Champions Oncology - Q4 2024

Transcript

Operator (participant)

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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Dr. Ronnie Morris, CEO at Champions Oncology. You may begin.

Ronnie Morris (CEO)

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'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 in 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 our historical performance, but also one that has us ending the year stronger, leaner, and positioned for a return to revenue growth and profitability.

David Miller (CFO)

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 with our bookings, we also experienced a cancellation rate above our historical norms, while noticing that customers were quicker to pull the plug on a study or parts of the study than in the past.

The lower bookings and increasing cancellations weighed heavily on revenue conversion. Additionally, as we've discussed over 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 built 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 which improved gross margins as our revenue expands. Turning to our core products, the PDX Bank continues to give us an industry-leading edge, and our in vivo business remains strong.

We continued 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're poised to see the ex vivo contribution increase even more substantially, driving 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 regards to Corellia, our wholly owned drug development subsidiary, we continue to be excited about the targets and the compounds 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 the carrying costs 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 a potential licensee, while not harming the target's development. Second, we continue to be actively engaged with investors in effort to raise capital to support and accelerate our growth. In summary, the year's performance, while anticipated, was below 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 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.

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 $50 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 dollar loss are non-cash expenses totaling 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 rightsize 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 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% margins 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. Our 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 is 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 its 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 unexpected, were weaker than we're accustomed to delivering, as we were impacted by the multiple obstacles 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, our long-term prospects are positive, and we look forward to improved financial results in the coming quarters.

We'll have a quick turnaround time before 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.

Operator (participant)

Thank you. At this time, we will be conducting a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star one if you would like to ask a question at this time. One moment please, while we pull for questions. We did have a question in queue coming from Matt Hewitt, from Craig-Hallum. Matt, your line is live.

Matthew Hewitt (Analyst)

... Good afternoon, and congratulations on the early stages of recovery. Maybe to dig in a little bit more on the back, on the 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 quarters that are finally getting funding and starting to be implemented? Or was this some new business that you had received either, you know, later in Q3 or even early Q4 because of the improving funding environment for pharma and biotech?

Ronnie Morris (CEO)

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, you know, 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.

David Miller (CFO)

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 should say, when things got tighter, is we just had 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 fiscally, this fiscal year. So it's hard to sometimes parse out, you know, what's 100% attributing to just getting back on track.

I think it's a combination of those factors.

Matthew Hewitt (Analyst)

Got it. That's helpful. And then you mentioned a couple times now the operational improvements that you've implemented to drive faster revenue conversion. Could you go into to maybe a little bit more color as to what those improvements are? And are we on 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?

Ronnie Morris (CEO)

Yeah, I think in every organizational evolution, and, you know, 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, you know, are just not in the right shape for the growth of the company. And I think that's a little bit what happened to us, that in combination with just, you know, just needing to get some better management in place. So there were a couple of issues, you know, in terms of just getting studies done. Remember, we deal with the biological systems, so sometimes things take a little longer than others.

David Miller (CFO)

But I think from both a technological perspective, process perspective, a management perspective, we just use that opportunity to just upgrade in all areas. So making things more efficient, more scalable, to be able to get to that next level and bump up the next level. So we certainly feel very comfortable that we're gonna get back to the margins that we had seen in prior years, and we feel very comfortable now about about a lot of the changes that we made in in kind of an operational perspective, just become more efficient, more scalable, more reliable on and on.

Matthew Hewitt (Analyst)

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

Ronnie Morris (CEO)

I'm gonna shoot that to David, because it, it changes all the time. So David, do you have them up to date?

David Miller (CFO)

Yeah, yeah, sure. It does change all the time. You know, rough estimate, it's approximately 40% from the top tier customers. We're actually pretty... And we've remained pretty evenly distributed over the years. What we call tier A, B, and C. You know, tier C being the new biotech, tier A being the top pharma, and tier B being 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 a, you know, an emphasis in terms of getting deeper into our top tier customers, and we're starting to see some of the larger opportunities coming from them.

So we think that we see that starting to take hold, and we anticipate that that'll have a maybe, you know, skew the revenue conversion towards the top tier customers, over the coming year.

Matthew Hewitt (Analyst)

Got it. And then maybe one more, and then I'll hop back into queue. But when you're- when you look at, obviously, your return to growth here in Q4 for the first time in a year, that, that's fantastic news. It sounds like you're 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, to some growth, but maybe get back to your historical growth levels, or do you think that's gonna take a little bit longer? Thank you.

Ronnie Morris (CEO)

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's growth. You know, 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.

David Miller (CFO)

But, hopefully, over the next quarter or two, when we get a sense for how this market's turning around, how a lot of our, 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.

Matthew Hewitt (Analyst)

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

Ronnie Morris (CEO)

Thank you, Matt.

Operator (participant)

Thank you, and if there were any other questions, please press star one on your phone at this time. 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.

Ronnie Morris (CEO)

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 the 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.

Operator (participant)

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