Earnings Call Transcript - CSBR Q3 2023

Operator, Operator

Good day, everyone, and welcome to the Champions Oncology Third Quarter Fiscal Year 2023 Earnings Call. It is now my pleasure to turn the floor over to your host, Dr. Ronnie Morris, Chief Executive Officer of Champions Oncology. The floor is yours.

Ronnie Morris, CEO

Good afternoon. I'm 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'll remind you that we are 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. Overall, our financial results were weaker than our previous quarter. However, we continue to make good progress on strengthening our platform as well as furthering our drug discovery efforts. As we reported last quarter, due to the macroeconomic environment we encountered some headwinds in our services business in two main areas: First, during our second quarter, we experienced a decline in quarterly bookings for the first time in over a year as we saw our customers reevaluating their discovery efforts and realigning priorities within their budgets given the new economic reality. This manifested itself by customers taking longer to commit to signing a study or not signing at all. Second, we saw an uptick in study cancellations, especially on the work that had not yet started. Both of these factors impacted future revenue. And as we indicated on last quarter's call, our second half results will be adversely impacted. On a more positive note, I also discussed that despite these negative trends, we were seeing a strengthening of our bookings pipeline, and we were cautiously optimistic that we had turned the corner and weathered the worst of the decline. While we still need to reiterate the cautious sentiment, we finished our third quarter with a new record high in bookings, and we've started the fourth quarter with strong bookings as well. Cancellations are still higher than our historical average but have come down from the prior quarter. These positive developments should enable us to reaccelerate our revenue growth in next fiscal year, which starts May 1. With regards to our drug development effort, we continue to make good progress. Our lead discovery programs are progressing well through the therapeutic discovery stages. The two wholly-owned lead programs continue to advance with exciting results and we are now at a stage where we are beginning to collect in vivo data and therapeutic kits for each program. These data sets will help to gauge the level of progression for these compounds and programs and the relative significance. We are also establishing in vitro data for the therapeutic kits established from the fan and collaboration with possible in vivo studies forthcoming. In summary, we view the third quarter and second half of the year as a bump in the road of our longer-term strategy. We continue to invest in expanding our platform and we are optimistic about our long-term growth prospects. We anticipate that our target discovery effort will progress into the preclinical stages, marking a significant milestone. 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 year results on Form 10-Q will be filed with the SEC on or before March 16. As Ronnie mentioned, our previously disclosed weaker bookings and an uptick in cancellations, as expected, impacted our third quarter financial results, leading to revenue of $12.8 million compared to $13.2 million in the year-ago period, a decline of $420,000 or 3%. Year-to-date, our revenue is $40.8 million compared to $36.2 million last year, an increase of 13%. For the quarter, we had a loss of $2.5 million compared to income of $829,000 in the year-ago period. Excluding stock-based compensation and depreciation, we had an adjusted EBITDA loss of $1.6 million. Focusing on results, excluding noncash expenses such as stock compensation and depreciation, our total cost of sales was $7.5 million compared to $6.3 million in our third quarter last year, an increase of $1.2 million or 19%. The increase was primarily from compensation expenses as we staffed our operational teams during the year to meet the demand of our expected bookings growth. While our revenue took a hit this quarter, demand is still strong, and we anticipate the revenue downturn will be relatively short-lived. Accordingly, we kept our operations teams intact to meet the expected increase in study volume without any delays executing for our customers. As a result of maintaining our staffing levels on lower revenue, the gross margin was 41% versus 52% in the year-ago period. We anticipate a return to margins in the 50% range in our fiscal 2024. R&D expense was approximately $3.2 million compared to $2.2 million in the year-ago period, an increase of $1 million or 47%. The increase is primarily due to compensation expense in our discovery business along with sequencing and mice costs as we added proteomic data, too, and replenished our TumorBank. Sales and marketing expense was $1.7 million compared to $1.5 million in the year-ago period, an increase of $200,000 or 14%. Our G&A expense was at $1.9 million for the quarter compared to $1.7 million a year ago, a 14% increase. The increase was primarily due to compensation and IT expense as we invest in upgrading our infrastructure to support company growth. In total, our cash-based expenses were $14.3 million for the third quarter of fiscal 2023 compared to $11.7 million in the same period last year, an increase of approximately $2.7 million or 23%, with the increases primarily stemming from cost of sales to support booking growth and R&D for advancing our discovery efforts. Now turning to cash. At the end of the quarter, we had $11.6 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 $1.6 million primarily due to an increase in deferred revenue, which includes billings from recent bookings. Cash used in investing activities of $750,000 was for equipment purchases for our laboratories. Our balance sheet is strong with approximately $12 million in cash and no debt. In summary, we experienced an anticipated decline in revenue in the quarter primarily from an increase in cancellations on studies signed during the first half of the year. The pace of cancellations has slowed, and we're optimistic that the bookings reacceleration will continue, setting the stage for a return to revenue growth and positive adjusted EBITDA in 2024. We're well-positioned to weather this small downturn, and we are excited about the company's overall progression and long-term prospects. As our next call is for year-end results, the call will be in late July. We look forward to a positive outlook for 2024. We would now like to open the call for your questions.

Operator, Operator

Your first question is coming from Matt Hewitt from Craig-Hallum.

Matthew Hewitt, Analyst

Maybe just trying to understand the difference here. So you're having this period of increased cancellations, at the same time you're announcing record bookings. And I'm just trying to mesh the two together; they seem to run counter to each other. If you could provide a little bit more color on what you're seeing and hearing from customers?

Ronnie Morris, CEO

Yes, certainly, Matt. When we consider the gap between bookings and revenue, we had two significant factors impacting our revenue this quarter. Firstly, the weaker bookings this quarter led to lower revenue, but those bookings were influenced by the previous quarter. During that time, there was considerable uncertainty, which still exists to some degree, but was much more pronounced then. Consequently, we observed a pause among many customers who were uncertain about their budgets, leading to reduced bookings, which in turn affected revenue this quarter. However, the sentiment has improved this quarter, and both bookings and the pipeline appear to be much stronger. This gives us confidence that as we enter Q1 next year, we will return to previous levels of performance. The second point to note is that between August and November, we experienced a higher than usual rate of cancellations. Many clients who had booked in earlier quarters were reassessing their budgets and canceling some studies to reallocate funds. Together, these two factors were the main contributors to the decline in revenue we saw this quarter.

Matthew Hewitt, Analyst

Got it. Regarding cadence, I didn't hear an update on your full year guidance. I'm uncertain if that means it remains the same or not. How should we view cadence? Will revenues recover a bit in Q4 before the significant increase expected early in '24? What should we anticipate for Q4?

Ronnie Morris, CEO

Yes, I believe Q4 will resemble Q3 in that regard. We're anticipating results at the lower end of our previous guidance. With cancellations returning to normal levels in the pipeline, we feel optimistic that Q1 will align more closely with our expectations. However, we expect that the second half of this year, specifically Q3 and Q4, will be weaker than we initially anticipated.

Matthew Hewitt, Analyst

Got it. As for gross margins, we’ve previously discussed the discrepancy between the costs incurred when starting a new trial or service for a customer and when those costs are recognized. However, that doesn’t seem to apply in Q3, unless I’m mistaken. It appears this situation is mainly due to cancellations, but you have maintained your staff in anticipation of a rebound. Did I understand that correctly?

Ronnie Morris, CEO

Yes.

David Miller, CFO

Yes. Exactly.

Ronnie Morris, CEO

I think you heard that correctly.

David Miller, CFO

Yes, Matt, expenses do occur before we see revenue, and that's still true this quarter. However, there's a more significant factor at play and a different situation to consider. While those expenses contribute to our current reality, this new aspect is what stands out as the more crucial point we wanted to communicate.

Matthew Hewitt, Analyst

Got it. And then maybe one more, and I'll hop back in the queue. But I'm wondering if we could get an update on how the Italian lab is performing. It's now been, I think, a couple of quarters since it was open for business. Have you started to fill some of the opportunity there? And what are your expectations for that as we look out?

Ronnie Morris, CEO

Yes. We opened the European lab to access more clinical biomarker opportunities. Overall, we are experiencing slow but steady growth in this area, though not as quickly as we had anticipated. Currently, our operations are solid, and we produce high-quality work. The focus now is on business development, ensuring that people know we have a strong presence in the clinical space in addition to our well-established reputation in preclinical oncology. It's a challenging time because global trial activity has declined, but we are gradually gaining more business due to our quality. It’s an ongoing effort, and while we believe this addition enhances our services, the uptake hasn't met our expectations from a couple of years ago. The positive aspect is that we have made the necessary investments, built the labs, and developed the expertise. Now, we need to communicate that we are not solely focused on preclinical work; we are also a clinical CRO and work to build customer confidence in using our services.

Operator, Operator

That concludes your Q&A session. I will now hand the conference back to our host for closing remarks. Please go ahead.

Ronnie Morris, CEO

So I wanted to thank everybody for joining our quarterly conference call. Certainly, it was a challenging quarter in terms of the results. But in terms of our outlook, there's a lot of positivity. We went through a challenging time, but we feel like we've navigated it well. And the pipeline is strong. The interest is strong. Our operations are in a good place. And we're excited about bringing everybody the results for the next couple of quarters. So have a good evening, and thank you for joining.

Operator, Operator

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.