Champions Oncology, Inc.

Greetings and welcome to Champions Oncology's fourth quarter and fiscal year-end 2023 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If you 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, 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 would 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 and to get financial measures as available in the earnings release. Overall, we had another year of progress, successfully expanding our business, core capabilities, and platforms while continuing to evolve and deliver on our longer-term strategy. However, the year also presented several challenges as our business was adversely impacted primarily on two fronts, one external and one internal. As we discussed over the course of the year, the negative funding pressure on the biotech impacted our quarterly booking numbers in the first half of the year, leading to a decline in sequential quarterly increases in our second quarter. Additionally, along with the bookings decline in Q2, the challenging economic environment resulted in an uptick in customer cancellations. While the rate of cancellations has steadied, our cancellation rate is still above historical norms as customers are still experiencing budgetary pressures and therefore are quicker to cancel studies than in the past. Internally, we encountered operational issues during the course of the year. These operational issues led to study delays which resulted in lower than expected revenue conversion and was another contributor to the increase in cancellations. While we feel confident that we have addressed and fixed many of the operational issues, they will continue to have a financial impact for the first half of this fiscal year. The cumulative impact of both the internal and external challenges led to both lower than expected bookings and revenue conversion which in turn led to weaker top line revenue and profitability. We anticipate that we will still feel the effects of these issues for the first half of this year and are looking forward to getting back on track to robust profitability in the second half of this year. On a more positive note, despite these negative events, our bookings re-accelerated in the second half of last year and the trend has continued into the beginning of this fiscal year. As part of our longer term plan, We have expanded our core services, including the continued development of our Exvivo platform. We feel that we have reached the next phase of development in our Exvivo platform, and we are expecting these services to be a driver of revenue growth. Similarly, we have made some strategic hires in our business development team to support our clinical services. With this team, we have already seen an increase in opportunity generation, which should lead to increased sales over the course of this fiscal year. With regard to our drug development effort, we recently announced the launch of our therapeutic discovery and development platform into a wholly owned subsidiary named the Corellia AI. Corellia launched out of Champions Oncology with a team of world-class scientists advancing a robust pipeline of therapeutic programs and a unique discovery and development platform. It will continue to leverage Champions' superior PDX molecular atlas, and its living bank of PDX models as central tools in its proprietary target and therapeutic discovery program. Our objective to develop innovative first-in-class antibody drug conjugates at a more rapid pace and with greater efficiency. Our lead discovery programs are progressing well through the therapeutic discovery stage with our two lead programs exhibiting promising results. At this stage, we are actively raising capital to support and accelerate the growth of Corellia. In summary, despite this being a more challenging year than we expected, we have robust bookings, a strong platform, a stellar reputation, and a strong team that is poised for the next growth spurt. Some of these challenges we experienced last year will spill over and continue to impact on our results in the first half of this fiscal year, but we are confident that we are poised to emerge with stronger revenue and profitability over the longer term. Now let me turn the call over to David Miller for a more detailed review of the financial results.

Thanks, Ronnie. Our full results on Form 10-K will be followed with the SEC later today. We had another year of top-line revenue growth with record revenue of approximately $54 million, representing year-over-year growth of 10% and within the revised range of the guidance provided. The issues Ronnie presented impacted our financial performance leading to a growth rate below our historic norm and which contributed to the net loss for the year. On a gap basis, our loss from operations for fiscal year 2023 was $5.3 million compared to income of $607,000 in the prior year. Included in the $5.3 million loss are non-cash expenses totaling $3.9 million which includes stock comp, depreciation, and an impairment charge. The impairment charge of $800,000 was due to writing off the remaining capitalized cost of our Lumen product. Excluding these non-cash items, our adjusted loss was $1.3 million for 2023 compared to adjusted EBITDA of $3.1 million in the year-ago period. Turning the focus to the fourth quarter and cash-based results, Fourth quarter revenue increased to $13.1 million compared to $12.9 million in the year-ago period, an increase of $200,000 or 2%. Our adjusted loss was $920,000 compared to adjusted EBITDA of $445,000 in the year-ago period. Total cost of sales was $7.1 million compared to $6 million in our fourth quarter last year, an increase of 18%. For the year, Cost of sales was $28.8 million compared to $23.2 million a year ago, an increase of 24%. The increase for both the fourth quarter and full fiscal year compared to the same period last year was primarily due to increases in compensation as we staffed our operational team to meet the anticipated bookings growth, which did occur, but which did not convert to revenue at the pace expected. Due to the increase in cost of sales on lower-than-expected revenue growth, our gross margins for the fourth quarter and year-end were under pressure, coming in at 45% for the quarter and approximately 47% for the year. For the same period last year, gross margin was approximately 53%. The margin pressure will continue for the first half of 2024 as our revenue conversion percentage is still expected to be below our historical rate. As revenue conversion improves, we anticipate an expansion of our gross margin in the second half of this year. For the fourth quarter, R&D expense was approximately $2.9 million compared to $2.6 million in the year-ago period. For the year, R&D expense was $11.5 million compared to $9.3 million for fiscal 2022. The year-over-year $2.2 million increase was attributed to our stated strategy to ramp up our R&D spend specifically investing in our drug discovery platform. For the fourth quarter, sales and marketing expense was $1.8 million, an increase of approximately $200,000 compared to the fourth quarter last year. For the year, sales and marketing expense was $6.8 million compared to $6.2 million in the year-ago period. The increases were primarily attributed to compensation expense related to the expansion of our business development team and additional marketing initiatives. such as conference attendance, as COVID restrictions eased. Our G&A expense was $2.2 million for both the fourth quarter of 2023 and 2022. For the year, G&A expense was $8.1 million compared to $7.2 million in the year-ago period. This was primarily due to an increase in IT and professional fees. We invested in upgrading our IT infrastructure to support company growth, and the professional fees were related to the formation of our new subsidiary. Looking ahead to fiscal year 2024, we anticipate a lower level of G&A increases and G&A as a percentage of revenue is expected to decline. Now turning to cash. We ended the year with $10.1 million of cash on the balance sheet and no debt. For the quarter, cash used in upgrading activities was $700,000 with an additional $760,000 for investment in lab equipment and $75,000 in financing activities as part of our stock repurchase plan. For the year, cash generated by operating activities was $4 million, and cash used for CapEx was approximately $3 million. Looking ahead to fiscal year 2024, we anticipate a decline in our cash balance over the first half of the year, but with the continued strength in our bookings and as we improve our revenue conversion, our cash position will rebound. Our planned CapEx spend is in the $2.5 million range as we further automate our XBO platform and other lab functions to increase capacity and improve efficiencies, allowing us to increase our revenue and expand our margins. In summation, our financial performance for 2023 was impacted by the challenges outlined in this call. However, despite the challenges, we reached another annual revenue record, recording approximately $54 million in revenue and growing by 10%. Our bookings rebounded from a small decline in the second quarter, reaching new highs in the second half of the year. We anticipate continued strength in our bookings over the course of fiscal 2024. We're projecting revenue growth for the year to be between 5 and 15%. The rationale for the wide range is that it's difficult to pinpoint the exact timing of the improvement of our revenue conversion, although we are expecting the revenue conversion to revert back to historical norms in the latter half of the year. I want to reiterate their message that despite some short-term obstacles, our long-term prospects are positive. Our sales are strong, and we are positioned to capitalize on the exciting long-term opportunities that lie ahead. We look forward to another update in about six weeks when we report our first quarter results. We will now open the call for questions.