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spk03: Good day, ladies and gentlemen, and welcome to the Champions Oncology Second Quarter Fiscal Year 2023 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Dr. Ronnie Morris. Sir, the floor is yours.
spk01: 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 will 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 Forms 10-Q and Form 10-K. A reconciliation of non-GAAP financial measures that may be discussed during the call to gap financial measures is available in the earnings release. Overall, we had another good quarter with record revenue in our services business as well as progress in our drug discovery effort. We continue to monitor the current economic environment, and for the first time we have noticed an effect on our business. During this quarter, specifically in September and October, we noticed a slowdown in bookings compared to prior quarters. While the quarter's total bookings remain strong, they were below those attained in our previous quarter. Our late stage pipeline continued to be strong, and we feel that in Q2 there was a general delay when it came to finalizing a proposed statement of work from our customer base. We are halfway through Q3, and we are cautiously optimistic that bookings are back on track to Q1 levels. We are confident that our superior tumor bank, high quality work, and expanded services will continue to propel our growth even in these uncertain economic times. With regards to Lumen, which is our multifaceted data platform, we have our software product and our data analytics product. As I discussed on our last quarterly call, Lumen adoption has been slower than anticipated. We still envision our data platform as an asset and part of our overall long-term strategy. However, we determined that we were at a crossroads with regards to our SaaS platform. We either needed to invest more heavily in both sales and marketing and our software support or to reduce some of our costs and wait for a more opportune time to increase investment. Given the current economic environment and the multiple platforms we are working on to expand our pharmacology offerings, we've decided to reduce our Lumen investment for the time being. While we are still signing up a small number of new users, The short-term focus will be to continue to learn from our active user base and to improve on the product. With regards to our drug development effort, we continue to make good progress. Our lead discovery programs are progressing well through the therapeutic discovery stages. As discussed last quarter, our partnership with Alloy recently reached a milestone with the completed development of a series of lead antibodies exhibiting favorable biophysical binding and specificity characteristics. A lead candidate was selected from this series and evaluated as a promising antibody drug conjugate. We expect to start preclinical testing shortly. Our lead molecule from our FANIN collaboration is also expected to progress into preclinical testing in the next six months. Both programs are the first of many potential therapeutic programs from our platform. In summary, during the second quarter we had record revenue. We continue to expand our platform. We are reacting to the current economic environment, and we are optimistic on our long-term growth prospects. We anticipate that our target discovery effort will progress into the preclinical phase, marking a significant milestone. Now let me turn the call over to David Miller for a more detailed review of the financial results.
spk05: Thanks, Ronnie. Our full results on Form 10Q will be filed with the SEC on or before December 15th. Our second quarter financial results were good with record revenue of $14.3 million compared to $11.8 million in the year-ago period, an increase of $2.5 million or 21%. We generated operating income of $7,000 and excluding stock-based compensation and depreciation, we recognized adjusted EBITDA of approximately $686,000. Focusing as we do on results excluding non-cash expenses such as stock comp and depreciation, our total cost of sales was $7.2 million compared to $5.5 million in our second quarter last year, an increase of $1.7 million or 31%. The increase was primarily from compensation and supply expenses as we geared up for an increase in study volume. Due to the current economic climate, we experienced an uptick in cancellations limiting our anticipated revenue for the quarter and pressuring margins. Gross margin for our pharmacology services was 51% versus 53% in the year-ago period, while total gross margin was 49% compared to 53% for the same period last year. As Ronnie mentioned, we've decided to reduce our Lumen spend in the coming quarters, which should alleviate some of the total margin pressure. R&D expense was approximately 2.6 million compared to 2.3 million in the year-ago period, an increase of 300,000, or 13%. The increase is in line with guidance provided in the past, as we indicated we'd be ramping up our R&D investment, adding data to our tumor bank, and investing in our therapeutic target discovery platform. Sales and marketing expense was a relatively flat 1.65 million compared to 1.6 million in the year-ago period. Our G&A expense was at $2.1 million for the quarter compared to $1.6 million a year ago, a 30% increase. The increase was primarily due to compensation and IT expense as we invest in upgrading our infrastructure to support company growth. Additionally, we increased our bad debt allowance due to the current economic conditions. In total, our cash-based expenses were $13.6 million for the second quarter of fiscal 2023, compared to 11 million in the same period last year, an increase of approximately 2.6 million, or 23%, with the increase primarily stemming from cost of sales as we built an infrastructure to support higher revenue levels. Now turning to cash. At the end of the quarter, we had 10.8 million of cash on the balance sheet, an increase of 2.8 million from our prior quarter. For the quarter, Net cash generated from operating activities was approximately 3.3 million, primarily due to positive cash-based operating results and an increase in accounts payable in the ordinary course of business. Cash used in investing activities of $600,000 was primarily due to equipment purchases for our laboratories. In summary, we had a good financial quarter, hitting a new revenue record of $14.3 million. As discussed, we experienced a slowdown in bookings in the quarter, along with an increase in cancellations. While we're cautiously optimistic that bookings will re-accelerate in the second half of the year, the slowdown in bookings and increase in cancellations will likely impact total revenue for the year. Accordingly, we're expecting our total revenue goals for fiscal 2023 to be in the 10 to 15% range, down from the approximate 20% range provided at the beginning of the year. We're well positioned to weather this revision, and we are excited about the company's overall progression and long-term prospects. We look forward to our next update call in mid-March. We would now like to open the call to your questions.
spk03: Thank you, ladies and gentlemen. The floor is now open for questions. If you have any questions or comments, please indicate so by pressing star 1 on your touchtone phone. Pressing star 2 will remove you from the queue should your question be answered. And lastly, while posing your question, please pick up your handset and put something on speakerphone to provide optimum sound quality. Please hold while we poll for questions. Once again, that's star 1 if you have a question or a comment. And the first question is coming from Matt Hewitt with Craig Hallam. Matt, your line is live.
spk04: Hi, this is Jack on for Matt. So the first question is, following a choppy Q3 reporting season where some companies spoke of headwinds due to the current weak biotech funding environment, I'm just curious what you're seeing and hearing from your customers. Thanks.
spk02: Yeah. So we're still seeing, we look at a couple of different key performance indicators. We look at the pipeline, which includes conversations, interest from our pharma customers. And then we look at the actual SOW signings. What we're seeing is a robust pipeline, a lot of conversations, a lot of discussions. There's a big need out there. But what we think we've been seeing over the last couple of months or what we saw in the middle of Q2 was just more scrutiny, longer time to the signing of those SOWs. And so far in Q3... we seem to be back on track. So it's unclear how things are going to progress the rest of the year. We still think we are well positioned to continue to have growth, but there's certainly an aspect out there of tightening of the belt. There's certainly an aspect out there where especially some of the Smaller biotechs, you know, are maybe either worried about their funding or not getting some funding. So it's definitely having an effect on us. But it's hard to quantitate because we had a couple of months where we saw that and then a couple of months now where we're seeing things seem to be opening up again.
spk04: That's helpful. Thank you.
spk03: The next question is coming from Scott Henry with Roth Capital. Scott, please proceed.
spk06: Thank you, and good afternoon. I did have a couple questions. First, with regards to the cancellations, can you talk a little bit about, you know, who is canceling? Are these smaller biotech companies? Are these larger companies? Is it earlier stage work or later stage work? Any color that you can provide would be helpful.
spk02: Yes, Scott, I think it's a little bit of everything. I think it's a mixture of some smaller biotechs, but certainly there are some mid and larger biotechs that we prioritize. I think that sometimes the reasons might be different. I think everyone over the last, let's say, six months has been scrutinizing their prioritization of projects I think we have examples of some of the larger biotechs that canceled some stuff but then rebooked some other stuff. So it's going to have a short-term impact because that stuff won't turn into revenue, but then they turned around and used that allocation to rebook other stuff. And then there's examples of some of the smaller biotechs that just cancel for lack of funding or reprioritization where they're just doing what they absolutely need to do right now, for some short-term results so they can raise more money. So I think it's a combination across the board. I think that everyone's been looking at their spend prioritization. And I think that when we think about the value we provide and the services that we provide, I think that puts us in a good place. But when everyone gets a little bit squeezed, I think we also get squeezed as well. Okay.
spk06: Shifting gears, the revenue guidance of 10% to 15%. I mean, there's only six months left in the year, so that range looks a little wider given that half the year's through. Do you feel comfortable that you're going to be at one end of that range, or are you targeting the middle of it? And as well, you know, we've got the sales between Q3 and Q4. All right. I'm sorry, what was that last question, Scott? The last part was as well if you could just talk about the mix between Q3 and Q4. Thank you.
spk02: Sure. So, listen, I think that we feel comfortable with that range, and it's a range for that reason. I think that what we've experienced with greater than usual cancellations and some of the weakness in the bookings in Q2 is definitely going to have an effect on the year's revenue. You know, certainly the stuff, most of the stuff that we book now and in Q4, even if it turns out that Q3 and Q4 go back to our normal projections, is probably not going to have as much of an effect on the total revenue for the year as what happens in Q2 in terms of the slowdown in bookings and the greater than expected cancellation. So from that perspective, we think that we're going to take a shorter term hit on what we expected, and that's why we revised our projections. I think longer term, we feel pretty comfortable and confident that all the stuff that we continue to do and have done over the last couple of years is going to put us in a good position to be able to weather the storm and continue to grow. So right now, from where it looks, you know, certainly there was a hiccup based on what we think is the economic environment. But what we're seeing now is, you know, pretty much the last six to seven weeks has come back to normal pace for us. So that was, you know, a good sign going into next fiscal year.
spk06: Okay. So should I assume that one would expect Q4 to be stronger than Q3?
spk02: Yeah, yeah. I would expect Q4 to be stronger than Q3, correct.
spk06: Okay. And I guess the final question, I completely understand the environment, cutting kind of non-core business expenses, but I'm curious why, you know, the discovery target business, you still seem pretty bullish on that, category uh and as well if maybe if you could just talk about you know when do you monetize that discovery target processing are you just trying to get through pre-clinical and then out licensed or do you ever anticipate taking it beyond pre-clinical uh just trying to get a sense of you know how much that business costs and what the timeline to expense recovery is there yeah so
spk02: Again, going back to the thesis we have that our data is a very unique set of data. It's a very, very deep set of data that's unique because of all these PDXs, but not just all the characterization we have on these couple thousand patients, but it's also the fact that all of these patients have been treated with multiple drugs, and we have multiple drug treatments against the PDXs. So it really gives us a very unique and rich data set with which to do our discovery. And I'll remind you that our bank is characterized on a very deep level, including proteomics, phosphoproteomics, the DNA and the RNA expression. So we really look at all of these treatments, what the effects were from these treatments. And so it gives us a very unique database. And that was the impetus for us to think that we could take this data and really find unique targets. So we're excited about the targets. We're excited about the molecules so far that we've been able to develop against these targets. So we continue to be excited about the results we're getting. We are starting to do preclinical work now very, very soon. So we've been doing a lot of work ex vivo and in vitro, but now we're starting to do some preclinical in vivo work. And the plan is really to do enough work so that we really get more confident, not only in the molecule and the stability and efficacy of the molecule, but also in the efficacy on the PDX models that we have. And then the plan is to go out and try to find a home for it, which includes getting investment or you know, out-licensing and so forth and so on. So that's the current plan. We don't plan currently to take these into the clinic, but the goal is to get them ready for the clinic and then find a partner.
spk06: Okay.
spk02: Great.
spk06: Thank you for taking the questions. My pleasure.
spk03: Once again, if there are any remaining questions or comments, please indicate so by pressing star 1 on your touchtone phone. Once again, that's star one if you have a question or a comment. Okay, we currently have no questions in queue. I'd like to turn the floor back to management for any closing remarks.
spk02: Thank you. Yeah, I just wanted to thank everybody for joining us for our call. We look forward to continuing to update everybody. We're excited about the growth and trajectory that we have at Champions. There's a lot of exciting assays and a lot of exciting services that are continuing to be developed that are important to the pharma and biotech world. So we look forward to continuing to update everybody on our next call. And thank you for joining the call. Have a good evening.
spk03: Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
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