Earnings Call Transcript - CSBR Q4 2022

Operator, Operator

Good afternoon, everyone, and welcome to the Champions Oncology Fourth Quarter Fiscal Year 2022 Earnings Call. It is now my pleasure to introduce your host, Ronnie Morris, CEO of Champions Oncology. Please go ahead, Ronnie.

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 on our Forms 10-Q and Form 10-K. A reconciliation of non-GAAP financial measures that may be discussed during the call to GAAP financial measures is available in the earnings release. Overall, we had another year of significant progress, successfully expanding our business and core capabilities while continuing to evolve and deliver on our longer-term strategy. On last year's year-end call, I outlined our strategic vision, highlighting our platform that emanates from the uniqueness of our tumor bank and related data. That vision included the expansion of our core services business, embarking on a drug discovery effort, and finding a commercial path to unleash the power of our data and analytics. Fiscal year 2022 represented an execution of this strategic plan. We expanded our core services and continued to develop our Ex Vivo platform, driving our improved financial results. This year, we will continue to invest further in expanding our platform with a concentration on our unique Ex Vivo platform that we believe has a strong potential for significant revenue growth. With regards to our multifaceted data platform, we have our Lumin software product in the data and analytics that are found within the system. Our Lumin SaaS sales and renewals have been slower than anticipated, and we have not reached the growth phase of the product life cycle as quickly as we expected. We view user education as the key element required to reach this next phase, and we are designing a strategy to achieve that goal. On a brighter note, the Lumin analytic infrastructure continues to add value to our other product offerings, contributing to their growth and allowing us to establish the Lumin business as a broader data platform rather than a strict SaaS offering. Although it is still too early to make any definitive projections regarding the magnitude of its future success, we still envision Lumin and our data platform contributing to the overall growth of the company over the next several years. Regarding our discovery platforms, our lead internal programs, as well as the program partnered with Fannin Innovation, are progressing well through the therapeutic discovery stage with encouraging preliminary data. Our computational discovery tools continue to evolve and, as demonstrated by the exciting progress of our therapeutic programs, provide substantial value to our comprehensive therapeutic discovery and development platform. This upcoming year, we'll focus on establishing data sets required to move these programs to preclinical development. The last several years have been a challenging period, first with the COVID pandemic and now with the economic downturn, which has hit the biotech sector especially hard. Just as we have continued our upward trajectory through COVID, we are cautiously optimistic that we will continue to grow through the current economic environment. Our pipeline remains robust, and we are optimistic that we can continue our bookings and revenue growth in the coming year. To summarize, we continue to focus and be excited about our growing services business, which has annually provided strong financial results. Our SaaS business has grown slower than anticipated but remains part of our longer-term strategy. While still in its early stages, we're excited about our AI-powered target discovery drug development initiatives. They are growing in potential and creating excitement throughout the organization. In general, we are very optimistic for the outlook of the company as we head into this year. Now let me turn the call over to David Miller for a more detailed review of the financial results.

David Miller, CFO

Thanks, Ronnie. Our full results on Form 10-K will be filed with the SEC on or before July 29. Overall, we had another year of significant financial milestones for Champions Oncology. Our annual revenue for 2022 was a record $49.1 million compared to $41 million for 2021, representing year-over-year growth of 20% and coming in at the high end of our guidance of 15% to 20%. Excluding stock compensation and depreciation, our adjusted EBITDA, which excludes stock-based compensation, depreciation, and amortization, was $3.1 million for 2022 compared to $2.1 million a year ago. On a GAAP basis, income from operations for fiscal 2022 was $605,000 compared to income from operations of $337,000 in the year-ago period. Turning the focus to the fourth quarter, revenue increased to $12.9 million compared to $10.6 million in the year-ago period, an increase of $2.3 million or 22%. Adjusted EBITDA was $445,000 compared to breakeven results in the year-ago period. Focusing as we do on adjusted EBITDA, total cost of sales was $6 million compared to $5.6 million in our fourth quarter last year, a modest 8% increase on revenue growth of 22%. The increase compared to the prior year was primarily related to SaaS expenses, which are no longer capitalized. Our total gross margin for the fourth quarter was 53% compared to 47% for the period ended April 30, 2021. Our gross margin for the full fiscal year was 53% compared to 48% for fiscal 2021. As discussed throughout the year, our reduction in outsourcing Ex Vivo work coupled with the leverage in our operating model has led to the gross margin improvement. Additionally, the gross margin continues to be driven primarily from our legacy services with room for additional expansion as higher-margin products such as Ex Vivo will actually contribute more meaningfully to revenue in the future. For the fourth quarter, R&D expense was approximately $2.6 million compared to $2.1 million in the year-ago period. For the year, R&D expense was $9.4 million compared to $7.2 million for fiscal 2021. The $500,000 quarterly increase and the year-over-year $2.2 million increase are attributed to our stated strategy to ramp up our R&D spend, specifically investing in our discovery platform. We anticipate the trend to continue in fiscal year 2023 with increases in R&D spend focused on target discovery initiatives. For the fourth quarter, sales and marketing expense was $1.6 million, an increase of $150,000 compared to the fourth quarter last year. For the year, sales and marketing expense was $6.2 million compared to $5.3 million in the year-ago period. The increases are primarily attributed to the expansion of our business development team. Our G&A expense was $2.6 million for the quarter compared to $1.5 million in the year-ago period, an increase of $750,000. The increase in the fourth quarter expense was primarily due to a bad debt write-off of $200,000, IT computing costs to support the growth of the business of $250,000, and increased compensation expense. For the year, G&A expense was $7.2 million compared to $5.2 million in the year-ago period. This was primarily due to an increase in compensation and IT expenses as we invest in upgrading our IT infrastructure to support company growth. Looking ahead to fiscal year 2023, 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 in a strong cash position with $9 million of cash on the balance sheet. For the quarter, cash generated from operating activities was $700,000, and cash used for investment in lab equipment was $400,000. For the year, cash generated by operating activities was a robust $6.5 million, and cash used for CapEx investment was $2.4 million. Looking ahead to fiscal year 2023, with continued strength in our bookings and improving cash-based operating results, we anticipate that cash generated from operating activities will grow over the year. Our planned CapEx expense is in the $3 million range. We're targeting CapEx for our Ex Vivo platform as investing in lab automation will increase capacity and productivity, allowing us to increase our revenue and expand our margins. In all, our cash position is expected to strengthen over the course of fiscal year 2023. Information reflecting on our fiscal year 2022 results reached another annual revenue record as we exceeded $49 million, growing our revenue by 20% and hitting the top range of our revenue guidance. For the full year, we were profitable on both a GAAP and adjusted EBITDA basis, with adjusted EBITDA of $3.1 million. Our bookings remain strong, and we are positioned to capitalize on the exciting opportunities that lie ahead. We're projecting revenue growth in the 20% range, which will result in another annual revenue record as we hit new quarterly revenue milestones over the course of the fiscal year. We have already almost completed our first quarter. Accordingly, we look forward to another update in about 6 weeks when we report our first quarter results.

Operator, Operator

Your first question is from Matt Hewitt from Craig-Hallum.

Matthew Hewitt, Analyst

Maybe, Ronnie, you addressed this a little bit in your prepared remarks, but regarding the state of the biotech and small pharma funding environment, what areas of your business are you seeing any impact? Or if not, what do you think is separating you from some of your peers that have started to see maybe a little bit of a slowdown in their business?

Ronnie Morris, CEO

Yes. So, so far, we haven't seen a real impact to the business. I think what we've seen maybe is just a little more deliberation from biotech and pharma in terms of the speed at which they might sign some of their statements of work. However, we seem to have a robust pipeline. People are still interested in doing preclinical work. We certainly have been working with many of these customers for many years. So I don't really see any signs right now that things are slowing down. However, as I said, we certainly are cognizant of the fact that many smaller biotechs are being a little more careful or cutting back on some of the R&D expenses. We are looking at all of that. Part of it is a combination of just us always expanding our services, doing more, having a lot more early on from discovery to the late-stage efficacy stage of offerings. So that probably could be why we're not seeing any slowdown because we're just doing more for more people.

Matthew Hewitt, Analyst

Got it. That's helpful. Regarding the Ex Vivo platform, obviously, it sounds like a very strong quarter and a strong year. As you look at the opportunity with that platform in '23, what can you add to that to expand the market opportunity and help drive incremental growth for Ex Vivo?

Ronnie Morris, CEO

Yes. So the way I would look at it, Matt, is I kind of feel like our current Ex Vivo platform is what we would call like a version 1 or 1.5 Ex Vivo platform. I think we're adding a lot of capabilities, especially when it comes to imaging and different types of abilities to analyze our Ex Vivo output. So what we're really building is the next-generation Ex Vivo platform. And what we're excited about is we have, as you know, a very unique well-characterized tumor bank that a lot of people are interested in understanding, especially because we have a lot of data associated with them, plus we have unique tumors. This gives customers in biotech and pharma partners another avenue to do larger screening studies to really understand where their molecules might have an interesting indication. And then hopefully, more hits will lead to more in vivo studies to confirm the ex vivo results. So we're excited about the ex vivo space. The ex vivo space in terms of technology for us and for others is getting more advanced. There are a lot better capabilities now that we can utilize whether it's organoids or other areas within the ex vivo space. We're excited about leveraging our strong, unique tumor bank with these new tools that we think are going to enhance our Ex Vivo assays and the way pharma uses our Ex Vivo assays, but also transitions to how they're going to use the whole service line, all the way from discovery to ex vivo to biomarker discovery to in vivo.

Matthew Hewitt, Analyst

Got it. Maybe one last one for me, and I'll hop back in the queue. Regarding Lumin, it sounds like we're still in the early stages. What do you think it's going to take to increase market awareness and drive adoption of that software platform?

Ronnie Morris, CEO

Yes, that's a good question. I think that we have a bunch of users on Lumin. What we've learned is that it can't be everything to everybody, but it is a useful platform for many people, primarily those who have invested in really understanding how to use Lumin. So I think there are two things that we need to do better. One, we need to invest in user education and spend more time with our users to really get them very comfortable with the system. It's not like riding a bike for most people, and it takes time. We need to come up with a strategy to help accommodate the busy lives researchers lead. We need to find a way to incorporate some type of training program and make it easier for users to get the training they need to really feel comfortable with the program. The second thing we need to do is beef up our business development activities to reach more scientists and PIs within the pharma and biotech world to improve our outreach. We've been somewhat focused away from signing up more subscribers to people interested in using Lumin for data extraction. So we need to be able to have the resources to pursue both initiatives and have not been completely successful due to constraints. I think it's going to take a little more time for the adoption to really build, and we have some work to do to ensure we invest more in user education and business development to promote Lumin.

Matthew Hewitt, Analyst

Understood. And congratulations on the progress in '22.

Operator, Operator

There are no further questions in the queue.

Ronnie Morris, CEO

Okay. So thank you so much, everybody, for joining us for our year-end and Q4 call. We're really excited about the progress we've made regarding the vision and the evolution of Champions Oncology, and we look forward to giving everybody an update in another 6 weeks on Q1 and then continuing to update people regularly about the business. Thank you again for joining us.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.