Champions Oncology Q2 2024 Earnings Call Transcript

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December 12, 2023

There are 5 speakers on the call.

Operator

Greetings. Welcome to the Champions Oncology Second Quarter Fiscal Year 20 24 Earnings Call. At this time, all participants are in a listen only mode. Please note this conference is being recorded. I will now turn the conference over to your host, Ronnie Morris, CEO, you may begin.

Speaker 1

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 described in those statements.

Speaker 1

Additional information on factors that could cause results to differ is available in our Forms 10Q and Form 10 ks. A reconciliation of non GAAP financial measures that may be discussed during the call and GAAP financial measures is available in the earnings release. Overall, our 2nd quarter's results were mixed as we continue to navigate through some of the challenges we've been highlighting over the past several quarters. Our financial results were weaker than we have been accustomed to delivering. However, there were several positive foundational developments in our core business that have us well positioned for the future.

Speaker 1

As we have discussed in the past, approximately 1 year ago, we encountered business headwinds on multiple fronts. The economic environment, specifically in our sector, turned markedly negative, which impacted our customers and ultimately champions oncology. As our customers' R and D budgets were reduced, may encounter longer sales cycles and fewer studies signed. Additionally, customers had a much higher propensity can cancel all or part of the study they had recently signed. The resulting lower net bookings was the precursor to the anticipated revenue decline we are currently experiencing.

Speaker 1

Additionally, in conjunction with the external factors, we identified some operational issues that led to slower revenue conversion, are creating further downward pressure on our operating results. I remain optimistic that we have made significant progress towards reversing these trends and we see a light at the end of the tunnel as positive trends are emerging. We have made the necessary operational changes with some key hires and internal restructuring that we are confident will lead to greater efficiencies and improvement in our overall operations. Cancellations have receded back to historical levels. Our bookings, which are the fundamental foundation for building long term success, are strong and we are anticipating continued acceleration for the second half of this fiscal year.

Speaker 1

As these higher bookings convert to revenue over the coming quarters, we will see a return to quarterly revenue growth and profitability. With regard to specific services, we have increased our clinical biomarkers pipeline with an uptick in bookings. This has been an area that has lagged behind our internal expectations, but we are feeling more confident that our clinical work can finally become a more are a meaningful contributor to our long term revenue growth as it ramps up in accordance with our initial expectations. Similarly, We continue to expand our ex vivo offering, adding additional models to our platform, which should lead to increasing ex vivo revenue in the coming quarters. With regards to Karelia, our wholly owned drug development subsidiary, our lead discovery programs are progressing well are in the therapeutic discovery stages with our 2 lead programs exhibiting promising results.

Speaker 1

We continue to be actively engaged with investors in an effort to raise capital will support and accelerate our growth. Although we anticipate a return to revenue growth and profitability, given some of the recent weakness in our revenue, in the short term, We are reducing our quarterly investment in this subsidiary. We do not anticipate this short term reduction in spend will have a have a material effect on our progress. In summary, the quarter's performance was as expected. We anticipate that improvements will slowly take hold can put us back on our targeted trajectory.

Speaker 1

Despite the slowdown, we continue to have robust bookings, have a comprehensive platform, a stellar reputation and a strong team that is poised for the next stage of growth. 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.

Speaker 2

Thanks, Ronny. Our full results are Form 10 Q we filed with the SEC speak on or before December 15. Our second quarter revenue was $11,600,000 and a decline of 19 will take from the Q2 of fiscal 2023. As we've been guiding over the last several quarters, the challenges encountered last year, specifically the customer cancellation, led to a decline in prior quarter net bookings and would lead to lower revenue in the first half of twenty twenty four. We believe Q2 was the low point and a gradual improvement will follow over the coming quarters.

Speaker 2

On a GAAP basis, Our loss for the Q2 of 2024 was approximately $2,000,000 compared to a gain of $8,000 in the prior year. Included in the $2,000,000 loss were non cash expenses of stock comp and depreciation totaling approximately 600,000 Excluding these non cash items, our adjusted EBITDA loss was approximately $1,400,000 for the quarter compared to an adjusted EBITDA profit of $686,000 in the year ago period. Turning the focus to our cash based results. The total cost of sales was $6,600,000 compared to $7,200,000 in our Q2 last year, a decline of 9%. The decrease relative to the same period last year was primarily due to a reduction in outsourced lab services and supply expenses.

Speaker 2

Despite the decline in cost of sales, as a result of our lower top line revenue, our gross margin for the quarter was 43% compared to 49% for the same period last year. Our margins should begin to improve over the coming quarters as our revenue expands and we leverage against the fixed cost component of cost of sales along with our variable cost increasing at a slower pace. For the quarter, R and D expense was approximately $2,500,000 compared to $2,600,000 in the year ago period. Our R and D spend is split between our traditional R and D, supporting our core business services and investing in our drug discovery platform. Owe approximately $1,200,000 was invested towards our drug discovery efforts during this quarter.

Speaker 2

For the quarter, Sales and marketing expense was a relatively flat $1,800,000 compared to $1,700,000 in the year ago period. Our G and A expense was also unchanged at $2,100,000 for the quarters ended October 31, 2023, 2022. Now turning to cash. We ended the quarter with $5,500,000 of cash on the balance sheet and no debt. For the quarter, cash generated from operating activities was approximately $600,000 resulting from an increase in receivable collections and an uptick in deferred revenue.

Speaker 2

The change in these working capital accounts was an ordinary cost of business. Investment in new lab equipment was a modest 150,000 and cash generated from financing activities is approximately $200,000 primarily from stock option exercises. We anticipate remaining in a generally cash neutral position for the next quarter or 2 with a gradual acceleration towards the end of Information directionally, our 2nd quarter financial results were mostly as expected. However, revenue was a bit below our expectations. This is mostly due to timing uncertainty on semi completion in the bookings to revenue conversion process.

Speaker 2

As a result, Despite the anticipation of revenue reacceleration in the second half of fiscal twenty twenty four, we are revising our full year revenue guidance and expect that revenue growth will be generally flat compared to last year. However, with continued strength in our bookings, which are a leading indicator of revenue, With the operational collections made beginning to take effect and with the reduction in cancellations, we are confident that despite these short term obstacles, our long term prospects are positive. We anticipate a slow but steady improvement in our operational results, including revenue growth and ultimately profitability within the next couple of quarters. We look forward to our next update in mid March when we report our Q3 results. We will now open the call to questions.

Operator

Thank you. At this time, we will be conducting a question and answer session. A confirmation tone will indicate your line

Speaker 2

is in the question

Operator

or comments. The first question comes from Matt Hewitt with Craig Hallum. Matt, please proceed.

Speaker 3

Hi, guys. This is Jack on for Nat. As you commented in your prepared remarks, you spoke to elevated cancellations. Is this broad based or is there 1 or 2 large And then how are things looking so far this quarter? Were you hearing some other issues that the rate of cancellations are declining?

Speaker 4

Yes. So I would say that it's pretty much a broad based in effect that started a couple of quarters ago that's washing out now. And we don't see it from necessarily 1 or 2 customers. We see it we saw it as a kind of a broad based industry wide exercise with just a lot of cancellations. Your second question was what again?

Speaker 4

Sorry, Remind me your second question.

Speaker 3

How are things looking so far this quarter? We're just hearing from others in the industry that the rate of cancellations are declining, but we're curious about the cadence of what you're hearing.

Speaker 4

Yes, totally consistent with what we're seeing. The cancellations have come back down to what we Our historical norms, the way it was before, I would say it started about a year or maybe a little over a year ago. So we are seeing that. We're seeing the bookings remain consistently strong with cancellations coming down, which gives us the optimism That we think things are going to get back to the way they were and back to normal profitability and growth in the short term.

Speaker 3

And then for my follow-up, a lot of foreign biotech companies are in a midst of budget planning. What are you hearing from them as far as expectations for next year? And how do you think that will impact your business?

Speaker 4

Yes. So we're hearing some mixed feelings. I think we're generally optimistic. Certainly, a lot of the larger pharmaceutical companies as opposed to some of the Smaller biotech companies, we feel very confident that their budgets are healthy and we've been in discussions with them about are planning for next year. So, I think it's a mixed bag still.

Speaker 4

I don't think we're back to the way things were a couple of years ago where there was A tremendous amount of investment in Biotech, but I don't think it's as bad as it was a year, year and a half ago where nobody knew what to do and everyone was hoarding Cash and was worried about where they're going to be able to raise money and holding on to budgets really tightly. So I think we're better than we were. I don't think we're back to the way things were a couple of years ago, but there are certainly different strategies. One of our strategies is to focus More on the large pharma and who I think have More visibility into their R and D budgets than some of the smaller biotechs.

Operator

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

Speaker 4

Thank you, everybody, did a quarter ago, but certainly not something that we had generally expected over the last couple of years with a lot of growth. We're looking forward based on all the information that we see in front of us to getting back to the continued growth. We're excited about The drug development effort and the subsidiary that we have carved out In terms of that endeavor, we're also excited about some of our newer service lines, including Clinical biomarkers and our ex vivo platform. So a lot of promising news to come, and we look forward to are updating everybody on our next quarterly call in a couple of months. Thank you everybody for joining.

Speaker 4

Bye.

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Champions Oncology Q2 2024
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