Earnings Call Transcript - CSBR Q3 2025

Operator, Operator

Greetings and welcome to the Champions Oncology Third Quarter Fiscal Year 2025 Earnings Call. Please be aware that this conference is being recorded. Now, I will hand the conference over to your host, Ronnie Morris, Chief Executive Officer. You may begin.

Ronnie Morris, CEO

Good afternoon. I am Ronnie Morris 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'll 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 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. Q3 marked a transformative quarter for Champions Oncology, underscored by our record revenue of $17 million and the successful closure of our inaugural data deal. Our core services business remains at the forefront, driven by our industry leading PDX bank and its precisely characterized multiomic data, which has become the foundation for the pharmacology studies that have been used broadly by the biopharma industry. Throughout the year, we have dedicated ourselves to strengthening our teams and refining our processes, resulting in enhanced quality, increased efficiency and scalability, which in turn have led to improved cost management and profitability. As we look ahead, we maintain a cautiously optimistic outlook for a rebound in our industry sector, with customers beginning to expand their R&D budgets and a slight recovery in the capital raising environment for the biotech industry. Despite the mild improvement in the sector, the environment remains tight, leading to potential performance volatility. However, the overall trend suggests promising opportunities for long term growth. A significant differentiator for Champions has always been our PDX bank, offering pharmaceutical and biotech companies invaluable insights for drug development. By consistently expanding our collection of unique tumor models and enhancing their characterization, we have developed a robust multiomic data set with substantial potential for both drug discovery and development. This data set serves as a vital resource for our pharma partners who gain access to model specific data. With the rise of AI, which can extract deeper insights from the biological data, the demand for our data set has notably increased in both breadth and depth. Recognizing this shift, we are actively exploring ways to extract greater value from this data. The recently closed data deal exemplifies our strategic vision, where we licensed our existing deep multiomic data set while also acquiring prospective omic data sets from our unique bank of tumor models. This continued expansion of our data set aligns with our mission to create the world's most comprehensive biological data set from a clinically relevant tumor population. Such a data set aims to bridge the gaps in existing data used for AI and ML mediated discovery workflows, ultimately transforming how the biopharmaceutical industry approaches target and biomarker discovery as well as pipeline management. Over the past few years, we have worked diligently to enhance this data platform, pioneering the use of deep multiomic data sets in oncology discovery. The biopharmaceutical sector is now recognizing the immense untapped value within this type of data set, shifting away from classical data sets that offer broad insights but lack depth. We are well positioned to take the lead in this evolving landscape, generating significant traction and enthusiasm for our initiative to build the world's deepest clinically relevant multiomic data set. However, I must caution that while we are excited about the initial validation of our strategy and continue to engage with other potential customers to build our opportunity pipeline, it remains premature to forecast the number of deals, their average size or the frequency with which they will occur. Consequently, we are not yet in a position to project the data revenue contribution to our overall results or its impact on our bottom line. In the coming quarters, we hope to secure additional deals that will provide clarity on these important questions. Regarding Corellia, our wholly owned drug development subsidiary, we are highly optimistic about the targets and compounds we have developed using our proprietary data. Our team is actively engaged in discussions to raise capital for the company while carefully weighing the impact on our bottom line results. Despite the challenging funding environment, we have partnered with experienced bankers to bolster our capital raising efforts and both we and our advisers remain hopeful about the outlook. In summary, as highlighted during this call, Q3 was a groundbreaking quarter for us. We are excited about the potential of our core business. And although we faced some challenges, we believe we are on a path towards long term growth. The successful completion of our first data deal represents an initial validation of our strategic vision, signifying that our data asset is poised to evolve into a transformative data business for Champions. Now I will hand the call over to David Miller for a more detailed review of our financial results.

David Miller, CFO

Thanks, Ronnie. Our full results on Form 10-Q will be filed with the SEC by Monday, March 17th. As Ronnie highlighted, we had a record breaking quarter with total revenue surpassing $17 million and adjusted EBITDA hitting a record high. Research service revenue was $12.5 million compared to $12 million in the year ago period and our data revenue contribution was $4.5 million, reinforcing the early traction of our new platform. On a GAAP basis, our income from operations for the third quarter was $4.5 million compared to a loss of $2.6 million in the prior year. This included $600,000 in noncash expenses related to stock based compensation and depreciation. Excluding these items, adjusted EBITDA was a record $5.2 million compared to an adjusted loss of $1.7 million in the prior year. Turning the focus to our cash based results. Total cost of sales was $6.6 million compared to $7.8 million in our third quarter last year, a decrease of 16%. The decrease was primarily due to our reduced salary expense, other lab costs and outsourced lab services. Our gross margin for the quarter was 61%, lifted by the high margin data revenue. Our research service margins also improved, increasing to 48% compared to 35% in the same period last year. Our research service margins will fluctuate over the next two quarters with some expected balance related in revenue and cost of sales but we anticipate long term margin expansion exceeding 15% as long term revenue growth. Our operating expenses reflected our commitment to disciplined cost management. Our R&D expense declined $500,000 or 21% to $1.7 million as we optimize spending while maintaining key investments in our core business. Our sales and marketing expenses remained stable at $1.8 million and our G&A expense declined $200,000 to $1.8 million, primarily due to reductions in salary expense. Summarizing our year-to-date results of total revenue. Total revenue was $45 million compared to $36 million in the first three quarters of 2024, an increase of 22%. Total cost of sales was $21 million compared to $21.9 million, a decrease of $900,000 or 4%. Total gross margin was 53% compared to 40% for the same period last year with improvement coming from the high margin data revenue along with the operational efficiencies implemented, which enables us to improve on our revenue conversion and maintain our cost. Research service margins were 48% compared to 40% for the three quarters ended January 31, 2024. And total operating expenses were down approximately $3.8 million compared to last year, primarily from reductions in R&D expense. We reported adjusted EBITDA of $8.3 million compared to adjusted loss of $4.8 million through nine months of fiscal 2024. Now turning to cash. We ended the quarter with $3.2 million of cash on the balance sheet and no debt. For the quarter, cash generated by operating activities was $900,000 and cash used in investment activities was approximately $500,000. The net $400,000 quarterly increase in cash was primarily from an improvement in operational results, offset by an increase in accounts receivable. Our balance sheet is solid and our cash position is poised to increase in the coming quarters as our long term operational results continue to improve and we progress on our new data revenue stream. To summarize, Q3 was a milestone quarter with record breaking financial performance and successful execution of our first data licensing agreement. While we anticipate short term volatility in research service revenue, we remain confident in our long term growth trajectory. We have reaffirmed our full year revenue growth guidance of 10% to 15% and continue to focus on expanding our data business, enhancing profitability and driving shareholder value. We look forward to updating you on our progress during our May end earnings call in July. We'll now open the call to Q&A.

Operator, Operator

The first question comes from Matt Hewitt with Craig Hallum.

Unidentified Analyst, Analyst

This is Tal for Matt Hewitt. I may have missed this as the connection cut out for a bit. Regarding the licensing deal, could you explain how it's structured and if there are any other opportunities in development?

Ronnie Morris, CEO

So the licensing deal that we signed was for a portion of our data and it was a one-time fee. And in terms of the pipeline, we are actively talking to multiple partners and customers from the biotech and pharma industry about the power and the value of our data. And that's something that we hope to continue to discuss over the next coming quarters.

Unidentified Analyst, Analyst

And then given the uncertainty we've seen in the past few weeks regarding tariffs, budget cuts, do you see any impact on your conversations with customers about those?

Ronnie Morris, CEO

I'm not sure if the tariffs have directly affected us. However, it's clear that the environment remains challenging, and we are monitoring it closely. Our strong reputation, along with our partnerships with various companies, has somewhat insulated us from these conditions, but the biotech sector, in particular, is still quite tight. It's possible that the impact of the tariffs is not yet visible. Overall, the biotech industry is not as robust as we experienced a couple of years ago, and it isn't performing at the level we would prefer.

Unidentified Analyst, Analyst

Given the weakness you're seeing in the biotech sector, how is that directly translating to the implementation of these early studies and the demand from customers, or is that not as direct as I'm thinking?

Ronnie Morris, CEO

I think it certainly had an effect. We have done a lot to weather that, being careful with our customer base and focusing more on larger biopharma over the last year and a half. On the operational side, we've ensured that our processes are in place and that we are much more efficient and scalable. We have addressed the tough environment both from a customer acquisition and an expense perspective. That said, it is still a challenging environment out there, but I believe we have been managing it well.

Unidentified Analyst, Analyst

Have you seen anything that gives you hope for a turnaround in customer demand, specifically in biotech, starting this year?

Ronnie Morris, CEO

I think that it's sector specific. I think that there's certainly still a lot of investment in the pharma and biotech. There's still certainly a lot of investment in oncology. There are definitely pockets of certain types of targeted therapies that continue to be exciting. So while I would say it's definitely still a mildly challenging time, I think there's still a lot of activity. And I think it's certainly slightly better than it was roughly a year and a half ago. So there are some silver linings. I just don't think that it's gotten back to the place where we saw it a couple of years ago and where we all wanted to get to.

Operator, Operator

The next question comes from Maj Soueidan with GeoInvesting.

Maj Soueidan, Analyst

I’ve been following the company for a while, but more closely recently, and I find the data aspect quite fascinating. I have two questions. First, regarding the subsidiary you mentioned that needs to raise capital, can you provide details on whether you are raising funds through the subsidiary or the parent company? Additionally, what does this mean for the company's capital structure? What capital raising methods are you considering, and how should I, as an investor, understand this? I will pause for that answer before asking my next question.

Ronnie Morris, CEO

A couple of years ago, we decided to focus more on our data, especially since we have become profitable. We were exploring different avenues, one of which was the raw data and its value. We also had extensive biological and response data, which we believed could help us identify targets for developing new drugs. This initiative is exciting for us, and it operates as a separate company with its own team, legally distinct from Champions, making it a true spin-out that we wholly own because we have been the sole funder so far. At this point, Champions can continue to support it as we aim to reach Phase I and Phase II trials, which require substantial capital. We are actively raising funds and expect that once we secure this capital, Champions will retain a stake in these new ventures. This will create an asset with a different investor base focused on drug discovery compared to Champions Oncology's current investors. This is our perspective as we seek funding for this initiative.

Maj Soueidan, Analyst

So you are not raising equity for this; you are seeking capital outside of CSBR's capital structure to help fund our ownership interest and cash flow?

Ronnie Morris, CEO

It's not going to affect the cash flow and it's only going to be an asset that, hopefully, if we raise money at attractive valuation, is going to be additive to the value of Champions' shareholders.

Maj Soueidan, Analyst

On the data side, what you're doing now is impressive and aligns with where much of the industry is heading, an opportunity others are starting to explore. Jensen has mentioned it briefly, and even the administration has discussed using it to aid cancer research. My question is about your approach to this new model, and whether you are looking into different strategies for pricing it. I understand that this involves a licensing fee, but are you considering alternative methods for selling this data as you delve deeper into it and gauge customer needs? I would like to know what that might look like in the future before I ask my third question.

Ronnie Morris, CEO

We're exploring all aspects of our data, which we believe is valuable. Customers come in different sizes and types, and there are various ways to license that data. You can license it for a fee, for a fee plus some form of royalty or milestones, and there are different options available. We're currently discussing with some smaller biotech companies that may be more inclined to offer royalties and milestones, while larger pharmaceutical companies tend to prefer flat license fees. Each customer is unique, and we're investigating various models. Right now, our main focus is to understand the value of our data and engage with enough customers so they recognize its worth. We want them to use and experiment with our data to grasp its value fully. This understanding is the initial step we're currently undertaking.

Maj Soueidan, Analyst

Over time, if things progress well, you can expect a combination of large licensing agreements as well as a possible recurring revenue stream depending on the specific biotech company involved.

Ronnie Morris, CEO

It's certainly something we think about a lot and we're looking at different models. And we're not reinventing the wheel. These have been done before. And so we're trying to learn and we're trying to understand what the market will bear. And it's going to be a little bit different for different customers, but we're early on. And right now, we're excited about the first deal, which is proof of concept and we have a couple of others in the pipeline. And as we continue to go, I anticipate like the rest of our business, we will continue to evaluate other opportunities and other possibilities of how we structure deals.

Maj Soueidan, Analyst

Regarding your operations, this is certainly a high-margin business. A significant portion contributes directly to the bottom line, depending on licensing or recurring revenue. In your last conference call, you mentioned that much of the interest in the data licensing model came from customer inquiries. I'm curious if that is indeed the primary source of interest. Was the new contract from an existing customer or a new client? I'm interested in understanding the opportunities you see with your current customer base and whether this represents a chance to grow your customer base.

Ronnie Morris, CEO

I think it's both. We work with between 400 and 500 pharma and biotech companies, which means we engage with a significant number of biopharma companies in oncology. We are well known in this space and have extensive interactions with these companies. Yes, we definitely have a large audience as we discuss our data with them. The core of our business remains focused on the studies we conduct for customers who send us their compounds, providing them with valuable insights about their drugs. However, our plan is to reach out to both our existing customers and potential new ones to communicate the value of our data and its importance.

Maj Soueidan, Analyst

When a customer buys a licensing arrangement or acquires a significant amount of data, do you think there's an ongoing opportunity for engagement, or is it typically a one-off transaction? I'd like to understand this better. I know they have the option to invest $3 million, so perhaps you could elaborate on that.

Ronnie Morris, CEO

We view data as something that continually evolves, which sets us apart from many other groups. For instance, we initially gathered genomic profiles for 100 lung cancer patients. Over time, we have enhanced our data by adding transcriptome profiles, followed by proteomics and phosphoproteomics, among other layers. This ongoing addition allows us to gain a deeper understanding of the various interactions within the tumor pathways and how these tumors respond in both clinical settings and PDX models. We continually enrich our data, which is a significant advantage. As we find more opportunities to refine our characterizations, we deepen our understanding of tumor biology. With the introduction of AI, even though data creation used to be complex, the importance of our data sets has increased, allowing for greater insights and learning. Our plan remains to generate more data from these sets, and this approach seems to resonate well with our customers.

Maj Soueidan, Analyst

Can you provide insight into the competition you are facing? You mentioned wanting to be a leader in this area. Are you observing an increase in the number of companies entering this space, or do you believe you are one of the pioneers in this undertaking?

Ronnie Morris, CEO

So I think a lot of companies have been selling data for a long time. I think for a long period of time, most of the companies have been selling very, what I would call, longitudinal data with hundreds of thousands of patients with a small amount of data on each patient. We're one of the first who are doing it a little bit differently, where not as many patients, but with each patient and each tumor, we're going very deep and really understanding the interactions at a very deep molecular and biological level. So from a discovery standpoint, from understanding the effect of a drug on the biology of the tumor and looking for new targets, I think we have a very unique approach. And I think it's the right time for it because the capabilities with AI and machine learning really avail this type of data set to be able to unearth some of the deeper insights. So that's kind of a little bit of a different approach that I think is the right time for this right now and that's our goal.

Maj Soueidan, Analyst

And my last question. Going back to your legacy business, are you seeing AI helping you in your own kind of your legacy business do your research for companies?

Ronnie Morris, CEO

Not so much yet. We haven't really seen that effect yet. It doesn't mean it's not going to come. It's just that right now, we haven't really seen the impact of that on the core business.

Operator, Operator

The next question is from Edward Gilmore, private investor.

Unidentified Analyst, Analyst

Just had a couple of quick questions. On the AI side of things with the data, do you see a potential for the data to be used outside of drug discovery and research, for example, maybe more in a clinical setting with identification and evaluation of tumors?

Ronnie Morris, CEO

You mean in terms of like a biomarker approach?

Unidentified Analyst, Analyst

Yes.

Ronnie Morris, CEO

I've always believed that there are two main beneficial uses for our data in understanding these tumors. One is from a discovery perspective, and the other is from a biomarker perspective. Right now, the discovery perspective seems like a more promising path. The biomarker path is still intriguing, but for some reason, the biopharma sector has not shown strong interest in identifying the right biomarker for the drug over the past decade. There are various reasons for this, and while they discuss biomarkers frequently, we haven't observed significant interest in pinpointing the specific patient population they should target in trials. It's crucial for them to ensure trial success, but I don't think they're particularly focused on finding that precise biomarker to narrow down the patient group that would respond to the drug. While utilizing our data to search for clinical biomarkers is certainly a smart approach, it hasn't yet become the primary motivation for people to engage with our data.

Unidentified Analyst, Analyst

We'll stay tuned for that. A couple of weeks ago, you announced a press release regarding the upcoming associates for cancer research meeting, where a number of your abstracts were accepted for presentation. Could you share more insights on that from your perspective as investors? How excited are you about it and what are your expectations? I know AI will be a significant topic of discussion there.

Ronnie Morris, CEO

We have always been an organization that's kind of not so much like a CRO but more of a scientific leader, and that's the way our partners see us. I think it was important for us to show that we continue to be on the cutting edge, doing a lot of R&D and just continuing to be innovative and thinking about how do we develop the assays to just help the pharma partners that we work with just to develop the best drugs and get the best preclinical package is going to give them the best chance in the clinic. So we're excited about the continued number of posters because it shows that we continue to innovate, we continue to think of ourselves as an R&D organization to a certain extent and we're excited about it. And certainly, those abstracts will become available and you'll be able to read them.

Unidentified Analyst, Analyst

One more quick question. On the PDX data side, do you have a team set up now internally that's leading that as far as how you do customer acquisition or what's the go-to-market strategy there, and then I'll drop off.

Ronnie Morris, CEO

In terms of what? I'm not sure I understand the question.

Unidentified Analyst, Analyst

In terms of how you're communicating to prospective customers about how they can find out that they have access to be able to license the data if they're a pharma or biotech company, just how they're discovering that they can find…

Ronnie Morris, CEO

We have a dedicated team managing the data aspect of our operations, as well as a separate team focused on the core business. However, there is significant overlap because both teams serve many of the same customers. As a result, there is substantial collaboration between the regular sales team, the business development team, and the team responsible for our data strategy.

Operator, Operator

The next question is from George Marema with Pareto Ventures.

George Marema, Analyst

I had a question on this $5 million license deal. Kind of roughly speaking, of all your data, the entire pie, how big a slice of the pie represented this deal? Is it 100%, 5%? How much data did they buy for $5 million out of the total data?

Ronnie Morris, CEO

That isn't something that we have publicly announced. We don't really talk about kind of how much people pay for tech and data. Different people have different deals depending on early, late. So that isn't something that we have spoken about publicly.

George Marema, Analyst

And on your kind of go-to-market on this internally, do you have like dedicated sales people for this or how exactly are you marketing and selling these data licenses currently?

Ronnie Morris, CEO

We have a dedicated team. We have a general manager Matt Newman, we brought in the Head of our Data Sciences. We have a couple of business development people who have a lot of experience in this area. So yes, we have a team now assembled. It's a fairly new team over the last six months to a year but we have a dedicated team that's out there talking about our data.

George Marema, Analyst

And did I hear earlier in the call that you do have a couple few that are in the pipeline in 2025 here so far?

Ronnie Morris, CEO

Can you repeat that, you cut out for a second?

George Marema, Analyst

Did I hear it right that you have two or three deals that are in the pipeline currently on data licensing deals?

Ronnie Morris, CEO

I think what you heard is that we have a pipeline and we are actively engaging with potential clients. We didn't specify the number of deals in the pipeline. To add to that, some of the deals will be large, others medium, and some small. Our aim is to encourage clients to utilize our data and to foster their belief in our offerings, leading them to use more data over time.

Operator, Operator

We have no further questions in the queue. I'd like to turn the floor back to management for closing remarks.

Ronnie Morris, CEO

Thank you very much. As we mentioned, this is an exciting quarter for Champions Oncology. We look forward to having our fiscal year end call mid-July. So until then, stay tuned. And we're excited about the progress that we're making and we look forward to following up with everybody. Thank you for joining.

Operator, Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.