Champions Oncology, Inc. (CSBR) Q4 2024 Earnings Report, Transcript and Summary

Greetings. Welcome to Champions Oncology's Fourth Quarter Fiscal Year 2024 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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.

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 be making forward-looking statements during today's call and that actual results could differ materially from what are described in those statements. Additional information on factors that could cause results to differ is available on our Form 10-Q and Form 10-K. A reconciliation of non-GAAP financial measures that may be discussed during the call to GAAP financial measures available in the earnings release. This past year was a challenging one. With disappointing financial results compared to historical performance, but also one that has us ending the year stronger, leaner and positioned for a return to revenue growth and profitability. I will detail the negative impacts and then transition to the emerging positive trends. Over the year, we discussed our challenges indicating they were caused by a combination of external and internal factors. Externally, the weakness and retraction in the biotech sector negatively affected their R&D budgets, thus leading to a decrease in our bookings growth that we have been accustomed to achieving. Our bookings were still solid, but did not expand from the prior year. The biotech economic environment resulted in less new companies booking services as well as a slight decrease in our average study size. This weakness did not only manifest itself in our bookings, we also experienced a cancellation rate above historical norms while noticing that customers were quicker to put on a study or parts of the study than in the past. The lower bookings and increase in cancellations are enabling our revenue conversion. Additionally, as we discussed during the course of the year, we were plagued by some operational issues that impacted on our financial results. These issues led to the need to repeat some of the work, increasing our costs and delaying the revenue recognition. Now the better news. As we end the year and pivot towards our new fiscal year, we have detected a gradual loosening of R&D budgets leading to an uptick in opportunity generation. Cancellations on more recently signed bookings have slowed. Strategically, we have focused on expanding and deepening relationships with our big pharma customers. These customers have the ability to sign larger studies and are somewhat less susceptible to the downturn in this sector. Biotech companies are still an integral part of our business, but we feel that this strategic focus provides upside opportunity and downside protection. Regarding our internal challenges, we are confident that the operations are back on track and build more to scale than previously constructed. The evidence of this is in the improved revenue number and adjusted EBITDA profitability achieved in Q4 and which is the result of some of our operational improvements. We also believe that we have redesigned our operational teams and improved our systems to enable revenue growth with a smaller increase in our operating costs with the need to improved gross margins as our revenue expense. Turning to our core products. The PDX spending continues to give us an industry-leading edge and our in-vivo business remains strong. We continue to develop our ex-Vivo platform and made a key strategic hire at the end of the fiscal year. Ex-Vivo has contributed meaningfully to our top line growth over the last few years with revenue contribution in excess of 10%, and we are optimistic that with this key addition we are poised to see the ex-vivo's contribution increase even more substantially, confirming the revenue growth and lifting our overall gross margin. Our clinical biomarker business is growing, and we are working to further expand the customer base. With regard to Corellia, our wholly-owned drug development subsidiary, we continue to be excited about the target on the compound that we have developed. We are actively engaged in discussions to out-license several of our programs. We are cognizant of the impact on our bottom line results and a carrying cost for this entity. As such, we are working to minimize the burden on two fronts. First, we are reducing our spending while we are actively searching for our potential licensee, while not harming the target of development. Second, we continue to be actively engaged with investors in an effort to raise capital to support and accelerate our growth. In summary, the year's performance, while anticipated would be low historical expectations. We anticipate that the improvements made will slowly continue to take hold as we have seen this last quarter and put us back on our targeted trajectory, as we head into our new fiscal year. Despite the down year from a financial perspective, we continue to have a robust bookings, a comprehensive platform, a stellar mutation 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.

Thanks, Ronnie. As Ronnie mentioned, Fiscal 2024 was challenging, as evidenced by our financial results. For the first time in many years, we saw a contraction in our top line with revenue coming in at $15 million, representing a year-over-year decline of approximately $4 million or 7%, leading to a larger net loss for the year. On a GAAP basis, our loss from operations for fiscal year 2024 was $7.4 million compared to a loss of $5.3 million in 2023. Included in the $7.4 million loss, our non-cash expenses totalling approximately $3.5 million, which included stock comp depreciation and a loss on disposal of equipment. Excluding these non-cash items, our adjusted loss was $3.9 million for 2024 compared to an adjusted loss of $1.3 million in the year ago period. Turning the focus to the fourth quarter and cash based results. We began to see the signs of the longer awaited financial rebound in the fourth quarter. Our revenue increased to $14 million compared to $13.1 million in the year ago period, an increase of $900,000 or 7%. Our adjusted EBITDA was approximately $900,000 compared to an adjusted loss of $900,000 in Q4 of 2023. Total cost of sales was $7.2 million compared to $7.1 million in our fourth quarter last year, an increase of 1%. The relatively unchanged cost of sales on revenue that was approximately $1 million higher is indicative of the measures taken to improve efficiencies and right-size our operational teams to leverage our costs on a growing revenue base. For the year, cost of sales was $29.1 million compared to $28.8 million a year ago, representing a similar 1% increase. Although total cost -- although total sales costs were mostly unchanged for the year, the variable component of our cost of sales was high relative to our revenue due to expenses related to repeat work and other inefficiencies. For Q4, pharmacology services gross margin expanded to 49% compared to 47% in the fourth quarter last year. We had been guiding that margins would be under pressure during 2024, but we are confident this quarter's improvement is more reflective of future results as compared to the 43% margin delivered for the full year. For the fourth quarter, R&D expense was approximately $2 million compared to $2.8 million in the year ago period. And for the year, R&D expense was $9.5 million compared to $11.5 million for fiscal 2023. The decline in R&D for both the fourth quarter and year-over-year was attributed to our stated strategy to more strategically manage our R&D spend while maintaining the ability to support future growth and sustain our target discovery efforts. For the fourth quarter, sales and marketing expense was $1.8 million, remaining relatively unchanged to the prior year. Similarly unchanged, the full year expense was $6.9 million compared to $6.8 million last year. Average G&A expense was $2.1 million for the fourth quarter compared to $2.2 million for the fourth quarter last year. And for the year, G&A expense was $8.5 million compared to $8.1 million in the year ago period. This was primarily due to an increase in compensation related costs, offset by a reduction in IT and professional fees. Looking ahead to fiscal year 2025, we anticipate keeping G&A mostly flat while reducing as percentage of total revenue. Now turning to cash. We ended the year with $2.6 million of cash on the balance sheet and no debt. For the quarter, cash used in operating activities was $1.8 million. Looking ahead to fiscal year 2025, we anticipate maintaining a generally cash neutral position over the next few quarters. We are carefully managing and monitoring our cash balance and expect that with improving bottom line results, our cash position will rebound over the long term. We do not anticipate significant CapEx over the course of the year as investments have already been made in prior periods to automate our ex-vivo platform and other lab functions to increase capacity and improve efficiencies, allowing us to increase our revenue and expand our margins. In summation, our 2024 financial results, although not expected -- unexpected were weaker than we're accustomed to delivering, as we were impacted by the multiple opticals outlined on this call. However, despite the setback, we feel that we're slowly emerging from the downturn, as evidenced by our fourth quarter results, and we're confident in the long-term prospects for the company. Looking ahead to the first half of 2025, we're going to be focused on our bottom line results with an expectation of profitability and revenue growth compared to the first half of 2023. I want to reiterate the message that despite the decline in this past year, have long-term prospects are positive, and we look forward to improving the financial results in the coming quarters. We'll have a quick turnaround time for our next call, which should be in approximately seven weeks when we report our first quarter results. We will now open the call to questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] We did have a question in queue coming from Matt Hewitt from Craig-Hallum. Matt, your line is live.

Good afternoon and congratulations on the early stages of a recovery. Maybe to dig in a little bit more on the back -- macro situation. It sounds like things are maybe improving a little bit. I'm just curious if what you saw here in Q4, was that a function of maybe some projects that had been delayed or held off on? The last couple of quarters that are finally getting funding and starting to be implemented or was this some new business that you had received either -- later in Q3 or even early Q4 because of the improving funding environment for pharma and biotech?

Yeah. I think, Matt, that we're certainly seeing more opportunity generation, we're seeing better discussions with pharma and biotech. I wouldn't say it's back to the way, it was necessarily in 2021, but we're definitely seeing an opening compared to last year. So there's a lot of positive areas in that respect. I would say that the trend that we started to see in Q4 is an accumulation of a bunch of different factors. I think one was just a little bit of a decrease in the cancellations. I think two, it was a -- some of our operational efficiencies that we've been working on for a while, just really getting into gear and us being able to complete the work and just getting stuff done. And I think it's partially attributed to what you said of just things opening up. So I think it was just a combination of a bunch of different things. I think one of the things we had to do over the last year when things got tighter -- last year and a half I shall say, when things got tighter, we decided to improve as an organization, both operationally and commercially and from a marketing perspective. I think we just had to become better. And so I think a lot of those things are now in place and gives us a really good position to go forward in this fiscal year. So it's hard to sometimes parse out what's 100% attributing to just getting back on track? I think it's a combination of those factors.

Got it. That's helpful. And then you mentioned a couple of times now the operational improvements that you've implemented to drive faster revenue conversion, could you go into maybe a little bit more color as to what those improvements are? And are we in the early stages of seeing the benefits of those or have they been implemented, you're basically where you want to be and now it's just a function of getting more deals across the transom?

Yeah. I think in every organizational evolution, certainly, we had a fairly rapid growth spurt over the last couple of years. I think you get to a point where the fundamental operations sometimes are just not in the right shape for the growth of the company. And I think that's a little bit of what happened to us. That, in combination with just needing to get some better management in place. So there were a couple of issues in terms of just getting studies done. Remember, we deal with a biological system. So sometimes things take a little longer than others. But I think from both a technological perspective, process perspective and a management perspective, we just used that opportunity to just upgrade in all areas. So making things more efficient, more scalable, and to be able to get to that next level and bump up the next level. So we certainly feel very comfortable that we're going to get back to the margins that we had seen in prior years, and we feel very comfortable now about a lot of the changes that we made in kind of an operational perspective just to become more efficient, more scalable, more reliable on and on.

Got it. In your prepared remarks, you mentioned that you've increased your, you’re putting a little more emphasis or focus on your big pharma, your large pharma customers. Do you know what percentage of your revenues are coming from large pharma?

That's for David, because it changes all the time. So David, you have a moment up to date?

Yeah. Sure. It does change all the time. Rough estimate is approximately 40% from the top-tier customers. We're actually really -- and we've remained pretty evenly distributed over the years, what we call Tier A, B and C. Tier C being the new bio’s -- new biotech. Tier A being the top pharma and Tier B be somewhere in the middle. So we've been pretty much relatively evenly distributed over many years. But I think over the last year or so, we've had more of an emphasis in terms of getting deeper into our top tier customers. And we're starting to see some of the larger – I’d say, opportunities coming from them. And so we think that we see that starting to take hold, and we anticipate that, that will have a -- maybe skew the revenue conversion towards the top-tier customers over the coming year.

Got it. And then maybe one more and then I'll hop back in the queue. But when you're -- when you look at, obviously, you returned to growth here in Q4 for the first time in a year, that's fantastic news. It sounds like you were forecasting or projecting growth for the first half. Do you feel like we've turned the corner at this point and you can not only get back to the -- some growth, but maybe get back to your historical growth levels or do you think that's going to take a little bit longer? Thank you.

Yeah. I think that it's a little hard for us to have a crystal ball on that right now because we're still trying to figure out what's happening out there externally. So we feel very confident that we've gotten back to profitability. We feel very confident that there is growth. The question about historical growth and where the markets are at, that’s something that we still need a little more time to see how things shake out. So that’s why we haven’t really given a lot of guidance on that. But hopefully, over the next quarter or two when we get a sense for how this market is turning around, how a lot of our upgrades and our changes are taking effect, we should have a better idea whether we can get back up to those higher growth rates that we’ve been accustomed to.

Got it. All right. Thank you and congratulations again.

Thank you, Matt.

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

Thank you. Thank you, everybody, for joining us for our quarterly earnings call. We're excited to get back to profitability. We feel very good about where the business is at right now and cautiously optimistic about where the biotech and pharma world is going. So with that, we look forward to speaking to everybody to give them our Q1 results in approximately seven weeks. So have a good evening, everybody. Thank you for joining us.

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