Champions Oncology Inc

NASDAQ:CSBR

Earnings Call Analysis

Champions Oncology Sees Path to Recovery

Champions Oncology reported a 6% decline in third-quarter revenue to $12 million but forecasts gradual improvement ahead. Despite a GAAP loss of $2.6 million, the non-GAAP adjusted EBITDA loss was $1.7 million, and the company aims to capitalize on operational efficiencies to boost margins over time. Cash reserves are considered strong at $4.5 million with no debt, and cost control strategies, including staff reductions, should improve bottom-line results. R&D spending decreased, reflecting a strategic pause in drug discovery investment. The company remains optimistic, expecting a slow return to growth and profitability.

Challenges in the Economic Environment Lead to Revenue Decline

Champions Oncology faced headwinds in the third quarter of fiscal year 2024, with third-quarter revenue dipping to $12 million, marking a 6% decrease from the equivalent period in the prior fiscal year. The downturn reflected broader economic challenges that started in October 2022, particularly within the biotech sector. The consequential impact on customer R&D budgets resulted in a direct hit to Champions Oncology's bookings and revenue. Ongoing customer cancellations led to fewer studies being ordered and elongated the sales cycle, further depressing the company's financial figures. Despite this, a silver lining appeared with sequential revenue improvement of approximately 4% from Q2 to Q3, hinting at the beginning of a possible recovery.

Strategic Cost Management and Margin Improvement Efforts Underway

To navigate the poorer revenues, Champions Oncology is streamlining its operations with a goal of returning to quarterly profitability and expanding operating margins in the longer term. Issues such as operational inefficiencies led to increased costs, contributing to a gross margin reduction to 35% compared to 41% in the previous year. Remedial actions are being taken to optimize costs, with anticipated improvement in margins correlating with future revenue expansion and lowered expenses, particularly in reduced mouse costs and operational team payroll. These strategies, along with lowering drug discovery spend, are part of a structured plan to improve the bottom line and pave a path back to profitability within the next few quarters.

Optimistic Outlook with Focus on Product Offerings and Pipeline

Champions Oncology is upbeat about its offerings' growth potential and operational pipeline. Although the clinical biomarkers segment saw moderate upticks and remained below expectations, it's subject to close scrutiny for future impact on revenue growth. The Ex Vivo platform is receiving positive feedback and is projected to be a strong growth driver in coming quarters. Corellia, the drug development subsidiary, shows promise in its discovery programs, with potential capital raising and licensing opportunities that could accelerate growth. Despite the quarter's underperformance and long-lasting effects of the challenging economic climate, Champions' management remains confident in the company's foundation, built on strong bookings and a comprehensive service platform.

Sustained Financial Health Despite Current Trends

Focusing on the ledger, Champions Oncology maintained a healthy cash position of $4.5 million with no debt by quarter's end. While the net loss led to cash use of around $900,000 in operating activities, a careful balance in CapEx and operational expenditure suggests fiscal prudence, setting the stage for an anticipated slight cash balance decline in Q4 but with expectations of a gradual cash increase starting fiscal 2025. The company is not planning any new significant CapEx investment in the near term and has no intentions of raising additional capital for the core business, indicating a confidence in steering through the present rough patch without resorting to the capital markets.

Earnings Call Transcript 2024-Q3

[Operator]

Greetings. Welcome to the Champions Oncology's Third Quarter Fiscal Year 2024 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Ronnie Morris, CEO of Champions Oncology. You may begin.

[Ronnie Morris, executive]

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're 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, we experienced a challenging third quarter with less than stellar results as we continue to navigate through the challenges we've been highlighting over the course of the year. However, I will reiterate that we see positive developments emerging that will translate to improving results over the coming quarters. As we have discussed on previous calls, the challenges began in October of 2022, when the economic environment, specifically in the biotech sector, turned markedly negative. Our customers reduced their R&D budgets in real time, which led to fewer studies ordered and increasing cancellations and longer sales cycles.

In addition, the study sizes were smaller than we were accustomed to, which is a trend that has continued. All of these factors resulted in lower net bookings and ultimately lower quarterly revenue. Along with the external factors, we identified some operational issues that led to slower revenue conversion, putting additional downward pressure on our top line and operating results. We have made significant progress towards reversing these trends and the metrics we use to measure operational efficiencies and success have made significant headway over the last several months. Cancellations have receded back to historical levels.

Our business development strategy is taking hold, which will contribute to our already strong bookings, which are the fundamental foundation for building long-term success. As these higher bookings convert to revenue over the coming quarters, we will see a return to quarterly revenue growth and profitability. Anticipating the slowdown in biotech funding and R&D, over the last year, we have expanded our work with some of our top-tier larger customers. These large pharma companies generally have larger and more stable budgets than the smaller biotech companies that we work with.

This does not mean we are abandoning the smaller biotech space, but we see a more robust pipeline of opportunities emanating from these larger customers. Despite the fact that the biotech sector is showing a lot more activity since the start of the year, we have decided to rightsize the operational teams and reduce our costs at this time to better reflect the current market conditions and our current revenue. When the need arises, we are confident we will be able to staff up to meet the increased need.

We are becoming leaner in order to reach our goal of quarterly profitability and the continued -- and then continue to expand our operating margin over time. As is often the case, anticipated turnaround has taken longer than initially expected, but it is coming.

With regard to specific offerings, our clinical biomarkers pipeline has grown with a modest uptick in our clinical bookings. This has been an area that has lagged behind our internal expectations, and we are monitoring closely to determine if it can finally become a more meaningful contributor to our long-term revenue growth.

Turning to Ex Vivo. We continue to expand our Ex Vivo offering, making it more robust by adding additional model to our platform. We continue to get extremely positive feedback from our customers on this platform and we anticipate strong growth from our Ex Vivo offering over the coming quarters.

With regards 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 continue to be actively engaged with investors in an effort to raise capital to support and accelerate our growth.

In addition to the prospect of raising capital, there are potential near-term licensing opportunities that we are currently evaluating. This is an exciting development within our target discovery program and a model we hope to replicate.

In summary, the quarter's performance was challenging, but not entirely unexpected. We anticipate that improvements will slowly take hold and put us back on our targeted trajectory. Despite the slowdown, we continue to have robust bookings, a comprehensive platform, a stellar reputation and a strong team that is poised for the next stage. We are confident that we will emerge with stronger revenue and profitability over the long term.

Now let me turn the call over to David Miller for a more detailed review of the financial results.

[David Miller, executive]

Thanks, Ronnie. Our full results on Form 10-Q will be filed with the SEC on or before March 18. Our third quarter revenue was $12 million, a decline of 6% from the third quarter of fiscal 2023. As we've been guiding on our calls throughout the year, the challenges encountered last year, specifically the customer cancellations, led to a reduction in convertible bookings and would ultimately lead to lower revenue in 2024. We believe last quarter, our Q2 was the revenue low point and the expectation remains that we'll see gradual improvement over the coming quarters, beginning with this quarter, Q3, which was approximately 4% higher sequentially.

On a GAAP basis, our loss for the third quarter of 2024 was approximately $2.6 million compared to $2.5 million in the prior year. Included in the $2.6 million loss were noncash expenses of stock comp and depreciation totaling approximately $900,000. Excluding these noncash items, our adjusted EBITDA loss was approximately $1.7 million for the quarter compared to an adjusted EBITDA loss of $1.6 million in the year ago period.

Turning the focus to our cash-based results. The total cost of sales was $7.8 million compared to $7.5 million in our third quarter last year, an increase of 4%. The increase relative to the same period last year was primarily due to an increase in [indiscernible] costs. These costs rose due to some operational inefficiencies, which are being corrected. This should lead to lower mouse costs as a percentage of revenue in the coming quarters.

As a result of our lower top line revenue and higher cost of sales, our gross margin dipped to 35% for the quarter compared to 41% for the same period last year. Our margins should begin to improve over the coming quarters as our revenue expands, leveraging against the fixed cost component of cost of sales and lower mouse costs resulting from both price reductions on recently negotiated terms along with improvement in operations.

Additionally, we anticipate a decline in salary expense as we make some strategic reductions in our operational team. For the quarter, R&D expense was approximately $2.2 million compared to $3.2 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 $900,000 was invested towards our drug discovery efforts during the quarter, down from $1.5 million in the year ago period. The reduction in our drug discovery spend should continue in subsequent quarters as we're in a holding pattern while we look to raise capital for future discovery efforts.

For the quarter, sales and marketing expense was unchanged at $1.7 million. Our G&A expense was mostly flat with expenses of $2 million in the current quarter compared to $1.9 million in Q3 2023.

Now turning to cash. We ended the quarter with $4.5 million of cash on the balance sheet and no debt. For the quarter, cash used in operating activities was approximately $900,000, resulting primarily from our net loss and partially offset by an increase in deferred revenue. Changes in our working capital accounts were in the ordinary course of business. Investment in new lab equipment was a modest $125,000 and we do not anticipate any significant CapEx investment in the near term. We are carefully monitoring our cash position and have no plans to raise capital for our core business.

We anticipate a small decline in our cash balance in Q4 with a gradual quarterly acceleration beginning in fiscal 2025, stemming from improvement in our operational results. We believe our cash position remains sound.

In summation, our third quarter financial results were weaker than usual, but mostly as expected. We envision a return to sustained revenue growth, which we began this quarter, while at the same time, we begin to realize operational efficiencies that have been a company focused over the last few quarters. We will keep tight control on our expenses, including making strategic reductions in several areas that won't adversely impact operations or long-term growth, but should start having an impact on our bottom line results in the near term. We are confident that despite recent obstacles from both internal and external factors, our long-term prospects are positive and we're poised for a slow but steady improvement in our operational results, including revenue growth and ultimately profitability within the next few quarters.

We are currently in our fiscal fourth quarter. As such, our next earnings call will be in late July when we report on fourth quarter and full year 2024 results and a 2025 preview. We will keep you apprised should there be any significant developments in the interim. We will now open the call to questions.

[Operator]

[Operator Instructions] Your first question for today is from Matt Hewitt with Craig-Hallum.

[Jack Christopher Siedow, analyst]

This is Jack on for Matt. A couple of questions. When do you expect the press release, it looks like that hasn't been published yet. And then for a follow-up, coming out of -- what have you been hearing from customers regarding budgets and their pipelines? Are they feeling a bit more comfortable with your balance sheet and willing to reengage from an investment standpoint?

[David Miller, executive]

So I'll take the first one, and I'll let Ronnie take the second one. Yes, I'm not sure why there was a delay in the press release. I actually got an e-mail confirmation just while we're on the call. It was sent out as per usual. And I know it didn't hit at 4:00 p.m. as it was scheduled. There's no other reason other than some technical issue on the press release side, not on our end.

[Ronnie Morris, executive]

Yes. And in terms of the -- in terms of what we're seeing out there, certainly been a loosening up of the R&D budgets in the pipeline. Certainly, there's been a lot more activity in the last couple of months than they were almost all last year. We're -- we -- as I think I mentioned in my comments, we anticipated this coming down the pike and we're working really hard to work more closely with some of the larger pharmaceutical companies and partners that we have. We are starting to see more of the biotechs starting to have more funds and starting to talk about doing more studies.

But I think it's still a little bit early for us to know exactly if -- how far back things have come. So certainly looking better than it was, let's say, a year ago, but how far it's going to come to where it was a couple of years ago, I just don't know yet.

[Jack Christopher Siedow, analyst]

Okay. That's helpful. And if I could squeeze in one more question regarding Corellia AI. Can you just give a progress update on that? How much do you think you've invested in the business during Q3? And then given the environment, does it make sense to maybe put it down the side burner until we see further improvement?

[Ronnie Morris, executive]

Yes, go ahead.

[David Miller, executive]

It was about $900,000. And again, there is some overlap between Champions and obviously, Corellia, but about $900,000 was in the current quarter. And certainly, Ronnie can take the -- in terms of the strategic planning for the future.

[Ronnie Morris, executive]

Yes. And in terms of the Corellia investment, we definitely are lowering our investment substantially for both Q4 and Q1 going forward. We are, we believe, getting close to getting investments or out-licensing deals for some of the assets. So we think in short order. So the answer to your question is number one, we are taking that into account, and we are reducing our spend significantly. And two, we are excited and hopefully getting outside funding in short order to take the pressure off of Champions to continue to grow the exciting platform.

[Operator]

[Operator Instructions] We've reached the end of the question-and-answer session, and I will now turn the call over to Ronnie for closing remarks.

[Ronnie Morris, executive]

Thank you. So thank you, everybody, for joining our quarterly earnings call. As I think we've mentioned, it was somewhat of a disappointing quarter from financial perspective, but we do feel very confident going forward, both looking at our bookings and our efficiencies and our operational excellence, and the customer feedback that we are going to start to have quarters where we have good revenue, higher base of revenue, decreased costs and profitability. So we are excited to continue to update you for Q4 and for next year's guidance as well over the summertime. So we look forward to that update and have a good evening.

[Operator]

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