to the increase in cost of sales on lower revenue, our gross margin for the quarter was 40% compared to 50% for the same period last year. The margin pressure will continue for the next few quarters, but we anticipate gradual improvement as our revenue accelerates over the course of the year, while our cost of sales will increase at a much slower rate. For the quarter, R&D expense was approximately $2.8 million compared to $2.9 million in the year-ago period. Our R&D spend is split between our traditional R&D supporting our core business services and investing in our drug discovery platform. Approximately $1.2 million was invested towards our drug discovery efforts during the quarter. Sales and marketing expense for the quarter was a flat $1.6 million. Our G&A expense was $2.3 million compared to $1.9 million in the year-ago period, an increase of $400,000. The increase was primarily due to a small increase in compensation expense and the bad debt and credit loss allowances. Now turning to cash, we ended the quarter with $5 million of cash on the balance sheet and no debt. For the quarter, cash used in operating activities was $3.8 million with an additional $700,000 for investment in lab equipment and $600,000 in financing activities as part of our stock repurchase plan. The accelerated cash burn for the quarter was due to multiple factors, including our net loss and a return of customer deposits on canceled studies, which reduced our deferred revenue and cash balance. As our operational results improved, cancellations decreased and with our bookings, which are our leading indicators of higher revenue, continuing to grow, our cash position remains solid and will gradually increase over the second half of the year. In summation, our first quarter financial results were mostly as expected. We project that results would still be impacted by the challenges faced in our fiscal 2023. However, with our continued strength in bookings and with the operational corrections made beginning to take effect, and with an improving economic environment we're experiencing, we're confident that despite some short-term obstacles, our long-term prospects are positive. We anticipate a slow but steady improvement in our operational results, including revenue growth and profitability as the year progresses. We look forward to our next update in mid-December when we report our second quarter results. We will now open the call for questions.

Operator, Operator

Thank you. At this time we will be conducting a question-and-answer session. And the first question today is coming from Matt Hewitt from Craig-Hallum Capital Group. Matt, your line is live.

Matt Hewitt, Analyst

Good afternoon. Thank you for taking the questions. Maybe first one regarding the landscape. Obviously, we've been hearing, not just from you guys on your Q4 call, but today, and we've heard from others that it's just a really difficult environment right now. Pharma and biotech companies are facing funding pressures. There's all sorts of issues. What are you hearing from your customers as far as these cancellations are concerned? It sounds like it's coming down, but is that a function of them reprioritizing pipelines? Is it a function of kind of shifting gears and maybe exiting one area to focus on something else, and that's what this next leg is going to be? Or is there something else driving the, I guess, what's an improving booking situation?

Ronnie Morris, CEO

Yes. I think it's a combination of all of the above. I think that the cancellations that we had over the last couple of quarters were primarily from things that booked a little earlier. And those, I think, were driven more by, I would say, the budgetary concerns of just are they going to be funded? I think that the newer ones are more of a prioritization where they might book something and then they might decide that with the landscape they want to prioritize one thing over the other. I think I would say two comments. And these are all very general because there's so many anecdotes. But I would say two comments. One that we have seen a palpable decrease in cancellations over the last couple of months. So it wasn't just one month or two months, now it's the third month. So we're kind of confident that from that perspective, those are moving in the right direction. And I would say the second thing is that we feel like things are opening up more now in terms of the mood or the feeling. The biotech's feeling like things are opening up for them to raise money and continue to fund their program. So certainly not the way it was a couple of years ago in terms of just a tremendous amount of influx and the feeling like there's always going to be money available, but we feel much better than we did, let's say, a year ago.

Matt Hewitt, Analyst

Got it. So maybe more back to a more normalized lull of capital.

Ronnie Morris, CEO

I think so.

Matt Hewitt, Analyst

Okay. Got it.

Ronnie Morris, CEO

I think so, yeah.

Matt Hewitt, Analyst

Okay. That's super helpful. And then a question regarding the gross margin. Some of the decline year-on-year was due to increased outsourcing that you guys are doing. Are any of those services something that in theory you guys could bring in-house at some point to reduce your dependence on others to complete some of these studies?

Ronnie Morris, CEO

Yes. We could for some of them. I would say the biggest pressure on the gross margins was just some of the delayed studies and the repeating of studies, which we think we have a pretty good handle on now. And that goes to the mouse costs increase because we're using more mice to get the same amount of work done. So I think that those pressures on the gross margin are probably the largest pressures that I think in the next couple of months, certainly the next couple of quarters, I think we're going to turn back around.

Matt Hewitt, Analyst

Got it. One last question from me before I return to the queue. I believe you mentioned the biomarkers and some key hires in that area. You've noticed an increase in lead generation and your clinical bookings are on the rise. How should we consider the scale of those types of studies? Are they larger than your past studies? I understand they have a longer lead time, so theoretically, they should be larger, right?

Ronnie Morris, CEO

Yes. The studies come in various sizes, mainly because for specific clinical biomarkers, you initially conduct a study to validate an assay. If the assay is successfully validated and is well-received by biotech or pharma companies, they will then proceed to sign a larger study. So, once an assay is validated, it typically leads to a larger study. I believe the studies vary in size. From our perspective, it took us a couple of years to refine our operations. We have discussed in the past how it took longer to make our labs run efficiently with the right regulatory and operational standards, but we've achieved that. The next phase was to establish a business development team capable of promoting our services, as this is a relatively new service line for us. We want to communicate that the high quality we provide in preclinical work also extends to our clinical services. This is why we're enthusiastic about the recent key hires in our business development team; we believe they will help us showcase our high-quality work, leading to increased business, which we are already beginning to observe.

Matt Hewitt, Analyst

That's great. Thank you.

Operator, Operator

Thank you. The next question is coming from David Baron from Baron Capital. David, your line is live.

David Baron, Analyst

Good afternoon, Morris. I wanted to ask you a question about your hiring. I know that it's out there that Champions is looking to hire. Are your results affecting your hiring goals? Are your hiring goals increasing? Or are they decreasing? And are these positions you're looking to fill more for entry level or higher level management in which you're seeking more seasoned employees?

Ronnie Morris, CEO

Yes. We are looking to hire for a couple of positions, but overall, we don't have many openings. We have a strong team that is high quality. At this point, based on our history, we have very few positions available. I'm not sure what the concern is regarding hiring, but I believe it hasn't changed. We have specific expectations for bookings and the work we intend to accomplish, and we've structured the organization to meet those expectations. For areas like scientific operations, the ex vivo platform, and biomarkers, we've built a team with excess capacity because it's necessary for us to function efficiently with high quality. Over the next year or two, we expect to fill that capacity and maintain operational efficiency. Right now, we don't have many job openings, although there is always some turnover. Our hiring pace remains consistent with what it has always been.

David Baron, Analyst

Thank you.

Operator, Operator

Thank you. And there were no other questions from the lines at this time. I would now like to hand the call back to Dr. Morris for closing remarks.

Ronnie Morris, CEO

Thank you for joining us for our quarterly earnings call. A lot of good things happening at Champions Oncology. We're very excited about the drug discovery effort that we have. We're very excited about some of the new assays that we've been rolling out, especially our ex vivo assay. We continue to be excited about our in vivo work that we do. And clearly, the biomarker that we perform for biopharma. So in all areas, I think we continue to have an excellent reputation in the marketplace for doing good, high-quality work. We are scientifically inclined, collaborative. And I think those are all the recipes for continued success. So we look forward to discussing those with you on our next quarterly call. And thank you, everybody, and have a good afternoon. Bye.

Operator, Operator

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.