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spk03: 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.
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 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.
spk04: 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.
spk03: 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 1 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 have any questions at this time. Please hold while we poll for questions. And the first question today is coming from Matt Hewitt from Craig Hallam. Matt, your line is live.
spk02: Good afternoon. Thank you for taking the questions and for the update. Maybe first one, just regarding the landscape, it sounds like you're seeing some improvement, albeit some cancellations are remaining a little bit elevated. Maybe if you could talk a little bit about what you're hearing from customers regarding their pipelines, regarding their desire to invest and keep moving the ball forward on some of those programs.
spk01: Yeah, thanks, Matt. We definitely, over the last year, have seen an increase in the willingness of customers to be more quick or changing their priorities fairly quickly, but based on their feelings and their budgetary feelings of when they're going to be able to raise new capital. That's certainly been a factor in terms of the cancellations. We feel at least now that things have stabilized So I think we felt most of it maybe a couple quarters ago. It's still happening, but we feel like that is coming back into line. And I think more recently we've just experienced some of these operational issues that have held back some studies and had some study delays. And I think that that is contributing now. So it was a combination of, I think, first couple quarters it was more customers, they're still a mix, right? They're certainly still a mix. I think customers are more conscious of if the study isn't going well in terms of they're not getting the results they want early, of maybe cutting part of the study out, whereas in the past they might have just rolled with the whole study, hoping for some better results in the latter half of the study. In the first half of the study, I think that they're now being quicker to say, hey, we're not seeing the signal we wanted, maybe we'll pare back the study. So that's certainly been a phenomena that we've seen over the last couple quarters. Just anecdotally and just, you know, a gestalt, we're starting to feel things open up a little bit more where people are less pressurized and seem to be, you know, now, you know, seem to be more consistent with the way they behaved, let's say, a couple years ago.
spk02: Got it. And then maybe touching on the internal issues that kind of popped up, could you provide a little bit of color on what those were and how those have been addressed?
spk01: Yeah, I think a lot of it started with a bunch of management changes that we had maybe about a year ago. We had some one or two key people from management, especially the in vivo side leave, led to a couple of issues, a couple of, you know, some high turnover, you know, not able to bring people on, train them in time, which led to delays, led to a couple of deviations, led to some higher of deviations than we've been accustomed to, which, of course, leads to having to restart studies, repeat studies, and that also leads sometimes to customers saying, you know, it's going to take an extra couple of months now, because, you know, the way it works with in vivo studies, it takes six months for an in vivo study. So if you have to start over, you know, oftentimes either study delay in the best of cases where the revenue is not going to be delayed by a long period of time or the customer's going to say, you know, maybe I'll use my dollars for some other purpose and just cancel the study. So we had a bunch of that. We have brought in, I think, now a strong management team. We've fixed a lot of the issues that that we had experienced over a couple months period but because it's in vivo studies it takes a while to wash out some of those issues so because these studies go on for a long time and the revenue is a long cycle it just takes a little bit of time for us to be able to see the fruits of those labors but we have it under control we've been doing this a long time and we now have the right people in place, the right processes in place, going back to the way we were, the right metrics in place, and we're confident that this is just going to be a short blip.
spk02: Got it. All right, maybe one last one, then I'll hop back into the queue. But I was wondering if you could give us an update on the Alloy Therapeutics Partnership, how that's progressing, any details there. Thank you.
spk01: Yeah, so the Alloy partnership is building antibody drug conjugates. That's really in the Corellia, which has been carved out as a wholly-owned subsidiary that we're out there raising money for. We're excited about it. We have really good data, and we're talking to a bunch of prospective investors at this time. So all things leading in the right direction. We feel like Alloy has done some real work. quality work building the ADCs against our targets, and we're excited about the position that we're currently in.
spk02: Great.
spk01: Thank you.
spk03: Thank you. Once again, please press star 1 if you wish to ask a question at this time. The next question is coming from Scott Henry from Roth Capital. Scott, your line is live.
spk06: Thank you, and good afternoon. Just a couple of questions. First, you mentioned year-over-year bookings were up 15% in the fourth quarter. Can you give us a baseline for that? What was that number in the first, second, and third quarters so we can kind of put that into context?
spk01: So I think what we mentioned was year over year, the bookings were up, um, 14%. I don't think we mentioned, uh, correct me if I'm wrong, David. I don't think we mentioned. No, it's both.
spk04: It's both. But they were both the same percentage. So comparing fourth quarter to fourth quarter, they were 50% comparing year over year, 15%. Okay. It just happens to be the same number. But in general, we don't disclose our exact bookings number. We're just indicating the strength in our bookings, uh, remains. Um, and yes, I know too, uh, to answer the question specifically, we have not provided specific bookings numbers over our history.
spk06: I don't know if you want to answer that. Okay, I'm just trying to get a sense of that number outside of isolation. It sounds like it was within the typical range, perhaps the higher end, but that's good. Second, David, I think you said 5% to 15% revenue growth in fiscal 2024. When we think about the first half versus the second half. It sounds like the first half would be the lower end of that range, the second half the higher end of that range. Is that fair? Correct. That's fair. Okay. Thank you. And then you're getting into the AI business, certainly in the drug discovery channel. Is AI also a threat to your business? I mean, how do you think about what AI could do to the core business if at all, or perhaps you can even do more with it and make it more appealing.
spk01: Yeah, so I think that AI actually enhances the business. I think any time there's tools, whether it was the genomic explosion, now the proteomic explosion, the transcriptomic explosion, now using all of that and using AI to find new hypotheses, I think any time we use... new tools to investigate information. What ends up happening is we come up with new hypotheses and pharma and biotech come up with all new ideas and interesting ideas. And that leads to more discovery, more investment, more need to test hypotheses. So I actually think that both AI is helping us and has helped us come up with new targets And it's helping a lot of other people come up with new targets. So from my perspective on both, I think it's helpful to us and it's also helpful in the core business because I think that it's just going to enhance and make more use of our services.
spk06: Okay, great. Final question, which is a bit of a tougher one, but I think a relevant one. You've got a great core business. It's done well for multiple years. You've invested in some new initiatives, which, to be honest, they haven't worked out as well as planned, which happens with new initiatives. But now you're starting to have some pain in the core business as well from execution. So, you know, the question is, do you think you're spreading yourself too thin? Could this Corellia business actually help to maintain the shift separate between the core and the new initiatives? Thank you.
spk01: Yeah, so I think that's a great question. So first of all, I think that we have tried to do a lot over many years, right? And certainly we have expanded. And as you've heard me talk about over the years, we expanded into data, tried to get into software. And I think that we have pared back over the last year or two and realized that we need to focus and concentrate on two kind of lines of business. One is the proprietary business that comes off of our proprietary bank, which is both our in vivo and our ex vivo platforms that really utilize the specialness of our tumor bank and all the data around our models. That still remains the bulk of our business and we're putting a tremendous amount of effort into our ex vivo platform. We're excited about feedback we're getting. We're excited about the bookings we're getting in that ex vivo business. Then we have the tools that we use for that business, which is all the biomarker tools, flow cytometry, histology, sequencing, and using those for either clinical or preclinical services standalone outside of people who utilize us for our tumor bank. And that's also starting to grow and that has been a little more tedious and it's been harder and there's more competition within that side of the business. However, I do believe over the long haul it's been harder than we expected and it's taken longer, but I feel like we're definitely making traction. It's definitely the right move for champions to continue to push on that. And then for certain things that we felt it wasn't the right time, even though it might have been a good idea, and we might have had good technology. So, for instance, like the software services and Lumen, and we still have some users of Lumen, and we still think it's a good platform, but we have de-emphasized that because there was a lot on our plate, and there was too much on our plate. So I think that carving out the discovery business into a separate business was another example of that. Like that has to stand alone. That has a separate team. It's a separate type of focus. And that does have to stand on its own and can't take the focus away from champions. So I think we are very, very focused right now. I think we have good people working on these areas. You know, there's always challenges. But I think in these areas I feel pretty confident that we're going to continue to grow and continue to be able to continue to expand, you know, adjacent expansion into – these what we call end-to-end preclinical services into the clinical services.
spk06: Okay, great. Thank you for the caller and thank you for taking the question.
spk01: My pleasure.
spk03: Thank you. There were no other questions in queue at this time. I would now like to turn the call back to Ronnie Morris for closing remarks.
spk01: Thank you for everybody for joining our quarterly call. As we've said, we're still very excited about the platform. We're excited about the growth potential that we're gonna have over the next couple of years. There are some challenging quarters ahead, but then we see line of sight to getting back to where we were in terms of robust profitability. We're also excited about the drug discovery effort that we have put into an entity. and we're excited that we're out there raising money and capital for the Corellia initiative, and we hope to have good news and be able to update everybody in the next couple weeks on our Q1 call. Thank you for joining.
spk03: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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